LONDON (Reuters) - Britain’s insurers will need more time to comply fully with new European Union capital rules that come into force next January, the Bank of England has said.
Andrew Bailey, who heads the BoE’s supervisory arm, the Prudential Regulation Authority (PRA), said implementing the Solvency II rules is his single biggest task this year.
The reform aims to ensure that insurers such as Prudential (PRU.L), Aviva (AV.L) and the Lloyd’s of London insurance market hold enough capital to meet policy commitments that stretch out for decades in some cases.
To determine the level of capital needed to cover liabilities, insurers use a complex mix of real and extrapolated interest rates as far forward as 60 years.
“The issue we have got is we have had quite a big shift down in the risk-free interest rate curves and that affects capital requirements under Solvency II,” Bailey told the Reuters Financial Regulation Summit.
In Britain the rate is based on sterling market rates as far forward as 50 years, which are currently very low.
Insurers in the euro zone only have reliable market rates up to 20 years ahead, relying thereafter on a rate calculated by regulators. This latter rate tracks higher far sooner than the sterling rate, thus dampening the amount of capital needed to potentially give euro zone insurers an advantage.
Straight comparisons between British and euro zone insurers will be harder for investors.
“I would prefer it if everybody was done on the same basis, frankly,” said Bailey, who is also a deputy governor of the BoE.
“We can’t have one set of firms benefiting from one set of treatments and another set benefit from a slightly different set of treatments,” Bailey added.
The EU rules allow regulators to grant transitional relief to insurers for up to 16 years to meet Solvency II in full.
“As long the risk-free curves remain where they are then firms will be making greater use of the transitional capital structure in Solvency II than they thought they would,” he said.
Some UK insurers will only meet Solvency II requirements in January with transitional relief factored in.
By making such transitional periods transparent, the PRA hopes to prevent market pressure building up on firms from January to find more capital quickly.
“This is not a world where the capital regime is bust. We don’t regard our insurance companies in that position,” Bailey said.
Bailey said the PRA will likely make a statement on the use of transitional periods before January.
Reporting by Huw Jones, editing by David Evans