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EU pension rules changes could infl ate UK funding shortfall to £450bn Preliminary fi ndings of quantitative impact study fl ag up potentially damaging results for defi ned benefi t schemes
UK companies could see their defi ned benefi t (DB) pension scheme defi cits soar by £150bn to a total of £450bn under proposed changes to European Union pensions legislation, the European Insurance and Occupational Pensions Authority (EIOPA) has revealed.
EIOPA has published the preliminary fi ndings of the quantitative impact study that it ran in eight countries to assess the impact of planned changes to the Institutions for Occupational Retirement Provision Directive.
In the UK, the Pensions Regulator calculated the impact of the plans against three scenarios using data from 6,432 DB pension schemes, with additional information provided by some of the largest UK schemes. Together, these schemes had a defi cit of £300bn at the end of December 2011.
Under the European Commission’s plans for sponsors to hold additional capital to protect their schemes from uncertainty – the solvency capital requirement – the funding shortfall increased to 24%, or £450bn.
While EIOPA stressed the preliminary nature of the results and the need to treat them “with caution”, CBI director of employment Neil Carberry said they showed just how damaging the proposed changes could be. For more on this story, visit bit.ly/ZkxHsr
MPs on select committee call for fresh look at cost of state pension shake-up
Early implementation of single state pension threatens both employers and industry with ‘signifi cant burden’
The government should provide an updated assessment of the costs of creating a single-tier state pension after bringing forward the date for the change by a year, MPs have said.
The work and pensions select committee said the plans to introduce the new single state pension in April 2016, and not April 2017 as originally planned, could have “signifi cant implications” for the public, pensions industry and employers. The decision to bring forward the reforms was announced by Chancellor George Osborne in his March Budget.
The move to a single state pension will bring an end to workers being able to contract out of the second state pension and instead receive payments through their workplace scheme. Both the employee and employer then pay lower National insurance contributions.
Having one less year to prepare for this would impose a “signifi cant burden” on employers and the pensions industry, MPs said.
“We believe it is therefore the government’s clear responsibility to work with these key stakeholders to ensure that the transition to the ending of contracting-out is as smooth as possible,” the committee’s report explained. For more on this story, visit bit.ly/Za2xne
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New record for reinsurer capital
The amount of capital held by reinsurers worldwide increased to a record $505bn (£330.5bn) last year as reinsurance companies more than recovered from the record catastrophe losses seen in 2011, Aon Benfi eld has said. The consultancy detailed a $50bn (£32.7bn) increase in reinsurers’ capital last year from the total recorded at the end of 2011 – equivalent to 11% growth.
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Buy-in and -out deals hit £4.5bn
Pension schemes shifted almost £4.5bn of their liability risk onto insurers last year using buy-in and buy-out deals, according to fi gures published by Hymans Robertson. The consultancy’s latest quarterly Managing Pension Scheme Risk report shows that almost half of this activity was recorded in the fi nal quarter of 2012.
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One in four has ‘lost’ pension pot
Almost a quarter of UK adults have lost track of at least one of their pension schemes, according to research published by Age UK. In total, 23% of respondents to the charity’s survey on people’s attitudes to and plans for retirement said they had no idea what had happened to at least one of their workplace pension pots. The problem was particularly prevalent among younger savers, with 37% of 18- to 44-yearolds having lost track of at least one scheme.
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First quarter of 2013 brings highest deaths since 2005
The fi rst three months of this year saw the most deaths registered in a quarter for eight years, according to an analysis of offi cial fi gures published by Towers Watson.
Provisional estimates from the Offi ce for National Statistics indicate that 144,299 deaths were registered during the fi rst 13 weeks of 2013. This is 6% higher than the 135,583 recorded over the same period last year, the consultancy’s analysis shows.
Most of the 8,716 increase occurred, like most deaths in general, among the older sections of the population, with a 7,444 (6%) increase in deaths among people aged 75 or older, and a 5,277 (10%) increase among those aged 85 or more.
Matthew Fletcher, a senior consultant at Towers Watson, said that the increase in deaths among older groups could not be blamed entirely on the prolonged cold weather in light of the overall population growing in size and age. But the cold start to the year did appear to have had a “signifi cant impact”, he added. For more on this story, visit bit.ly/Zxu4QE
Focus on risk management boosts resilience of SMEs
Five years of economic stagnation and volatility have forced small- and mediumsized enterprises (SMEs) in the UK to signifi cantly change their approach and attitude to risk management, according to research published by insurer Zurich.
Adapting in Tough Times: The Growing Resilience of UK SMEs details a major shift in how insurers manage risk, with 53% of businesses surveyed spending more time on their business strategy and risk management than they did before the fi nancial crisis.
More than one-third (35%) of those questioned are doing more long-term fi nancial planning and 33% are considering their business continuity plans more frequently than fi ve years ago, such as by planning for the failure of key suppliers.
According to the report, which was written by the Economist Intelligence Unit, this shift is “a hugely positive step for the long-term resilience and sustainability of SMEs and the UK’s SME economy”.
