General Insurance Article - Solvency II Fundamental Spread: Annuity prices remain steady


Changes made today to the calculation of the Solvency II Fundamental Spread by EIOPA (European Insurance and Occupation Pensions Authority) should help ensure annuity prices remain steady for customers, the Association of British Insurers said.

 The ABI, which has been working closely with EIOPA to secure this outcome, estimates that this prevents a potential £2.5 billion increase in the value of annuity liabilities across the industry. This will improve firms’ solvency positions and encourage long term investments, including infrastructure. It will also avoid a potential reduction in annuity incomes paid to new customers as insurers will not need to hold an excess of capital for each customer.
  
 The Fundamental Spread is set by EIOPA as part of the Solvency II regime, a new EU wide regime which starts next year, and specifies how much capital insurers and reinsurers need to hold. The Fundamental Spread is used by firms as a part of their Matching Adjustment calculation and represents the expected cost of default and downgrade of assets which back providers’ annuity business and that firms are therefore exposed to. Today’s changes to the fundamental spread calculation are essential to ensure firms’ Matching Adjustments work as intended under the new Solvency II regime, and that the Matching Adjustment benefit is not undermined‎.
  
 The Matching Adjustment is a crucial concept of Solvency II for the UK pensions market, secured during negotiations, recognising that insurers selling annuities are not exposed to short-term market fluctuation. This is intended to prevent significantly higher annuity premiums for pensioners, by reducing the capital that insurers need to hold to ensure they pay pensioners in the future.
  
 Hugh Savill, ABI Director of Regulation, said:
 "This sensible change in the calculation of the Fundamental Spread is a result of the close work between the ABI and EIOPA on this issue. This decision will benefit customers, and prevent them being offered higher annuity prices as a result of insurers needing to hold more capital. The Matching Adjustment is a key part of Solvency II for UK pension providers, and this necessary change will ensure it works as intended following lengthy negotiations on Solvency II.
  
 "With just weeks until the start of Solvency II, firms will reflect this vital change as the industry works towards the smooth and successful implementation of the regime."

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