Level playing fields are fine in concept. When drafting began, the European Union’s plan to standardise the valuation of insurers’ assets and liabilities was intended to create a single, risk-based capital requirement standard across Europe. Now, as negotiations on the EU’s Solvency II directive enter their final phase, UK insurers are belatedly lobbying against a requirement that could force them to raise an estimated £50bn of additional capital. That is a galling prospect as insurers have weathered the latest financial crisis without asking shareholders for cash. The market took fright yesterday, marking down the shares of annuity writers Legal & General, Prudential, Aviva and Friends Provident by between 2 and 9 per cent.

Solvency II hits annuity writers hardest. Annuities are a common form of pension provision in the UK – more so than in other European countries where state pension schemes are generous. Because annuities are long-term liabilities, insurers back them by investing in similarly long-term assets such as gilts and corporate bonds. The problem is that Solvency II treats corporate bonds as risky assets and requires a greater proportion of capital to be held against them than insurers currently hold. Insurers counter that annuities are illiquid – they cannot be cashed in – so an “illiquidity premium” should be factored in to the discount rate on their liabilities, obviating the need for a higher capital buffer.