Insurers providing annuity products could be forced to hold
more reserves and charge clients more for such products if regulators do not
assess new rules on the insurance industry adequately, Deloitte has warned in a
new report. Meanwhile, the impact of new rules on wealth management-related
insurance products is unlikely to be big, it says.

The firm talked about the impact of Solvency II – an
upcoming set of European regulations on the insurance sector – on the annuities
sector. So far, the potential effect of these rules have not been widely
discussed within the wealth management industry, but seen as largely an
insurance sector issue.

The European Commission is assessing the fine print of
Solvency II. “This initiative by the Commission and EIOPA to test potential
approaches is welcome, but it does place a burden on annuity providers at a
busy time. The findings will prove important in helping to finalise this aspect
of the Solvency II regime and reduce uncertainty,” said Tamsin Abbey, insurance
partner at Deloitte.

When asked how the rules might affect wealth management “wrapper”
products provided by insurers, and high net worth insurance services generally,
Abbey said the impact should be relatively small.

“In an insurance wrapper, although the assets may be held
for a long period, the main risk of investment performance is borne by the
policyholder themselves.  This will not
generate significant capital requirements and therefore we would expect to see
little change in prices,” she said. “Insurance for the risk of loss or damage
to HNW valuables tends to be sold on a one-year basis. The premium
for the year then covers the expected claims and very little needs to be
invested.  Again this means that we
expect little change in prices from Solvency II capital requirements,” she
added.

“Solvency II has been several years in the making and brings
many benefits, particularly in the way insurance companies manage their risks
and hold capital against them. However, one of the key stumbling blocks in the
negotiations has been the treatment of annuity liabilities and the implications
for customers at retirement,” Abbey said.

(To view an article on wealth management and insurance
products, click here.)

One impact of Solvency II would be to cut annuity rates by
between 5 and 20 per cent, tightening a squeeze on a sector of business already
hit by high bond prices and tight industry margins, Deloitte said.

The impact assessment on annuities is scheduled to begin at the end of this month.