As the government tries to sort out difficulties over capital requirements and the standard formula to calculate solvency requirements and the ‘illiquidity premium’, the negotiations for Solvency II requirements will be a long drawn affair, said Treasury financial secretary Mark Hoban.
The government will try to avoid putting “undue burdens” on the insurance sector and ensure that changes over current rules are “proportionate”, said Mr. Hoban while addressing the Association of British Insurers (ABI) today morning.
“We still have a long way to go if we’re to get level two to where it needs to be. In this game at least, there’s still a lot to play for”, said Mr. Hoban.
“It’s important to keep lines of communication with EU officials open because as you well know there remain some outstanding issues”, he added.
Hoban said the new directives will count profits from future premiums towards capital calculations and definition of liabilities will be made more ‘sensible’ and contract boundaries clearly demarcated.
The proposed calibrations of the standard formula should reflect the risks of an “average firm”, he said. He said the FSA’s commitment of not benchmarking the internal model for risk management – to be used for analyzing the overall risk of an insurance situation, with the standard formula.
The government is also committed to a “predictable, automatic and objective” method for discounting annuities, known as ‘illiquidity premium’, he added.