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EU likely to water down Solvency II proposals

Draft European Union solvency rules that could force UK insurers to raise up to £50bn worth of capital are likely to be watered down.

According to Reuters UK, the Solvency II proposals, which have been heavily critisised by Britain’s leading annuity providers in particular, are now attracting criticism in continental Europe, increasing the probability they will be changed.

Next month, regulators from all 27 EU countries will meet in Berlin to agree on recommendations for final Solvency II legislation, which will be submitted to the European Commission early next year.

Further alterations are possible before final legislation is agreed in June 2011, but Reuters says British insurers are hopeful their concerns will be reflected in the regulators’ advice.

The article quotes Legal & General director of annuities John Pollock as saying: “The industry is working together to get a sensible outcome. I think that is much more likely now than it was before the debate started.”

The CEA – the European insurance federation – issued a strong letter to the body consulting on the rules earlier in the month to complain that it had “abandoned the principle-based and economic approach it has adopted in favour of crude ratcheting up of financial requirements”, confirming fears over their impact are spreading.

Germany’s insurance industry association, GDV, is also pushing for the proposals to be altered claiming they would force insurance premiums up for customers.

FSA managing director of retail markets Jon Pain recently labelled Solvency II a “potential timebomb” for the pensions market.

He said: “The directive poses a significant risk for the pensions market. The nub of the issue arises from the question of whether the legislation will allow firms to continue to take into account a liquidity premium in capital provisions for annuity business.

“In simple terms, if the implementing legislation does not allow for it annuity providers are likely to have to significantly increase the capital they hold and as a result increase the cost to consumers.”

The Association of British Insurers has written to Chancellor Alistair Darling warning that the amount of capital annuity providers would have to hold if the proposals were passed could be equivalent to the current market capital of the whole industry.


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There is one comment at the moment, we would love to hear your opinion too.

  1. EU likely to water down Solvency II proposals
    As I see it, the most pressing priority is to move as far as possible away from the annuity trap and replace forced annuity purchase with a Pension Income Bond. Under a PIB, the level of income available would not be shackled to GAD annuity rates and any unspent funds could be passed on to the next generation free of punitive tax charges. Such an evolution of the at-retirement market is so straightforward and would do so much to reinvigorate the retirement savings market that it seems positively bizarre that the government remains so stubbornly resistant to change. How can the powers that be not see this? Or is it a case of there being none so blind as those who will not see?

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