Solvency II sword has already fallen and slashed annuity rates

Solvency II has been cast as the sword of Damocles hanging over UK life companies, ready to fall and cut annuity rates to ribbons. But there is much to suggest that, contrary to the fears of many, its effects will be negligible.

Last month, Deloitte warned annuity rates could fall by up to 20% due to Solvency II. It pointed to the well-worn argument that rates would suffer as annuity providers were forced to hold more capital in reserve, and switch from investing in corporate bonds to lower-yielding gilts.

It said the introduction of ‘matching adjustment’ would require insurers to take account of market volatility even when they were not exposed to it, forcing a change in their investment strategy and impacting annuity rates.

However, several providers have claimed Solvency II has already been priced in. The expectation of more stringent capital requirements has been around so long they have already adjusted underwriting assumptions in anticipation of lower yields, they have argued. As with any warning of bad news, just thinking about it brings you down.

Predictions sensationalist

Billy Burrows (pictured), director of annuity specialist Better Retirement Group, says predictions of a 20% drop in rates are sensationalist as it would mean consumers would be paying providers to get back less money.

‘At the moment the underlying interest rate is very low. If rates fell 20%, in effect consumers would be paying insurers to give them less than their money back. While there is no prospect of annuity rates increasing, there is the probability they will be cut a little bit, but not 20%.’

Burrows says gender-neutral pricing was likely to have more of an impact on rates as, unlike Solvency II, it had not yet been priced in by actuaries.

Insurers have until 21 December to stop charging a different rate for men and woman following a European Court of Justice ruling in March 2011, which effectively banned them from pricing on gender.

‘If you speak to actuaries, off the record they will say we have priced it [Solvency II] in.

‘Gender-neutral pricing will have an impact, about a 2% decrease for males, and a 1% increase for females,’ he said.