SimˈpōzēəmGideon Benari, Editor, Solvency II Wire The treatment of long-term guarantees (LTG) remains key to the successful implementation and application of Solvency II. It raises questions about market consistent valuation of assets and liabilities and has far reaching implications for long-term investment in the wider economy, beyond the more immediate effect on insurance firms. Solvency II brings much needed reform to the regulation of the insurance industry in Europe, introducing a market consistent and risk based framework. Under the new regulation insurers will be required to value the whole of the balance sheet on a market consistent basis and to hold enough capital to meet their liabilities based on this valuation. Because the present value of future liabilities is calculated based on current market prices there is a danger that if these prices do not reflect economic reality the valuation of the liabilities will be distorted. In other words, extreme circumstances today could warp the value of liabilities that will only have to be paid long into the future. And because the present value of future liabilities determines the amount an insurer has to set aside to meet the liabilities this distortion could result in one of two negative outcomes: undercapitalisation or overcapitalisation. Undercapitalisation means insurers may not be able to meet their future obligations. Overcapitalisation means insurers will be less able to attract long-term funds. While the former will affect policyholders and insurance firms, the latter will affect the wider economy because of the role of the insurance industry as a long-term investor. The problem for policymakers is how to provide adequate protection for consumers without detracting from this vital role of the insurance industry.