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Solvency II – what is the effect on buy-out pricing?

The European Union is establishing a new regulatory regime for insurance companies known as Solvency II. This is due to come into force in October 2012 and concentrates on two main issues:

-          attempting to more closely reflect the assessed risk of an insurer in setting the required solvency level that it is required to hold;

-          increasing disclosure of financial risk management information, and improving dialogue between insurers and regulators about risk management.

Solvency II is causing considerable concern for UK bulk annuity providers. In 2008, the Committee of European Insurance and Occupational Pension Supervisors (CEIOPS), the body responsible for designing Solvency II, ran tests on their new reserving and solvency calculation methodology. As a result of these tests, a revised version of Solvency II was drafted, which was considerably more stringent than the current FSA regulations.  CEIOPS claim that increased governance of insurers is necessary due to uncertainty about future life expectancy and the default risk of corporate bonds.  However, the potential impact of this is that the insurers would have to hold significant additional capital which could feed through into increased annuity buy-out prices.

Solvency II is still in the consultation stages and the UK bulk annuity providers have been lobbying against the current draft regulations. They are concerned that the requirements of Solvency II could severely damage the UK insurance industry. Some European countries already have more stringent capital requirements but the point has been made that the UK market is somewhat “unique” and that CEIOPS should not apply a “one-size-fits-all” solution. The lobbying has had some effect as CEIOPS has indicated that they will reconsider some of their proposals. However, it still appears likely that additional capital will be required.

At the moment, we have not seen Solvency II having a significant effect on bulk annuity pricing.  We believe this is due to the uncertainty over the final regulations and the fact that no insurer wants to be the first to implement a significant increase to its prices. However, if the final regulations do require an increase in capital, this may feed through to prices well before 2012. Any scheme considering buy-out or buy-in in the near future should, in our view, consider obtaining quotations now before the effects on pricing of Solvency II become significant.

For more information please contact your normal Barnett Waddingham consultant or email
corporateconsulting@barnett-waddingham.co.uk  


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