Collective punishment for insurers?

Oliver Bäte: We're not so much nervous as concerned. The financial crisis has shaken us all to the core. Following an enormous effort we've managed to stabilize our economic system – albeit at a huge price. Now politicians and regulators are trying to prevent any recurrence of a crisis. That's understandable, but I fear that the measures will fail. There have always been crises and there always will be.

Oliver Bäte: "The insurance industry has proven to be a stronghold of stability"

Bäte: Of course we have to take action to help prevent crises, and we can learn from our mistakes. But what's going to happen with Solvency II? For the first time, the calculation of an insurer's capital adequacy takes into account the company's risk profile. However, the repercussions of the financial crisis have meant that new ideas are constantly being floated about how we might be able to protect ourselves against every conceivable crisis. And this is where insurers, banks and other financial service providers are threatened with collective punishment. No insurance company got into trouble due to its insurance business during the financial crisis. Quite the contrary, the insurance industry has proven to be a stronghold of stability.

Even so, the solvency margin requirements under Solvency II have suddenly become much stricter, particularly in life business. The situation is aggravated by accounting guidelines, which introduce volatility into our accounts that doesn't accurately represent our business.

Let's go back to Solvency II: Our analysis demonstrates that national specifics can lead to distortions here. The issue is whether an insurance group operating from Germany can still achieve competitive capital ratios or whether it is massively disadvantaged by the national specifics of the regulatory and accounting environment. Corporations need to be analyzed as a unit, independently of where their head office is based.

Bäte: It's still completely unclear how the various initiatives – i.e. Solvency II, the accountancy rules enshrined in the new International Financial Reporting Standards, the deliberations on insolvency protection, and the issue as to what extent insurers are relevant to the economic system – affect each other and what shape they will take. There's a great deal of discussion going on and a lot of figures are being bandied about, but there are no serious estimates. The greatest danger in this plethora of ideas is that everyone wants to focus on their own patch but nobody's looking at the overall picture. If we're not careful, there will only be losers in the end because the industry will be choked.

Bäte: Solvency II has indeed become very complex, and I can't help but ask myself whether this complexity is helpful. However, insurance is a complicated business. We shouldn't be under the illusion that Solvency II will be immediately fully comprehensible.

Bäte: Life insurance products with long-term guarantees are being squeezed from two directions. On the one hand, our customers are suffering from a prolonged low-interest environment. Low interest rates are likely to help generate an upswing in the economy, but this is only reflected very slightly in greater lending volumes. The people who have to foot the bill are investors in low-risk products, all savers and holders of life insurance products. They will pay more today and will feel the backlash when they get older and find that the income from their pensions is lower than it was for previous generations.

The situation is becoming even trickier for insurance companies. Capital costs money, and if we have to put additional capital aside unnecessarily due to a climate where excessive caution reigns, this will ultimately damage everyone.

At the same time, we all know that in the long run, countries with aging populations will not be in a position to provide a comprehensive solution for dealing with the long-term effects of retirement provision. Ultimately, people who want private provision are left with three options. They will have to accept a lower return or they will need to take complete responsibility for the investment risk involved in making provision for retirement because they can no longer afford the products that used to be standard with a guaranteed yield. The third possibility – which would be absolutely catastrophic – would see people putting less money aside and increasing the risk of poverty in their retirement.

We need to ask ourselves whether to accept this situation with our eyes wide open or whether we want to design the regulatory framework and hence the solvency requirements for this form of retirement provision in a fair and just way. Solvency II needs to be adapted to these scenarios.

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