The dead kitten is becoming a cat.
Here’s a snapshot of the price action in Prudential on Wednesday afternoon:
Although it is not the only insurer moving higher:
Those gains are in part due to the performance of the wider market — the FTSE 100 was up another 0.8 per cent at the time of writing — but also because of news from the body advising the European Commission on proposed new capital rules called Solvency II .
The Committee of European Insurance and Occupational Pensions Supervisors (Ceiops) has just published a report on the illiquidity premium and the discount rates used to calculate guaranteed liabilities.
Now, this is a key issue for annuity writers like Pru, Legal & General and Aviva: there have been fears that the new rules could have forced the above companies to raise tens of billions in fresh capital.
But Task Force is not proposing anything more onerous that the currently rules, according to broker KBW:
The Task Force is effectively recommending the use of a swap rates plus 35-40bps for the discount rate on UK-style annuity liabilities. This would only be a little bit more onerous than the current Solvency 1 basis, which amounts to around 40-60bps over swap rates. This is an improvement on previous recommendations by CEIOPS and it would be beneficial for UK life insurers with large annuity liabilities, especially Legal & General.
However, it is worth noting that Ceiops issued a covering letter alongside the report saying that it is not convinced the recommendations should be applied.
It does not want a premium included at all in Solvency II, as KBW explains.
CEIOPS has mentioned that an alternative method to using a liquidity premium on valuing insurance liabilities would be to consider adjusting the value of assets that do not meet the definition of being active or within deep liquid and transparent markets. It believes that this “would limit the need to introduce unreliable and stressed market inputs in the risk-free rate” i.e. “liquidity premiums”.Nonetheless, KBW thinks today’s report provides the EU with the theoretical ammunition to go ahead with a recommendation the industry wants.
Ceiops agrees that, if a liquidity premium were to be adopted in Solvency 2, then the principles put forward in the Task Force’s report “could constitute an adequate basis for the recognition of the liquidity premium”. However, members of CEIOPS are currently undecided whether a liquidity premium should be applied here. We are of the view that the tone of the letter written by the European Commission in November 2009 to CEIOPS implies it wants a “liquidity premium” included.
And that potentially removes another threat from Solvency II.
Related link:
Ceiops poised to give reprieve in UK on annuities – FT
Solvency rules could raise capital needs – FT
Banks, insurers and sovereign debt – FT