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Solvency II is still necessary in spite of damaging delays, says Standard & Poor’s The long run-up is eroding confi dence and adding to costs, but new rules for the insurance industry remain crucial

The ratings agency Standard & Poor’s (S&P) has issued a report considering the future of the Solvency II plans, based on comments made by S&P staff during a conference in Dublin last month. It noted that the existing regulatory system, Solvency I, was “virtually devoid” of incentives for good risk management. It also lacks capital requirements for asset risk, it said.

This means Solvency II, which will place new capital requirements on insurers depending on the results of a risk-based assessment of their assets and liabilities, is “needed now”.

However, the long run-up to Solvency II is “reducing investor confi dence”, the report warned, adding: “The regulatory uncertainty is raising insurers’ cost of capital and some are deferring strategic decisions.” The rules were originally scheduled to be introduced in January 2014, but implementation is now not expected until 2016. For more on this story, visit bit.ly/11EFlWl

Pensions minister announces crackdown on auto-enrolment consultancy charges Two-pronged approach will outlaw ‘high and inappropriate charges’, promises Steve Webb

Consultancy charges on pension schemes being used for auto-enrolment will be banned under plans set out by pensions minister Steve Webb.

Regulations will be laid “as soon as possible” to outlaw the charges as part of a “two-pronged” approach to address “high and inappropriate” charges, he revealed.

The other aspect of the plan will involve a consultation this autumn to cap the charges levied on all defi ned contribution (DC) default funds – the investment option used by most pension savers. This move comes in response to the Offi ce of Fair Trading inquiry into competition in the DC market, which was launched in January and is expected to report shortly.

Webb noted that the government’s own review of consultancy charges had found that measures to prevent advisers deducting high charges from members’ pension pots were inadequate. This has a disproportionately high impact on people who move jobs regularly, he added. For more on this story, visit bit.ly/15TON9u

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Defi cits rise for pension funds

The combined defi cit of the UK’s defi ned benefi t (DB) pension schemes increased to £256.6bn in April, according to fi gures published by the Pension Protection Fund. The estimated fi gure represents a £20bn increase from the £236.6bn defi cit recorded at the end of March for the 6,316 schemes that are eligible for entry to the Pension Protection Fund.

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Month’s grace for fl ood cover

Insurers have extended their commitment to off ering cover to properties at high risk of fl ooding by one month to the end of July. The guarantee, which is part of an agreement with government known as the Statement of Principles, was due to expire on 30 June. It will now run for another month to give more time to fi nalise the details of a replacement arrangement.

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Five-year high for pension deals

There were 14 pension buy-in and buy-out deals worth over £100m last year, the most since 2008, according to fi gures from consultancy LCP.

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Pensions regulator warns trustees of ‘over-prudence’

The Pensions Regulator has warned trustees against being over-cautious when agreeing their pension funding plans and stressed the fl exibilities available to employers struggling to close their scheme defi cits.

In its annual funding statement, the regulator sets out how defi ned benefi t scheme valuations should be carried out in the current economic climate. It stresses that trustees can use the fl exibility in the regulatory system to calculate future liabilities in a way that best suits the individual scheme and employer.

Trustees are also urged to take into account what is “reasonably aff ordable” for employers when setting the contributions they need to make to the pension scheme, and to consider giving them longer to close their defi cit.

Michael O’Higgins, chair of The Pensions Regulator, said: “I want to see pension trustees agree long-term strategies that protect retirement savers, while also enabling viable businesses to thrive and grow. We expect them to mitigate the risks to their scheme, but this does not require them to be overly prudent.” For more on this story, visit bit.ly/YF7Bqa

Lengthy retirement ‘is bad for your health’, says IEA

Ministers have been urged to remove barriers to people working longer after a study found that retirement has a detrimental eff ect on both mental and physical health over time.

The Work Longer, Live Healthier report from the Institute of Economic Aff airs (IEA) found that retiring may provide an initial health boost. But, longer term, it decreases the likelihood of someone assessing their own health as ‘very good’ or ‘excellent’ by 40%. Retirement also increases the probability of clinical depression by about 40% and of having at least one diagnosed physical condition by about 60%. Problems were exacerbated by the length of time in retirement. For more on this story, visit bit.ly/15PpcPv

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Insurer ban wake-up call for SRA

The Solicitors Regulation Authority (SRA) has been criticised for its failure to address the problem of unrated insurers providing solicitors in the UK with professional indemnity (PI) insurance. Latvian insurer Balva, which is understood to be providing 1,300, mainly small, solicitor fi rms with PI cover, has been barred by the Latvian Financial and Capital Market Commission (LFCMC) from writing business in the UK after failing to provide the Latvian regulator with suffi cient information about its UK operations. The SRA has written to the solicitors concerned assuring them that the ban applies only to new business, and that the Latvian decision does not alter Balva’s obligation to provide cover for up to 90 days after 30 September – the main renewal date – if fi rms cannot renew their cover. Balva off ered cover in the UK through passporting rights, but the LFCMC banned Balva from writing in the UK from 1 March. Gallagher London, the speciality arm of broker Arthur J Gallagher International, said: “In recent years, we have seen both Quinn and Lemma going into administration in the solicitors’ PI space and this should serve as a wake-up call to the SRA to demonstrate stronger leadership on this issue of insurer ratings.”

