The Association of British Insurers came out yesterday with a firm statement on the proposals to increase the capital that insurers ‘hold’, arguing, based on analysis by Willis Towers Watson that the proposals would in fact on average lower the capital ‘held’.
This results conflicts somewhat with UK government claims that the proposals would free up capital to support investment in wind farms and other worthy things.
Figure 4.1 from Willis is copied above. It had Eumaeus scratching his head for a long while, even with help from his dogs. The block colour represents the range in which ‘all’ the sample of 16 firms sit, except for the maximum and minimum outlier values, so the block colour does not in fact represent ‘all’ firms, but never mind.
But the results are intriguing. Under the PRA scenario A, for example, the average reduction in own funds (Solvency II ‘capital’) leads to an average reduction in capital of about 5%. But that is for all firms. For all annuity providers – who are the main customers for MA – the average reduction is 20%. And worse, there is an outlier firm that loses 30% of its capital. Yikes!
Admittedly, scenario A is severe, and the PRA always signalled this, but none of the other scenarios look particularly encouraging given the purpose of the government proposals. For the proposals were to free up capital for long term infrastructure projects, which could only come from firms with long term liabilities, i.e. annuity providers. But it is annuity providers who are most severely affected under all the scenarios!
It’s all a mess and will lead to more friction between the government and the Bank of England.
That is not to say the reforms are a bad thing. Far from it: in Eumaeus’ view they do not go nearly far enough. But the mess is an indication of the broken nature of life insurance, and of the failure of regulation to deal with the problems in a timely way in the aftermath of the Great Financial Crisis.
Those who sow the wind etc etc.
[UPDATE] The Eumaeus response to HMT is here.