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Solvency II retreat on cash call

European regulators have pulled back from forcing UK life insurers to hold billions of pounds extra capital.

Life companies had protested at the original draft advice from the Committee of European Insurance and Occupational Pensions Supervisors on the original proposed Solvency II legislation.

A major concern for British insurers was the exclusion of an illiquidity premium in the risk-free rate. Analysts forecast that life offices would have to raise billions of pounds of additional capital to cope with the plans.

The European Commission also sent a list of seven issues where it believes Ceiops’ advice was not aligned.

Ceiops chair Gabriel Bernardino wrote to European Commission director general Jorgen Holmquist last Tuesday, claiming he had “provided solutions” to some of the more controversial proposals.

Bernardino says: “Although the choice of the reference rate is a technical issue, Ceiops rec- ognises this has strong political implications. This app- lies, in particular, to the inclusion of an illiquidity premium in the risk-free rate.

“Further work would have to be carried out with a clear concept and mandate in light of the framework contained in the advice. Ceiops is prepared to take the lead in this area.”

Association of British Insurers director of financial regulation Peter Vipond says: “The positive message is that Ceiops has recognised that some of their original ideas were unsuitable, as insurers across Europe made clear.

“The challenge remains to shape Solvency II, allowing it to deliver its original aim of prudentially sound firms with consumers’ interest paramount. Ceiops has recognised that the liquidity premium must be included, although it has restricted this to business in force. More progress is needed here and we will continue our efforts to find a suitable solution.”

Deloitte financial services partner Rick Lester says: “Ceiops and the industry have engaged in a constructive and positive way. Ceiops has acknowledged that a full quantitative impact analysis will be required to get a measure of the overall impact of all the advice combined. It will be vital for the industry to play an active role in this.”

Fitch senior director for insurance David Prowse says: “This advice does seem to signal a turning point and could turn out to be a defining moment for insurers’ capital requirements.

“It is non-conclusive but the fact that Ceiops is recognising the need to discuss liquidity premiums will have annuity players breathing a cautious sigh of relief.”

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