Will NAIC Insurance Regulators In U.S. Import Harmful European Rules?

My colleague Ari Patinkin, research associate at the Competitive Enterprise Institute, contributed to this post.

Although the inflation rate may be slowing, the American economy still faces headwinds with record-high prices for many essential goods and the prospect of a recession. As if this weren’t enough, another threat is emerging. Powerful policymakers overseeing the U.S. insurance industry are on the verge of pushing through a disastrous rule for U.S. insurers strikingly similar to European regulations that have played a significant role in Europe’s economic malaise.

For nearly a decade, Europe’s insurance market has been governed by the Solvency II regulatory framework, a complex and burdensome set of rules cobbled together by European Union bureaucrats and ratified by the EU Parliament in 2014. Since it went into full effect on January 1, 2016, Solvency II has resulted in higher insurance premiums for European consumers and businesses and a shortage of long-term insurance policies such as annuities. It has also taken away billions in capital from enterprising European businesses, harming the Eurozone’s growth rate.

Solvency II makes it prohibitively expensive for insurance companies to buy equities such as stocks and relatively cheap to purchase bonds, particularly those issued by governments and the biggest corporations. Capital charges for equities range from 39 to 49 percent, while for bonds they range from 10 to 20 percent. This means that for every $100 in equities an EU insurance company buys, it must retain nearly half the value of that equity in cash, which often makes it cost-prohibitive for insurance firms to purchase stocks and other equities as opposed to bonds.

These mandates have forced drastic changes in the risk management of European insurers and are being reconsidered by European governments due to myriad negative consequences. A report on Solvency II by the House of Commons Treasury Committee in the United Kingdom found that “Solvency II has been very costly to implement” and that “extra costs in complying with the rules, and loss of access to some asset types, are leading to poorer value” for British consumers.

This report and other studies of the effects of Solvency II have noted a sharp reduction in Europe in the availability of annuities, financial instruments sold by life insurers that provide a stream of income for the rest of a person’s life. Funding these requires the strong financial returns that equities can provide. This annuity shortage, the Treasury Committee report noted, will likely result in more dependence on government to provide retirement income at a time when European governments are already fiscally stressed. So, “in addition to reducing choice and value for consumers, this transfers risk to the State if and when individuals run out of money in old age,” the report concluded.

Read the full article on Forbes.