COMMENTAs the deadline for Solvency II implementation approaches, concerns about the effects of the Directive continue to be voiced. In this article, Chris Leslie MP, Shadow Financial Secretary, asks: is The Government fully aware of the impact of Solvency II on policyholders, the insurance industry and the UK economy as a whole? Solvency II – a reality Solvency II is fast becoming a reality for the UK. It is a game-changing regulation that will have a profound impact on the insurance industry, asset management and policyholders. But there is a sense of complacency about Solvency II in Westminster – a sense that Solvency II is something confined to the insurance industry, to be dealt with once Brussels has finished with the final draft. This is a mistaken assumption. Once the Directive text is finalised in Europe, it will become UK law. To protect the interests of UK policy holders in particular, the UK Treasury and Chancellor must take a more active role in shaping the regulation. Solvency II matters. It matters to the UK insurance industry, it matters to policyholders and it matters to the UK economy as a whole. The regulation aims to increase policyholder protection by making sure insurance firms are sufficiently capitalised to meet their liabilities, and introducing better risk and governance systems. These general objectives are perfectly laudable and we ought to have tighter rules to ensure that the experience of the banking sector during the crisis could never occur in the insurance sector. But there is a danger that setting the capital requirements in the wrong way could result in “prudence on top of prudence”, creating regulations that might unfairly increase costs and reduce cover to policyholders. Furthermore, there could be unintended perverse consequences that harm investment in UK corporations. Effect on policyholders If the conditions on insurance firms’ capital are framed in the wrong way it could lead to higher premiums as insurers look to make up lost investment revenues to meet liabilities and remain profitable. Insurers could also look to alter their products or remove certain products from the market altogether to compensate for lower investment income. We are already seeing this taking place with the demise of the defined benefit pensions schemes (although other factors are contributing to this shift). Altering or removing products could have wider systemic impact. Less choice and lower cover will result in a sustained shift of risk to individuals, as they will have to put aside more funds to compensate for inadequate cover in both life and non-life insurance products. While care needs to be taken when listening to the predictions of harm for customers made by insurance companies themselves – who clearly have an interest in protecting profitability – there are now so many anxieties being expressed that the time has come for a wider debate at a higher level, something that George Osborne should take more seriously. Effect on UK Plc Solvency II could also have profound effect on UK corporate funding. The way capital charges are designed at the moment has raised concern that insurance firms will shy away from long-term debt and low rated corporate bonds. The UK insurance industry manages assets amounting to 24% of the UK’s total net worth. A shift out of corporate debt could have serious consequences for investment in British business. These are issues which need careful consideration. Complacency in Westminster The Government has indicated that it is engaged in “regular discussions with European counterparts” on the effects of Solvency II. But we have yet to hear a clear voice and coherent stance about it from the Chancellor. Given the size of the UK insurance industry (it is the largest in Europe) and its well developed annuity market, the UK should be playing a key role in these discussions with a coherent government policy leading the way. There is far too little discussion of Solvency II in Parliament, but the responsibility to protect the interests of UK industry and consumers cannot rest with the Government alone. The industry must be more active in bringing these issues to the attention of political decision-makers across the board. There is a sense that Solvency II is an obscure technical Directive that is confined to the insurance industry. I have tabled a series of written parliamentary questions to Ministers which I hope will be answered when Parliament returns from the summer recess, and I hope that these will shed some further light about what the Treasury is doing on this matter. The Government are failing to recognise the real impact Solvency II may have on British consumers and the economy as a whole. Simply leaving it to Europe, or the insurance industry alone, will not do. — The author is the Shadow Treasury financial secretary. The views expressed are the author’s own.
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