By Daniel Hunter

As regulators start to assess the impact of potential rules to align the treatment of insurance across Europe, Deloitte, the business advisory firm, highlights the huge implications for annuity providers.

The European Commission’s Long Term Guarantee Assessment - part of the development process for the Solvency II rules - will test the impact of different approaches to how insurers set reserves and capital for products like annuities.

Deloitte says the inappropriate treatment of this could force insurers to hold greater reserves, raise more capital and charge more for annuities — resulting in lower pension payments for consumers.

“Solvency II has been several years in the making and brings many benefits, particularly in the way insurance companies manage their risks and hold capital against them," Tamsin Abbey, insurance partner at Deloitte, said.

"However, one of the key stumbling blocks in the negotiations has been the treatment of annuity liabilities and the implications for customers at retirement.

“This initiative by the Commission and EIOPA to test potential approaches is welcome, but it does place a burden on annuity providers at a busy time. The findings will prove important in helping to finalise this aspect of the Solvency II regime and reduce uncertainty.

“The Matching Adjustment is an extremely important issue for life insurance companies and pensions savers. Depending on what the final regulations say, annuity providers might need to hold larger reserves, which could lead to them either reducing dividend payments or raising more capital. Insurers must ensure senior management understand and manage their company’s risks properly. How much capital is held in the technical provisions is only one part of the equation.

“Consumers could also be affected because annuity rates could fall by between 5-20%, and that will effectively make retirement a lot more expensive.”

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