EIOPA has recently published its technical findings on the Long-term Guarantees (LTG) assessment which was undertaken across Europe at the beginning of the year. As Towers Watson has previously highlighted, these are regulations within Solvency II that could have a significant impact for the growing number of UK general insurance (GI) companies who now have material exposure to annuity type liabilities through periodical payment orders (PPOs).

The Insights paper 'Where now for Long-term Guarantees and Solvency II' outlines Towers Watson's interpretation of the latest EIOPA proposals that are scheduled to be included in the Omnibus II vote in October 2013. The paper has been written for the benefit of all life and non-life insurers across Europe, and whilst we believe most of it is relevant reading for UK GI companies with PPO liabilities, in this document we have summarised what we believe to be the key factors for insurers with PPO liabilities.

  • It is apparent that the design and subsequent assessment of the LTG package has taken place without consideration for PPOs. This is not surprising because UK GI insurers have, so far, largely not engaged in the process. The result is that it is still not clear how PPOs will fit into the LTG package.
  • In particular, the extended matching adjustment (EMA) that was included in the previous draft of the package has now been removed because of concerns about what EIOPA described as "providing false risk management incentives". This was the area of the package where we believed some provision for PPOs could be envisaged. In its place, however, the specific exclusion of GI companies from the classic matching adjustment (CMA) has been lifted, although it is worth noting that the matching criteria of the CMA is even more stringent than under the EMA, placing further doubt on how PPOs will be treated under this regulation.
  • Another key aspect of the latest advice is the replacement of the proposed counter-cyclical premium (CCP) with a 'volatility balancer'. The volatility balancer is only applicable where no matching adjustment is used. Further details on this change are covered in 'Where now for Long-term Guarantees and Solvency II'.
  • Taking these factors into consideration, our general recommendations for non-life insurers are:
  1. Ensure you understand the impact of the LTG package on your business by crunching the numbers – not only as at now, but also in a scenario representing the position in 20-30 years' time when PPOs will be a much larger component of the balance sheet. This impact is likely to vary significantly from company to company.
  2. Get the UK GI case on the table – the position on PPOs will not be resolved while UK GI insurers sit on the side-lines of the issue. Action will have to come from insurers themselves in the first place: At the least the industry needs clarification on how this regulation will apply to PPOs.

One thing that is sure is that the debate about the LTG package is not over because market reaction across Europe to the latest advice has been very mixed. So the opportunity for UK GI insurers to get their voice heard in relation to PPOs may not yet be gone, although timeframes are tight.

We trust you find the content of this document and the accompanying Insights paper useful in determining an action plan. If you would like to discuss or require further assistance to understand the complex and still-evolving elements of the LTG package as they affect PPO liabilities, please contact Sarah MacDonnell.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.