Modifications to Solvency II requirements post-Brexit should give insurers greater flexibility over the assets they hold and boost annuity rates, the Treasury select committee was told today (17 January).
The Treasury select committee on European Insurance Regulation today heard experts suggest what modifications, if any, should be made to Solvency II for the UK insurance industry after Brexit.
The Solvency II directive is a European Union law that dictates the amount of capital that EU insurance companies must hold to reduce the risk of insolvency.
Andrew Chamberlain, chairman of the life board at the Institute and Faculty of Actuaries, said the level of protection imposed by European legislation had increased the price of annuities.
Average annuity rates fell by more than 3 per cent in the last quarter of 2015.
Rates were affected by low gilt yields, but one of the main drivers has been insurers moving to make sure they are compliant with the Solvency II regulations.
He said: "The price the consumer is paying for Solvency II is too high. The balance between security and value for money has got out of kilter. It has made annuities too expensive."
He said this had limited the choice of annuities to the consumer.
"The trade off between the level of security and the price the consumer has to pay is something they do not get a choice in. That choice has been made by the regulatory system."
He added the requirement to purchase gilts at the expense of assets such as property or infrastructure had also brought a level of risk to the system.
In times of market crisis, such as in 2008, there could be a lack of liquidity if insurers sought to sell the same type of asset at the same time, he said.
He urged greater flexibility for insurers to choose the assets that backed their products.
Also speaking to the Treasury select committee this morning (17 January) Phil Smart, head of insurance and investment management at KPMG, agreed that risk margins in Solvency II did not properly reflect the nature of products such as annuities.
However, the willingness of insurers to change their risk levels for annuities in order to improve the amount of cash paid out to those who purchase this product was called into question by Tom McPhail, head of pensions research at Hargreaves Lansdown.
He said that while annuity companies have not been enthusiastic about Solvency II, he had not seen much evidence of them publicly challenging it.
"Whilst I have heard a lot of insurance companies say that Solvency II is an issue for them, the trade off on this is that any watering down of the consumer protection carries with it the risk that if there is a subsequent market failure then challenging questions are going to be asked about whether the decision to dilute those protections was was appropriate or not," he said.
According to Retirement Advantage, the average annuity rate was 5.18 per cent at the end of November, or £2,591 a year on a £50,000 pot.
Since the market low in August 2016, analysis of data supplied by Investment Life and Pensions Moneyfacts to Retirement Advantage for 30 November 2016, showed the average annuity rate has increased by 10.6 per cent.
The gap between the worst standard and best enhanced on a moderately impaired annuity is 26 per cent, the analysis which looked at level annuities without a guarantee and a purchase price of £50,000 at age 65 showed.
david.rowley@ft.com
