03 March 2010
Published in: Regulation - supervision
Liquidity premium report is “positive”, says ABI
Today's report on the treatment of the liquidity premium under Solvency II is a "positive development", according to the Association of British Insurers (ABI).
The report was produced by a task force for the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS). It will serve as an input for discussions in the European Commission to determine the risk-free rate for Solvency II level 2 implementing measures.
Peter Vipond, the ABI's director of financial regulation, said the report "calibrates Solvency II in a more pragmatic way, undoing some of the problems identified earlier with CEIOPS' work."
The insurance industry wants a liquidity premium to be recognized when calculating liabilities under Solvency II to avoid what they see as overly prudent capital levels for annuities. However, in a consultation paper for Solvency II level 2 implementing measures, CEIOPS proposed that the liquidity premium should be excluded. It softened its position in its final advice, though, by keeping open the possibility of further debate [see IERM, Regulation/supervision, 12 November, "Myners "delighted" at liquidity premium move"].
The UK is watching the debate particularly closely as it has a large annuities market, and it fears the cost of its annuity provision will be driven up. Vipond added that the report "will enable European insurers to give consumers better value for money when they purchase products such as annuities."
The task force was set up by CEIOPS in October 2009 with the aim of considering, from a technical point of view, the implications of allowing for a liquidity premium.