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By Chris Vellacott
LONDON, July 9 (Reuters) - Regulators placing more onerouscapital requirements on insurers are stifling investment thatwould jump-start economic recovery, frustrating governmentpolicy, a UK industry association said.
In a report published on Tuesday to herald the start of abiannual industry conference, the Association of BritishInsurers (ABI) bemoans the apparent conflict between governmentand regulators on how best to use capital.
On the one hand, boosting economic activity is a "publicpolicy priority" as government looks to insurers as a source ofprivate sector finance for long-term infrastructure projects.
The insurance industry, keen to find new investmentsoffering reliable revenue streams, would willingly invest insuch projects in partnership with government, the ABI says.
At the same time, however, regulators are expecting insurersto reduce risk by holding more capital in reserve, often inshort-term government debt.
"There is a mismatch between potential investment financebeing skewed into short-term government debt while the samegovernments desperately need it to be channelled into projectsto boost short-term growth and develop long-term productivecapacity," the ABI says in the report.
A central plank of regulation on how insurers should setaside capital to cover payment promises they make on long-termproducts is the so-called Solvency II proposal being consideredby European Union states and the European Parliament.
The ABI says that the conflict between government andfinancial watchdogs shows a lack of communication betweenregulators and finance ministers.
"(Regulators) often discuss capital adequacy isolated fromelected finance ministers and fail to take a holistic view abouthow to regulate risk management and investment in a way thatencourages growth," the association says.
Insurers are increasingly wary about the prospect of newregulation demanding higher capital buffers to protect againstfuture cash crunches. The fear is that higher buffers mayrestrict profits and tie up funds they need to invest.
"There is a tension here between imposing capitalrequirements which for some insurers could be too punitive andcould prevent them offering some products to customers andconstrain investment," said Dominic Simpson, European insuranceanalyst at Moody's.
With interest rates at historic lows since the financialcrisis, insurers are under pressure to seek greater returns oninvestment to fund obligations such as clients' pensions andannuities.
Many are attracted to infrastructure investments becausethese often come with risk-reducing government guarantees andcan offer long-term revenue streams from projects such as tollroads and bridges.
Governments, meanwhile, are looking to insurers as sourcesof funding for key infrastructure to ease the financial burdenon state coffers.
Big insurers such as Allianz, AXA,Generali, Aviva and Legal & General are considered to be well prepared for Solvency II'ssophisticated risk-management requirements.
Some smaller insurers, however, could struggle to shoulderthe additional administrative burdens.