However, the research also found that SMEs had become more conservative in their approach to risk taking, with 25% rating themselves as risk-averse compared with other companies in their industry. For more on this story, visit bit.ly/15md5s7
›GENERAL INSURANCE NEWS ROUND-UP
Caribbean fund adds rain cover
The Caribbean Catastrophe Risk Insurance Facility (CCRIF) is expected to add extreme rainfall insurance to its portfolio this year. “We are currently in discussions with a number of countries in the Caribbean to encourage them to purchase this coverage in addition to hurricane and earthquake coverage,” said the chief executive offi cer earlier this year. “We’re also in discussions with countries that are not at risk for hurricanes or earthquakes.” He also told Best’s Insurance News Service: “It’s diff erent from traditional insurance, which is based on assessing the damage after an event, which can take months or up to a year.”
Losses associated with heavy rainfall are not covered by hurricane coverage – this includes wind and storm surge damage. Swiss Re has worked with the CCRIF to develop a trigger to invoke coverage for the extreme rainfall insurance. The facility transfers some of its risk to the reinsurance market by purchasing traditional reinsurance and is also looking at catastrophe bonds.
CCRIF has experienced signifi cant rain-related losses in the region, including from the Dominican and Haiti earthquakes and Hurricane Ike.
Consumer Insurance Act update
The Consumer Insurance (Disclosure and Representations) Act 2012 come into force on 6 April. This will change over 100 years of industry practice and replace parts of the Marine Insurance Act 1906.
The act removes the consumer’s duty to volunteer material facts to their insurer or broker when taking out a policy, replacing it with a responsibility to take reasonable care when answering questions relating to the policy. The onus has shifted to the broker or insurer to ask the right questions for them to obtain the information they need.
Motor insurance peaks too soon
Early analysis of the 2012 annual results released from two-thirds of the UK motor insurance industry suggests that the market will return its best result in fi ve years. However, despite the Net Combined Ratio (NCR) improving by almost 20 percentage points, the NCR is expected to reach only 102, rather than below 100, a result that would produce an underwriting profi t.
The results also show that many companies are expected to reduce prices during 2012 and 2013, meaning that profi tability has already peaked. Catherine Barton, partner in Ernst & Young’s fi nancial services practice, commented: “These early results show that the market has turned too soon, well before many players have managed to break even. To buck this trend, less profi table insurers should be looking to maintain underwriting discipline in order to improve their performance – but this does not seem to be supported by the pricing actions we are seeing in the market.”
She added: “There is a clear pattern emerging between the results of the past three years and the shape of the market a decade ago. The preliminary results this year confi rm that, again, the market has softened before most players have become profi table outside of ancillary income. This time, however, we believe that insurers will need to face up to the reality of performance deterioration more quickly, as the pressures being put on ancillary income by regulation and the Competition Commission will force insurers to address the shortfall in profi ts more quickly.”
Lloyd’s returns to profi t
Lloyd’s of London posted a US$4.5bn (£3bn) pre-tax profi t last year, following a loss of US$800m (£525m) in 2011. Lloyd’s posted “a strong result, despite incurring US$16bn (£10.5bn) of total net claims in 2012, including Superstorm Sandy”, said CEO Richard Ward in a press release. Total claims were down from US$20.6bn (£13.5bn) in 2011, which was Lloyd’s worst year on record for natural catastrophes. Lloyd’s central fund, which pays claims if an insurer fails, rose 4.1% in 2012 to US$4.05bn (£2.7bn), while investment returns were up 31% to US$2.08bn (£1.4bn) compared with 2011. Gross written premium income in 2012 reached a record high of US$40.5bn (£26.6bn). Lloyd’s combined ratio improved to 91.1% from 106.8% in 2011.
PRA sets out objectives
The Prudential Regulation Authority (PRA) has published its approach document setting out how it will regulate insurers, following the replacement of the Financial Services Authority by the PRA and the Financial Conduct Authority on 1 April. The document, released on the day the ‘twin-peak’ regime was formally introduced, was revised from the version published in October 2012. Changes were made to several areas, including: recovery and resolution planning for insurers (a description of the gaps that may exist in the current insolvency framework); amendments to refl ect revisions to the approved persons regime; updates to refl ect the introduction of ICAS+; the approach to allow insurers to use their Solvency II internal models to meet current individual capital adequacy standards; and updates refl ecting the PRA’s new duties in relation to external auditors (see feature, p32-34).
LARGE LOSSES
US$443m Estimated economic losses from the hail, winds and tornadoes that hit China during March
Europe winter weather – 12-31 March
Late winter weather aff ected Europe throughout March, bringing heavy snowfall, sub-freezing temperatures, high winds, ice and fl ooding. The hardest-hit areas were found in France, Germany and Ukraine. Total economic losses were preliminarily estimated at €1.4bn (£1.2bn), including €706m (£608m) in France alone. More than 100,000 insurance claims were fi led in France, with automotive claims surpassing €101m (£87m).
Severe weather, Asia – 9-13 March
Severe weather was also prevalent in Asia, highlighted by a strong tornado that left at least 35 people dead in Bangladesh’s Brahmanbaria district. In China, an extended stretch of hail, damaging winds and isolated tornadoes left 29 people dead, 331,250 homes damaged or destroyed and an estimated US$443m (£290m) in economic losses during March. Several days of hail also left heavy damage in central and northern Vietnam.
