EUROPE - Certain elements of Solvency II might actually encourage insurers to take more risk at the wrong time, according to Philipp Keller, an actuary at Deloitte Switzerland.

Speaking at an event organised by the Austrian actuarial association AVÖ in Vienna, he argued that some elements of the new regulation would give rise to "bad incentives".

Keller said a provision allowing insurers to ignore market volatility they were not exposed to when calculating capital requirements would lead to non-performing assets being "locked in" as held-to-maturity investments

He said this could be "disastrous", as insurers might then be unable to sell assets when they ought to.

"The matching adjustment will lead to insurers taking more risk when their business is down," Keller said.

He added: "Held-to-maturity approaches lead to people hoping that it will get better, and then they will not sell - or are not able to sell - when the next crisis hits. And it will."

Another technical problem found within Solvency II, according to Keller, is that the mark-to-market valuation is not always consistent with static replications on which the matching adjustment is based.

He said there had been too little discussion about replication with financial instruments with reliable market prices, which is "the really defining factor" from which discount rates and risk margins are derived.

As for the future of the capital market, Keller said: "We will reach a new form of stability, but we do not know what it will look like yet."

He said the financial crisis had been "exciting" for actuaries, as old models were not working anymore and new models and approaches were needed.
The actuary also pointed out that the concept of 'embedded value' had become "an absurdity" during the crisis, adding that many concepts - such as 'market-consistent valuation', currently "lacked a commonly accepted understanding".