The Bank for International Settlements (BIS) has warned that pension funds and insurers may not be able to hold on to their long-term investment strategies due to the looming changes in regulatory and accountancy norms, which will seriously impact the industry’s ability to raise capital and investments of policyholders.
The BIS, considered effectively as the central bank for bankers, in its 65 page latest report published on 12 July, warned that new regulatory norms, particularly Solvency II, will seriously inhibit the ability of pension funds and insurers as long-term investors.
These inabilities will, in-turn, seriously affect the industry’s ability to raise capital from the market, it added.
Commenting on the various proposed international accounting standards for pension funds and insurance companies, the report titled Fixed Income Strategies of Insurance Companies and Pension Funds cautioned that it may bring more volatility in financial statements.
The newly proposed, and yet to be implemented Solvency II norms that requires insurers to hold loss-absorbing capitals against full range of risks on both assets and liabilities sides, would affect insurance companies to a greater extent, it warned.
“While the latest quantitative impact study by European insurance regulators suggests that the majority of insurance companies will not face an imminent need to raise new equity, they may rebalance their asset portfolios in line with the new risk charges”, the report observed.
The BIS report also questioned the sustainability of life insurance firms and pension funds as long-term investors.
“Factors contributing to this concern among market participants include the steep regulatory risk charges and short horizons to be used for assessing solvency and for addressing funding shortfalls,”, the report said.
“As is the case for institutional investors more generally, these factors tend to encourage a shift away from long-term investing in risky assets, in addition to the ongoing trend toward more conservative asset allocations in the aftermath of the financial crisis”, it added.
“This could alter the traditional role of life insurance companies and pension funds as global providers of long-term risk capital,”, the BIS report warned.