Berkshire Hathaway sidecar plan

Aon announced in March a new co-insurance agreement where Berkshire Hathaway would take a 7.5% ‘sidecar’ of London market placements where there is a Lloyd’s participation. The sidecar would be managed by Aon Underwriters Ltd, the managing general agency of Aon, which would have authority to underwrite business on behalf of Berkshire Hathaway Insurance Ltd. In the past weeks, there have been signifi cant concerns that this would lead to downward pressure on pricing and the freezing out of traditional syndicates. Lloyd’s chairman John Nelson recently met with Aon leaders and stated that “I am pleased that Aon has agreed to refl ect on the issues we have raised. We will be having detailed discussions to address these concerns”. Aon’s head of global relations, David Prosperi, said: “Aon remains excited about the Berkshire Hathaway sidecar and how it benefi ts clients, whose response overall has been very positive.”

PRA head voices Solvency II fears

Andrew Bailey, head of the new Prudential Regulation Authority (PRA), has said that the EU’s Solvency II proposals are “not comprehensive enough” when it comes to insurers’ capital adequacy. In a letter dated 19 April to Andrew Tyrie, chairman of the UK Parliament’s Treasury Committee, Bailey said that PRA planned to deploy “early warning indicators” in order to avoid a repeat of the Equitable Life crisis. The potential area for confl ict would appear to be Solvency II’s allowance of “internal models” rather than the one-size-fi ts-all base capital requirement model. Bailey said that if the PRA’s indicators showed that those internal models were being used to cut back on capital requirements, it could trigger “immediate supervisory action”. He stated that Solvency II would do little to make the insurance sector safer and had proved to be “vastly expensive”. He also said that, as there seemed no realistic timetable for Solvency II being implemented, the PRA had scaled back its work on implementation. Tyrie released the exchange of letters, saying that it was “a breath of fresh air to hear a regulator telling it as it really is”.

ABI urges halt to whiplash boom

The UK has become the “whiplash capital of Europe”, according to the Association of British Insurers (ABI) in its submission to the Parliamentary Transport Select Committee (TSC). The ABI asserted that, in the UK, 78% of personal injury claims following road accidents are for whiplash, and that this was twice the average for whiplash claims across

LARGE LOSSES Europe. France has an average of 30%, and Spain has an average of 31%. It also observed that, although between 2006 and 2011 there had been a 20% fall in injuries reported to the police, there had been a 40% rise in injury claims made by third parties. The ABI has proposed to the TSC that there should be an independent medical assessment of all personal injury claims and a “fair and transparent” method for calculating compensation levels for minor whiplash injuries. However, the Law Society has taken a diff erent line, asserting that such a system would penalise genuine claimant accident victims.

US$1.3bn

Estimated economic losses from the fl ash fl ooding and record rainfall experienced in Argentina in April

Flooding in Argentina – 2-4 April

Record rainfall fell across Argentina’s city and province of Buenos Aires, prompting fl ash fl ooding that killed at least 70 people. In the La Plata region, 15.7 inches fell in two hours. The total was more than the city had ever recorded for an entire month of April. Overall economic losses were estimated at US$1.3bn (£0.86bn).

Explosion in Texas – 17 April

There was a large explosion at a fertiliser plant in the town of West, near Waco in Texas. Fourteen people were killed and more than 150 injured. The explosion caused up to US$100m (£66m) in property damage to the town and surrounding area. Several homes were destroyed by fi re up to a mile from the plant, while fi res were sparked at a local school and nursing home. The police said that there was no suggestion that it was anything other than an industrial accident. Reports suggest that West Fertilizer Co, the owner of the plant, carried only US$1m (£0.66m) in liability coverage. Texas does not require such companies to carry general liability cover, even where several tonnes of volatile ammonium nitrate are being stored.

Earthquake in China – 20 April A 6.6 magnitude earthquake struck

Sichuan Province in China. At least 196 people were killed and more than 13,000 injured. Local government estimates suggested economic losses of US$27bn (£17.8bn), which would suggest insured losses of around US$250m (£165m).

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