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The Actuary The magazine of the Institute & Faculty of Actuaries

Insurance regulation poses risk to financial stability

Regulatory and accounting changes faced by the insurance industry will dramatically alter its investment style, meaning companies will face greater problems raising funds to invest in the real economy, a legal firm has warned.

Michael Wainwright, partner at international law firm Eversheds, said: "The sovereign debt crisis in Europe is beginning to highlight the risk inherent in the new European framework for making laws on financial services.

"Under the new regime, it is a great deal easier to adopt new measures, and there is a great deal more political influence on the content of those measures.

"In the case of the new Solvency II regime for insurers, there is a risk that political considerations may lead legislators to tip the balance in favour of insurers investing in EU government debt and against alternative investments. This might assist struggling EU economies in the short term, but the Bank for International Settlements is right to warn that it could have a serious adverse effect on the stability of the financial system.

"In addition, by constraining the returns that insurers can earn, it could also make insurance considerably more expensive in future. There is a real question over whether Europe now has the right forum to balance considerations of this kind in its rule-making on financial services."

[Source: Postonlineā€