September 02, 2015

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.