Uncertainty over how long-term investments by insurers will be treated under Solvency II will need to be addressed before insurers increase their role in financing key UK infrastructure projects, a Treasury minister said today.
Sajid Javid, economic secretary to the Treasury, told a specially convened summit in London that there was a 'real opportunity' for insurers to 'fill the gap' that had been created by some banks shifting their focus from infrastructure investment to rebuilding their balance sheets in the wake of the economic crisis.
The provision of long-term products is expected to be a 'significant source of growth' for the insurance industry as a 'culture of savings' builds up. 'The importance of this for the wider economy is that insurers need to invest to generate the income to pay for the returns on their customers' savings,' Javid told the Insurance Summit.
'But the opportunities for growth in insurance products and for investment financed by that are emerging at a time when there is an increased regulatory focus on the insurance industry - particularly from the European Union.'
'The challenge will be that in ensuring the financial stability of the insurance industry we don't harm the role of insurers as long-term investors,' he added.
Javid highlighted the High Speed 2 rail link, upgrade of the M1 motorway and improvements to the broadband network as examples of the kind of infrastructure projects that insurers were 'well positioned' to invest in.
While the government remains committed to establishing a single rule-book and market for insurance under Solvency II, the minister acknowledged that the 'continued uncertainty' around the Directive was 'very unhelpful'. Solvency II was originally expected to be implemented in January 2014, but Europe’s insurance regulator has told The Actuary that a delay of at least two years is expected as political negotiations over the final shape of the Directive continue.
Javid told the conference that the UK was playing a 'very full part' in these negotiations, with the aim of delivering a regulatory regime that supports the role of insurers in the economy.
He noted that the 'matching adjustment' which affects the way insurers will calculate their capital under Solvency II and offers favourable treatment to firms who match predictable liabilities with long duration assets was now 'widely accepted' in a form that works well for the UK. 'We have negotiated sensible asset and liability requirements for the matching adjustment so that investments in infrastructure can get the benefit of the matching infrastructure,' he added.
The European Union has also 'come round' to the UK's focus on the importance of supporting long-term investments, he said.
'The commission will shortly be publishing a green paper on long-term financing that's looking again at some of the features of Solvency II to ensure that they are supportive of long-term investment and economic growth,' Javid explained.
'We plan on using these opportunities to push for the right regulatory environment - one which supports and sustains the vital role of insurers as long-term investors in the real economy. '