Regulatory pressures could prevent the European insurance industry from playing a leading role in investing in economic growth, a report has warned.
Funding the future, which was published by trade body Insurance Europe and consultancy Oliver Wyman yesterday, expects insurers to become increasingly important for the European economy as new rules forced banks to withdraw from certain kinds of investment.
This is because, under the Basel III regulatory framework, banks are expected to reduce the risks associated with maturity and liquidity transformation. This is expected to create a funding gap of at least 4-5 trillion by 2016, the report claimed.
Insurers are already the largest institutional investors in Europe, with 8.5trn of assets under management as of the end of last year and are 'ideal sources' of the long-term funding needed to encourage economic growth, it explained.
Because most insurance policies create predictable and long-term liabilities for insurers, they can invest in long-term and illiquid assets, it noted.
Sergio Balbinot, president of Insurance Europe, commented: 'As we carry out our primary function as providers of risk-transfer, protection and pension products, we benefit from a continual flow of premiums and predictable claims that enable us to keep investing when others withdraw. Insurers therefore play an important stabilising role in the economy.'
There are, however, real threats to insurers' long-term investing, the report said. In particular, it noted the constraints that capital requirements being introduced for insurers under Solvency II could place on this role. The proposed financial transaction tax and reforms of over-the-counter derivatives trading could both also have an impact, Insurance Europe said.
'A range of regulatory developments have the potential to create conditions that would affect the insurance industry's investment strategies and ability to continue providing long-term funding to the economy,' Balbinot warned.
'The capital requirements and balance-sheet volatility in the current Solvency II proposals, for example, would make it less attractive for insurers to invest in long-term assets.'
He added: 'Good and consistent regulation is important for a healthy insurance industry, but if regulatory frameworks do not take proper account of the distinctive characteristics of insurance, they may have a negative impact not just on insurers but also on policyholders, hindering growth opportunities for the wider economy.'
