Solvency II could lead to insurers holding safer assets but this could have negative impact on financial markets and consumers, according to a report published by the Bank for International Settlements (BIS). The report, Fixed income strategies of insurance companies and pension funds, examines the effects of Solvency II and IFRS* on the asset allocation of insurance companies and pension funds and the resulting impact on financial markets. Mark Carney, Chairman, Committee on the Global Financial System at the BIS, said introducing the report, “Over the coming years, accounting and regulatory changes could lead to reallocations of funding across financial instruments and sectors and encourage greater use of derivatives.” “The changes could also make it more difficult for insurance companies and pension funds to play their traditional role as global providers of long-term risk capital and accelerate the shifting of risks to households,” he added. The report said that the overall effect of accounting and regulatory changes is likely to be a reallocation of assets to reduce risk. “The proposed changes tend to make it more expensive to hold equity-like instruments, structured products, and long-term or low-rated corporate bonds, whereas government bonds and covered bonds will receive relatively favourable capital treatment.” Faced with higher capital charges on riskier assets, insurers have a number of options:
- Change size and asset allocation portfolio.
- Transfer risk to financial markets through reinsurance, securitisation of use of derivatives.
- Restructure or streamline group operations.
- Redesign products over time by reducing guarantees and options.