(August 8, 2012) — Incoming regulation on the insurance industry could lead to market disruptions and make retirement provision even more costly, a review of the Solvency II guidelines has shown.
The length of time life insurers hold liabilities has not properly been addressed, according to consulting firm Towers Watson, which means the regulation does not take into account the ability these companies have to weather storms of financial crises.
“We find the design of life insurance products means that in many cases insurers can invest assets with a long-term perspective. Insurers need not suffer losses from forced sales in times of financial crises,” a paper from the consultant said.
Solvency II has already received wide criticism from the pension and retirement benefit sector which has claimed the rules on capital adequacy are too stringent and would make running schemes too expensive.
Towers Watson has called on regulators to address how Solvency II would match assets and liabilities in the life insurance sector, or risk creating a dangerous market environment.
“Failure to widen the application of the matching adjustment will significantly increase the capital required by companies, with increased costs to consumers and less product diversity,” the paper continued. “In addition, removing incentives for long-term investment may also cause systematic market disruption in the short term and increase systemic risk.”
Solvency II is expected to come into force in 2014. The full paper from Towers Watson can be found here.