Solvency II in focus – Unintended consequences and how regulation encourages short-term thinking in insurance

This week we serialise a study, published recently by Clear Path Analysis, on Solvency II regulations and their impact on asset managers and insurers.

The full report is available at https://www.clearpathanalysis.com/reports/solvency-ii-the-global-dimension-2012/

In the first extract, below, The International Centre for Financial Regulation’s CEO Barbara Ridpath, argues “The unintended consequences of complying  with Solvency II may actually be a less than optimal use of the insurance  industry’s funds in the interest of longer term European prosperity.”

 

Striking the right balance is difficult in almost all endeavors where there are multiple objectives involved.

Insurance regulation provides a very clear example of this. Competing objectives among insurance shareholders, insurance policyholders, regulators, legislators, and consumers create a tension within the industry.

In addition in the life insurance industry, there is an intergenerational tension: how to balance the promises made to today’s pensioners without depriving future generations of wealth?

Such tension, put to good use, can optimise outcomes for all stakeholders. However, in certain circumstances, due to events, or even inadvertently, some objectives strongly outweigh others, causing the balancing of objectives to skew.

This article will argue that the combination of the desire for financial stability occasioned by the financial crisis, together with a primacy of the solvency objective among regulators, and the value that accounting standards place on the market value of many insurance investments, have all encouraged short-term thinking within the profession.

It will argue that such short term thinking is in no one’s long term interest.

 

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