I know it’s hard, but you have to feel a bit sorry for Britain’s insurers. No sooner have they calmed fears about their capital strength by bumping up reserves than along comes another horror blockbuster — Solvency II.
In its present form, this latest production from European regulators will effectively force insurers, from 2012, to hold government paper rather than corporate bonds to match the liabilities in their annuities portfolios.
The lower yields on UK gilts, or the higher reserves they have to put aside if they stay with company debt, could reduce annuities to pensioners by between 10 and 20 per cent, it is claimed. It could also force Legal & General, Prudential, Aviva and numerous other big European life companies into cash calls worth up to £50 billion and push up the premiums they charge, according to the Assocation of British Insurers, which is lobbying furiously to modify Solvency II.
The ABI’s concerns are acknowledged by the Financial Services Authority, according to Stephen Haddrill, its outgoing director-general.
The claims sent insurance shares tumbling yesterday, with L&G, in which hedge funds have been building up short positions, down nearly 9 per cent.
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Solvency II is a particular threat to UK insurers because annuities are a more important element in pension provision than in other European countries. Solvency II treats corporate bonds as risky assets, requiring insurers to hold more capital against them, but ignores the fact that annuities cannot be cashed in, which the companies argue should reduce the need for a bigger capital cushion.
Solvency II seems to be another example of an overeager European Commission and battle-scarred regulators trying to clamp down on the wrong culprits in the wake of the banking crisis.
Hedge funds and private equity groups are fighting with Brussels over the draft alternative investment fund management directive, which will introduce onerous reporting requirements and undermine some key investment strategies.
Boris Johnson, the London Mayor, took up their cause with typical bravura yesterday, travelling to Brussels to tell regulators that the proposal, which has already resulted in a string of fund departures to Geneva, was a “blanket attack” on London as a financial centre.
This is exactly the sort of line that some insurers want to avoid. They fear that portraying Solvency II as a particular threat to London will not help their case. Luckily, they can point out that there is expected to be growing demand for annuities throughout Europe.
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There is a good chance that the arguments will be won on both issues.
But there is a great deal of work still to do. And the stakes are high.