Insurance: Is anyone looking at how Solvency II might affect investments in the real economy and the premiums to pay?

Sir, Alistair Gray writes about how investors in the insurance industry are struggling to assess the impact as European regulators finalize details of Solvency II regime, “Insurers face crunch over new capital rules” September 1.

Is anyone looking at how Solvency II might affect the investments of the insurance companies in the real economy?

Is anyone looking at how Solvency II might affect premiums for covering different risks?

The answer to both those question is most probably a “NO!” That because regulators molded in credit-risk weighting traditions, clearly do not care one iota about such minutia.

So what could the consequences of Solvency II then be for other than the investors?

First, it will certainly create incentives for insurance companies to hold more of safe “infallible assets”, and so there will be additional demand for sovereign debt and less demand for riskier assets… like long term investments in infrastructure projects. And so the safe havens will be further dangerously overpopulated and the riskier but perhaps worthier bays even more underexplored.

As for the insurance clients let me speculate over what it could imply in terms similar to those applied by the Basel Committee to banks. For instance when selling health insurance to smokers and non-smokers.

Traditionally insurers looked at actuarial risks of smokers and non-smokers in order to decide on the premiums to charge and the exposures to accept, and that was it. But, now, it could be that since regulators believe the smokers are “riskier” than the non-smokers, Solvency II could have in mind using the same actuarial studies in order to set higher capital requirements for insuring smokers than insuring non-smokers. That would of course mean that the spread in premiums paid by these two groups would increase… and drive up any inequalities.

@PerKurowski

Because of way too optimistic expected returns, pension funds will not be able to deliver.

Sir, Martin Wolf writes “Pension reform makes sense up to a point” March 11 and I hope he takes the opportunity to also look in at the rates of return of pension funds used in actuarial valuations.

As an Executive Director of the World Bank (2002-2004) I continuously held that “It really is not possible for the value of investment funds to grow, forever, at a higher rate than the underlying economy, unless they are just inflating it with air, or unless they are taking a chunk of the growth from someone else. Therefore when we observe how many Social Security System Reforms are based on the underlying assumption that the average pension fund will obtain returns of 5 to 7 percent, in real terms, forever, I have to wonder when we are going to use our knowledge, and inform the world that this is just plain crazy.”

And even after the crisis, the world mostly uses those overly optimistic expected rates of returns in… what cheats they are!

PS. The extract is from my book Voice and Noise of 2006, one of which I also then gave Martin Wolf. Unfortunately Mr. Wolf must not have read it otherwise he would not have perhaps wasted so much valuable opinion space on his macroeconomic-imbalances explanations for this crisis, and would have understood better and earlier the monstrous regulatory imbalances.

PS. Strangely it seems this article by Martin Wolf has disappeared from the web.