Monday, 16 April 2012

Economist Intelligence Unit - new Solvency II research on Insurers and Society

Our pals at the EIU (kindly sponsored by BNY Mellon) have published this new research on how 'regulation'  affects the insurance industry's ability to fulfil its role in society (no prizes for guessing which 'regulation' in particular this focuses on!).

It has a more cross-professional angle than other EIU releases (here, here and here for example), which is a by-product of BNY Mellon's sponsorship, looking more at changes in capital allocation and derisking which are likely to be by-products of Solvency II implementation.

Sample size is pretty good at 254 respondents, all EU based, mostly Financial (72%) or Risk (24%) professionals, and nicely spread across the continent. They split the results into Insurers, Other Financial Institutions and Non-Financials, which is handy to see where divergences in the comprehension of Solvency II's impact are. I noted the following on the way through;

Solvency II Directive and impact on capital
  • Only 16% disagree that Solvency II "goes too far" in ensuring capital adequacy
  • Life Sector respondents more equivocal on whether "most" insurers already have sufficient capital
  • Great table on p14 for Solvency II asset popularity (or not!) by asset class, supplemented by an insurers-only version on p 15
Policyholders and products
  • 73% feel that policyholders are going to bear the costs (over 80% when just insurers are considered) - I think I have flagged this previously!
  • Half think that the (inevitable?) shift to providing more unit-linked business will have a negative affect on pensions and savings
  • 67% of responsdents have life insurance down as a product which will be "most negatively affected" by Solvency II
  • Less than a quarter disagreed that With-Profits products would be valued in the current market, but have been driven out by accounting rules and capital charges
  • Over half feel that the "squeezed middle" of smaller insurers and mutuals will consolidate to achieve scale, or indeed outsource (though not clear on whether this means administrative functions to reduce overheads, or something else).
Balance Sheet de-risking
  • Hints at knowledge gap between corporates and insurers regarding the impact of insurers being overcapitalised (corporates favouring additional capital being held by insurers for additional security).
  • Divergence between non-financial and financial institutions regarding how important rating and tenor of debt issuance will be in future (non-financials seemingly less concerned).
  • Similar divergence around whether unrated debt will be forced to pay higher yields to appear more attractive to insurers (p18) - insurers were by some distance less convinced than other financial institutions and non-financials, so clearly a perception issue there.
Capital charges
  • Half want the risk-free aspect of Eurozone government debt to be revisited (which Omnibus II has promptly obliged!).
  • 41% want all capital charges reconsidered as they stand,  while only 22% would like them maintained as they are (down to a trifling 9% when measuring just insurers). Can this level of displeasure really stand during the trialogues?
Some smart general comment throughout by some "expert" talking heads, which expands on some of the conflicting responses.

Another worthy piece of research from the EIU, and hopefully will be wielded by the trialogue parties accordingly.

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