Solvency II, too bureaucratic?

Paul Tucker, Deputy Governor of the Bank of England, recently described the Solvency II directive in an interview as overly complicated and expensive. Tucker indicated that the Solvency II directive might contribute to financial instability rather than provide greater security.

According to Tucker, the main issues are the high costs associated with implementing the new directive and its complexity.

“At the Bank of England, we are astonished by the resources required for us and the market as a whole to get up to speed with Solvency II by early 2014,” said Tucker. “We are also concerned that implementing a risk-sensitive regime makes the directive too complicated, similar to Basel II for banks.”

“We must prevent regulatory bodies from ‘drowning’ in the data provided by insurers and being unable to handle this data flow. This could result in regulators overlooking significant risks,” he added.

This concern resonates with many in the insurance market, who have been warning about these issues for some time.

The new directive is considered the most significant change in this area in Europe. Potential plans to extend the directive to pension funds could cost British businesses around £600 billion, according to research by JPMorgan Asset Management. JPMorgan stated that it would be nearly impossible for some pension funds to maintain the required amount of capital.

Mr Tucker’s speech coincides with rumours that Britain’s largest insurer may relocate its headquarters to Hong Kong due to the proposed measures.

Tucker stated that insurers, like banks, “must be able to fail calmly, in a controlled, orderly manner.” If the international community removes the safety net, bondholders will be exposed to risks from such failures.

“Insurers are significant investors in securities and other financial instruments. In the near future, you will no longer be protected by an implicit state guarantee for those investments,” Tucker concluded.

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