Solvency II ease up welcome

Peter Vipond, director of financial regulation at the Association of British Insurers (ABI) has welcomed the CEIOPS Task Force Report on the Liquidity Premium that may relax proposed Solvency II rules.

“This report has the potential to be a positive contribution to the European Commission as it calibrates Solvency II in a more pragmatic way, undoing some of the of problems identified earlier with CEIOPS work; and will enable European insurers to give consumers better value for money when they purchase products such as annuities,” he said.

The Times said insurance shares rose on the news, with Legal & General up 3¾p to 77p and Aviva up 11p to 390¼. “Even Prudential, which has seen its shares hammered after announcing a deal to buy the Asian arm of AIG, was up 12½p to 500p,” the Times said.

European Commission

Reuters said CEIOPS has effectively give the European Commission the final say on new capital adequacy rules for after failing to agree. British insurers had feared the rules would have forced them to raise up to £50bn.

"CEIOPS' members are still divided on the question whether a liquidity premium should actually be applied to insurance liabilities, even if limited to the situation of a stressed liquidity position," CEIOPS Chairman Gabriel Bernardino wrote in a cover letter to the report.

Munich Re Chief Executive Nikolaus von Bomhard, speaking to an insurance conference, said insurers had twice paid heavily for a crisis they did not cause, once when share markets were hit, and again with the current post-crisis recession.

"We have to do everything we can to avoid paying a third time," he said. "We need the right regulation."

Political decision

"At the end of the day, the decision on whether to introduce a liquidity premium (rule) will be a political one," Thomas Steffen, responsible for insurance supervision at Germany's Bafin, told an insurance conference.

Insurers are expected to benefit from an exemption or 'grandfathering' clause for in-force business, industry observers say.

Bloomberg reported that Munich Re’s von Bomhard said insurers need to have a supervision “suitable” to their business model.

“Unified capital requirements for banks and insurers would be wrong,” he said at a conference organised by German newspaper Handelsblatt in Munich. “The current crisis had its origin in the banking industry, which also has been hurt the most.”

Different business models

Banks’ and insurers’ business models differ for three reasons, von Bomhard said. Insurers have relatively low liquidity risks due to their regular premium income, and they are also better capitalised and less leveraged.

Furthermore, while risk accumulation grows with the size of banks, size “is an element of risk minimisation” in the insurance industry as diversification helps spread risks across segments, regions and time, he said.