Solvency II could have ‘huge implications' for annuity customers with rates likely to fall by up to 20% if insurers are forced to hold greater reserves, Deloitte warns.
The European Commission will begin assessing the impact of different approaches to how insurers set reserves and capital for products with long term guarantees, including annuities from 28 January 2013.
Deloitte says inappropriate treatment of this could mean insurers have to raise more capital and charge more for annuities - resulting in lower pension payments for consumers.
Tasmin Abbey, insurance partner at Deloitte warns while Solvency II will help insurers manage risk, a key "stumbling block" in the negotiations has been the treatment of annuity liabilities.
Abbey added: "This initiative by the Commission and EIOPA to test potential approaches is welcome, but it does place a burden on annuity providers at a busy time. The findings will prove important in helping to finalise this aspect of the Solvency II regime and reduce uncertainty.
"Depending on what the final regulations say, annuity providers might need to hold larger reserves, which could lead to them either reducing dividend payments or raising more capital. Insurers must ensure senior management understand and manage their company's risks properly. How much capital is held in the technical provisions is only one part of the equation.
"Consumers could also be affected because annuity rates could fall by between 5-20%, and that will make retirement a lot more expensive."
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