EU's Upcoming Insurance Rules Not Seen Having Big Wealth Sector Effect - Deloitte

Tom Burroughes

29 January 2013

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.

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.