March 01, 2012

New Solvency II Insurance Regulations Go Too Far and Policyholders Will Ultimately Bear the Costs, Says BNY Mellon-Economist Intelligence Unit Study


New research sheds light on potential impact of Solvency II on retail consumers, the insurance sector and industry more generally

LONDON, March 1, 2012 — New research sponsored by BNY Mellon, the global leader in investment management and investment services, and conducted by the Economist Intelligence Unit, found that a majority of institutions surveyed believe that Solvency II oversteps the mark. And almost three quarters of survey respondents (73%) agree that the costs to insurers of compliance with the new regulations will be passed on to policyholders, and there is concern that both corporates and individuals may choose to be under-insured as a consequence.

Encompassing a fundamental review of the capital adequacy regime for the European insurance industry and set for implementation in January 2014, Solvency II aims to establish a revised set of EU-wide capital requirements and risk management standards that will replace the current solvency requirements.

The Economist Intelligence Unit conducted a survey of 254 EU-based companies, including insurers, other financial institutions (excluding insurers) and corporates (non-financial institutions). The research – Insurers and society: how regulation affects the insurance industry's ability to fulfil its role – is available at www.bnymellon.com.

Paul Traynor, Head of Insurance, Europe, Middle East & Africa at BNY Mellon, said: "There is an understandable tendency on the part of regulators to focus more on protection than risk-sharing, but that presents the insurance industry with a challenge. The public want insurers to fulfil three key roles for society: provide individuals with saving & pension products and to insure them against specific risks; provide corporations with an efficient mechanism to transfer risk; and to be a source of debt & equity capital to industry.

"However, the survey suggests there is a real concern that the cost of regulation may raise the cost of life cover and annuities, perhaps beyond a tipping point. It also suggests that, as currently calibrated, the regulations will inadvertently crowd out debt and equity capital for industry in favour of EU sovereign debt and unproductive cash holdings. That will make it ever more difficult for insurers to make those positive contributions to society."

Monica Woodley, Senior Editor at the Economist Intelligence Unit, said: "A majority of respondents favour an overhaul of insurance regulation in the EU and recognise the importance of the sector to society. Indeed, 86% of insurers surveyed believe the industry must contribute positively to society. Our survey findings indicate that, although there is a perception that something should be done to improve the current situation and that harmonisation should bring its own benefits, the proposed regime could be seen to be overly cautious. The findings suggest that while the industry welcomes the broad thrust of the regulation, certain calibrations are wrong."

Solvency II was designed to ensure better protection for policyholders, but raises important questions about the extent to which consumers and corporates will ultimately foot the bill for the new regulations – either directly through higher costs or indirectly via less comprehensive products. Meanwhile, the demands of the new regime threaten to disrupt the key role played by insurers as investors in the capital markets, by pushing them towards 'safer' assets with lower capital charges, and away from the equities and non-investment grade debt on which much private industry depends for financing.

Only 16% of respondents agreed that the proposed legislation strikes the right balance when it comes to ensuring insurers have sufficient capital to meet their guarantees.  Insurers and FIs (excluding insurers) are more critical of Solvency II, with 55% believing the directive goes too far compared to 39% of corporates (non FIs). Less than one in five insurance respondents (18%) believe that most insurers are insufficiently capitalised under the present regime.

A majority of respondents believe that policyholders will end up paying for implementing the directive, although insurers are markedly less convinced (57%) than FIs (excluding insurers) (82%) and corporates (non FIs) (69%) raising the question of how they see the costs of regime change being met. Over half of survey respondents (51%) believe the shift to unit-linked policies, which put the investment risk on the policyholder, will have a negative long-term affect on pension and long-term savings provision, with life insurance and annuities considered the products most likely to be negatively affected.

Other key findings include:

Insurers expect to further de-risk their asset allocations – a clear shift down the risk spectrum is anticipated by respondents. Assets expected to attract more interest include investment-grade corporate bonds, cash and short-dated debt, at the expense of non-investment-grade bonds, equities and long-dated debt.

Corporates seem less aware of the impact Solvency II will have on debt issuance – among insurers and FIs (excluding insurers) there is a strong consensus that Solvency II will make the tenor and rating of bonds from corporate issuers more significant, as insurers, driven by capital charge considerations, are increasingly pushed towards investment-grade debt.

Regulators should revisit their capital charge levels – overall, less than a quarter of respondents (22%) believe that regulators should maintain the current capital charges.

Solvency II may create a 'squeezed middle' among insurers – only 16% of respondents expect no material impact from Solvency II on the structure of smaller friendlies and mutuals, and more than half (54%) believe the pressures of the new regime will result in a spate of consolidations to achieve scale.

BNY Mellon has insurance assets under custody of $2 trillion and its clients include 75% of top 100 life insurers and 70% of top 50 non-life insurers globally.  The company manages in excess of $83 billion on behalf of insurance companies.

BNY Mellon is a global financial services company focused on helping clients manage and service their financial assets, operating in 36 countries and serving more than 100 markets.  BNY Mellon is a leading provider of financial services for institutions, corporations and high-net-worth individuals, offering superior investment management and investment services through a worldwide client-focused team.  It has $25.8 trillion in assets under custody and administration and $1.26 trillion in assets under management, services $11.8 trillion in outstanding debt and processes global payments averaging $1.5 trillion per day.  BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation. Additional information is available on www.bnymellon.com or follow us on Twitter @BNYMellon.

The Economist Intelligence Unit (EIU) is the world's leading resource for economic and business research, forecasting and analysis. It provides accurate and impartial intelligence for companies, government agencies, financial institutions and academic organisations around the globe, inspiring business leaders to act with confidence since 1946. EIU products include its flagship Country Reports service, providing political and economic analysis for 195 countries, and a portfolio of subscription-based data and forecasting services. The company also undertakes bespoke research and analysis projects on individual markets and business sectors. More information is available at www.eiu.com or follow us on www.twitter.com/theeiu.

The EIU is headquartered in London, UK, with offices in more than 40 cities and a network of some 650 country experts and analysts worldwide. It operates independently as the business-to-business arm of The Economist Group, the leading source of analysis on international business and world affairs.

This press release is issued by The Bank of New York Mellon to members of the financial press and media. All information and figures source BNY Mellon International unless otherwise stated as at December 31, 2011. The Bank of New York Mellon, London Branch, registered in England and Wales with FC005522 and BR000818 Branch office: One Canada Square, London E14 5AL Authorised and regulated in the UK by the Financial Services Authority.