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Insurers caught between regulation and government policy

By Chris Vellacott

LONDON (Reuters) - Regulators placing more onerous capital requirements on insurers are stifling investment that would jump-start economic recovery, frustrating government policy, a UK industry association said.

In a report published on Tuesday to herald the start of a biannual industry conference, the Association of British Insurers (ABI) bemoans the apparent conflict between government and regulators on how best to use capital.

On the one hand, boosting economic activity is a "public policy priority" as government looks to insurers as a source of private sector finance for long-term infrastructure projects.

The insurance industry, keen to find new investments offering reliable revenue streams, would willingly invest in such projects in partnership with government, the ABI says.

At the same time, however, regulators are expecting insurers to reduce risk by holding more capital in reserve, often in short-term government debt.

"There is a mismatch between potential investment finance being skewed into short-term government debt while the same governments desperately need it to be channeled into projects to boost short-term growth and develop long-term productive capacity," the ABI says in the report.

A central plank of regulation on how insurers should set aside capital to cover payment promises they make on long-term products is the so-called Solvency II proposal being considered by European Union states and the European Parliament.

The ABI says that the conflict between government and financial watchdogs shows a lack of communication between regulators and finance ministers.

"(Regulators) often discuss capital adequacy isolated from elected finance ministers and fail to take a holistic view about how to regulate risk management and investment in a way that encourages growth," the association says.

Insurers are increasingly wary about the prospect of new regulation demanding higher capital buffers to protect against future cash crunches. The fear is that higher buffers may restrict profits and tie up funds they need to invest.

"There is a tension here between imposing capital requirements which for some insurers could be too punitive and could prevent them offering some products to customers and constrain investment," said Dominic Simpson, European insurance analyst at Moody's.

With interest rates at historic lows since the financial crisis, insurers are under pressure to seek greater returns on investment to fund obligations such as clients' pensions and annuities.

Many are attracted to infrastructure investments because these often come with risk-reducing government guarantees and can offer long-term revenue streams from projects such as toll roads and bridges.

Governments, meanwhile, are looking to insurers as sources of funding for key infrastructure to ease the financial burden on state coffers.

Big insurers such as Allianz , AXA , Generali , Aviva and Legal & General are considered to be well prepared for Solvency II's sophisticated risk-management requirements.

Some smaller insurers, however, could struggle to shoulder the additional administrative burdens.

(Editing by David Goodman)

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