Anthony Hilton: Relax the rules to give our insurers a chance

Unfortunately, Solvency II is one of those brilliant ideas in theory that has become a giant train smash in practice by insisting (as with pension schemes) that assets and liabilities with a life running for decades should be measured for risk on a 12-month basis.

Of course, having spent all that money, it becomes like the emperor’s new clothes, and no one will face up to the reality and scrap it. This is a pity because, among many other things, it puts Europe’s insurers at a major competitive disadvantage. Mark Wilson pointed out in his article that a Canadian insurance company wanting to make a $200 million investment to finance a wind farm would be required by its regulator to allocate $3 million of capital to cover the risk.

Under Solvency II, a British insurer making an identical investment would have to put up more than $10 million — over three times as much. That is why when assets like City Airport or the high-speed rail link from London to the Channel Tunnel come up for sale, the Canadians can always outbid the British.

Meanwhile, the British are incentivised by Solvency II to invest instead in the safe debt of the Greek government.

Wilson says that if the British Government is serious about encouraging infrastructure investment, it needs to stop these heavy-handed formulaic approaches to regulation and change the rules towards a principles-based system. Insurers ought to be permitted to use their judgment again and to be encouraged to take sensible, well-thought-through risks so they can fulfil their economic purpose.

But powerful forces are also pushing the other way. In a speech in America last week, International Accounting Standards Board chairman Hans Hoogervorst pointed out that accounting rules currently allow insurance companies to come up with all sorts of different numbers for their profit — often in the same set of accounts.

Figures can easily vary by 50% while at the same time the accounts fail to show the devastating effect of the low interest rate environment. Hoogervorst has big changes in mind that will come as a huge shock to the industry.

At the heart of this lies the debate about what a company is for. Is it there for its investors alone, its customers alone or society as a whole? Accounting is not the same as regulation, of course, but it does play to the same theme. It is all very well for the regulator to insist that customers must be totally protected, just as it is sensible for accountants to believe that investors should be totally protected.

But these things come at a cost, and that cost can easily become excessive. The more prescriptive and intrusive the accounting and regulatory requirements are, the more society suffers because they prevent the insurance industry deploying its investment funds to maximum effect.

Do we really believe the national interest is best served by piling on regulation in the vain hope that investors and customers will never lose money? Or would we prefer to accept a bit more risk and in return see these oceans of capital deployed more effectively throughout the economy?

If we are to have any hope of remaining competitive in the world, there can only really be one answer.