Solvency II – a necessary sequel

12 September 2007

Most things that have their origins in the 1970s are looking a bit outdated, and solvency requirements for insurers are no exception. In July, the European Commission published a draft directive for a new system of rules and principles covering the solvency of insurance companies operating in Europe that is expected to apply from 2012 – the Solvency II framework. Put simply, the intention is that insurance companies should hold enough money to ensure the chance of insolvency, in a wide range of possible adverse financial situations, is very small.

Three decades on from when the original Solvency I rules came in, there is now a much greater understanding of exactly what risks companies are exposed to and, as a consequence, risk management techniques have evolved dramatically. The new framework radically modernises and extends some of the themes in the Solvency I regime, and will force companies to hold capital consistent with the nature of the risks they carry. So the riskier your business, the more capital you need to hold. That makes sense, and as Solvency I doesn’t capture all the risks we can identify, we need a replacement that does.

If the proposals go ahead, insurance firms will have an increased understanding of their risk profile, with capital to match, resulting in better protection for policyholders; allowing advisers to have more faith than ever in the companies they recommend. You can’t argue with that. The UK insurance industry has already embraced the new proposals and is providing substantial input to the Solvency II process. The result should be the largest change ever witnessed in the field of cross-border insurance regulation.

Douglas Herdman

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Clear blue water?

5 September 2007

With the next general election shaping up to be the most competitive for years, it is important to be aware of the direction in which an alternative government might take the industry. The recent report by the Conservative Party’s Economic Competitiveness Policy Group, chaired by former Cabinet Minister John Redwood and ‘Next’ CEO Simon Wolfson, contained a number of significant proposals on pensions and long-term savings.

The Conservatives have been arguing for some time now for an end to compulsory annuitisation and for increasing the maximum age at which people start to draw an income from their savings. The Group’s report provides further backing for this stance.

Increased longevity and changing patterns of working life make it important to think about how existing rules will impact. While the security that annuities provide will continue to make them suitable for a wide range of customers, these proposals merit serious consideration.

The report also puts forward the idea of a ‘lifetime savings plan’, attracting the same tax relief as a pension, but with the option of borrowing from the fund to pay for either training or a property purchase, and then repaying back into the fund over an agreed period. This has similarities to the 401(k) arrangements in the US and New Zealand’s KiwiSaver scheme and it may be that lessons can be learnt from these countries. Allowing people access to their savings before retirement may possibly encourage people to save more, but if they are able to take away their money before retirement, there is a real risk they will end up with little pension. And this could undermine the principle that people should save for their retirement.  

The Group was acting in an advisory capacity and the proposals are not yet firm policy commitments. But with every prospect of a general election next year – or even earlier – now is the time for the industry to talk to the Conservatives about getting the detail of their proposals right.

Mark Stockwell
Corporate Affairs Officer

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Important note

This blog provides the views of our industry lobbying team. The views are the opinion of the person writing the entry of the blog and don't necessarily represent the views of AEGON in the UK. They are based on their interpretation of industry developments and their current understanding of UK proposed and actual legislation, and should not be interpreted as recommendations or advice.