Solvency II, too bureaucratic?
Paul Tucker, deputy governor of the British bank, recently described the Solvency II directive as too complicated and too expensive in an interview. Tucker indicated that the Solvency II directive may contribute to the financial crisis instead of providing more certainty.
The main reasons for this, Tucker indicated, are the high costs associated with the implementation of the new guideline and the complexity of this guideline.
“At the Bank (i.e. the Bank of England) we are amazed at what it will cost us and the market as a whole in resources to get up to speed for Solvency II by early 2014,” said Tucker. "We are also concerned that the implementation of a risk-sensitive regime will make the directive too complicated, just like Basel II for banks."
"We must prevent the supervisory authorities from 'drowning' in the data provided by the insurer and that these authorities are not in the power to handle this data flow. As a result, we run the risk that the supervisory authorities will overlook the larger risks he added.
The above sounds are familiar to many. The insurance market has been warning about these aspects for some time now.
The new directive is considered the biggest change ever in Europe in this area. Any plans to extend the directive to pension funds would cost UK businesses around £600 billion, research by JPMorgan Asset Management shows. According to JPMorgan, it would be nearly impossible for some pension funds to maintain the required amount of capital.
Mr. Tucker's speech coincides with rumors surrounding Britain's largest insurer threatening to relocate its headquarters to Hong Kong as a result of the measures it has announced.
Tucker noted that, like banks, insurers "should be able to 'fail' quietly, in a controlled, orderly manner." If the international community were to remove the safety net, bondholders would be exposed to the risks of such a failure.
"Insurers are major investors in securities and securities. For the foreseeable future, you will no longer be protected by an implicit state guarantee for those investments," Tucker said.