Insurers must avoid investment traps of Solvency II says Swiss Re’s Hess

Insurers should fight for their right to invest more freely and, for the good of themselves and their policyholders, better communicate their value proposition to supervisors, politicians and buyer groups, urged Mr Hess and other experts at Swiss Re’s Nordic Risk & Insurance Summit (NORIS) this week. They should also more strongly make the case that the insurance industry does not pose the same systemic risks as the much-maligned banking sector, the experts added at the conference in Oslo, Norway. Under Solvency II proposals, investments deemed risky by the regulator incur a higher capital charge than low risk options. By design this discourages insurers from overly investing in volatile markets or assets.hideBut, according to Mr Hess, who is also Head of Economic Research & Consulting at Swiss Re, this will reduce insurers’ investment income. He is particularly concerned that many insurers are being pushed towards investment in governments bonds that, despite current concerns, are seen as the safest of investments. They only deliver very low investment yields and, along with cutting costs, will force insurers to boost premium income to make up the lost money. “I think insurers should really be careful that they do not run into too many traps on the investment side. We should really fight to have the freedom to invest—of course within the borders of risk management. This is the background behind our critique of Solvency II,” said Mr Hess. He warned that in light of the various bailouts in several European countries there is now increased political pressure on supervisors to ensure that investors, including insurers, buy government bonds. “They need someone to buy their debt. But it is simply not fair to push certain investors into government bonds,” he said. “Strategically, as an industry, insurers do not want to be forced into holding government bonds because when you have, for example, a German government bond you get a terribly low return—it’s a negative fear premium,” he continued. Solvency II will further force insurers from investing in what Mr Hess described as the ‘real economy’. This also means that insurers’ investments are not helping to drive growth in struggling economies. For example, investment in infrastructure incurs one of the highest capital charges under Solvency II’s proposals. “Considering the importance of investment income to insurers this is a terrible situation. Solvency II regulation basically pushes insurers even further into that corner. Strategically it is another restriction,” bemoaned Mr Hess. He argued that added to financial analyst demands, accounting requirements and rating agencies’ demands on capital, Solvency II will add to the accumulation of restrictions placed on insurers and their investment strategies. “And the result—insurers get squeezed. We have a soft market and we have low investment returns—so what is the way out? I do not think there will be an immediate fix on the pricing side. That will take time and as we have seen in the past the cycle takes time—claims have to come up…but if the industry is pressured to raise rates it will happen,” Mr Hess explained. Despite these restrictions he believes the business model of non-life insurers is valid. “Companies need protection and there is no real alternative, and that is a good thing for the insurance industry.” Mr Hess and other experts agreed that insurers needs to better articulate their concerns over Solvency II and other issues including the low interest rate environment [see related story]. “We need to win the public and create awareness amongst the political decision makers by better communicating the value proposition of insurance,” said Jean-Jacques Henchoz, Member of the Group Management Board Division Head Client Markets EMEA at Swiss Re. “Our industry needs to inform the public sector, policy makers, regulators and other stakeholders about the role of insurance and its characteristics. In particular we need to distinguish ourselves from the other financial players and make sure the policy makers understand the prerequisite and incentive for a private insurance market to function properly,” he said. He reiterated Swiss Re’s view that any regulatory system should take note of the differences between insurance and banking activities and focus on systemically important financial activities but certainly not institutions.

Insurers must avoid investment traps of Solvency II says Swiss Re’s Hess

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