After Solvency II is implemented next year, it is important that the capital charges that a firm is required to apply to each asset in which it has invested reflect the true underlying risk of the asset class they represent, the Bank of England has said in a forthcoming article.
In particular, barriers which might prevent insurers from investing in the real economy should be removed, Robin Swain and David Swallow of the Bank's Prudential Policy Directorate have written in the Bank's latest Quarterly Bulletin. "Therefore, the standard formula capital charges will need to be further considered following the implementation of Solvency II."
Criticism from insurers over what they consider to be unreasonably high levels of charges for some assets such as infrastructure has already prompted a rethink among regulators.
The European Insurance and Occupational Pensions Authority (Eiopa) announced in February that it had started a new consultation project that will look into the treatment of infrastructure investments by insurers as a part of the Solvency II framework (IAR, 5 February, Eiopa reconsiders Solvency II infrastructure investments charge), and last week Eiopa chairman Gabriel Bernardino said the authority would next month publish a proposal to reduce the capital charges that apply to a subset of infrastructure debt that is deemed "safe" (IAR, 3 June, Bernardino hints at features of capital-light infrastructure investments).
In the Bank of England article -- on the prudential regulation of insurers under Solvency II -- the authors also consider the greater flexibility that insurance companies will have in their investment decisions, "as the existing crude, quantitative limitations over asset choice and composition limits will be removed."
But the 'prudent person principle' approach to regulation places responsibility for investment decisions on a firm's management, the article pointed out, and the PRA will be assessing the ability of a firm's management to identify, manage and mitigate investment risks.
