• Governments sometimes seek to guard the solvency of the portfolios backing annuities.portfolio image by andrey polichenko from Fotolia.com
  
  Annuities are contracts that individuals purchase from life insurers that provide a guaranteed income until death. This hedges against the possibility that an individual might otherwise outlive her assets. Regulations within the members countries of the European Union (EU), aimed at protecting the solvency of the underlying portfolio or aimed at fairness to the annuitants, have to some extent stifled the development of this market.
  
  

Types of Regulation

• Annuities hedge the risk of outliving your assets.old age image by EditStudio from Fotolia.com
  
  Annuity regulations are not promulgated at the level of the European Union itself, but by the governments of the member nations. Still, there are elements in common among the EU nations, and generalizations can be made about the regulatory systems as they apply in this area.
  
  There are at least three types of regulation directed at the sellers of annuities by EU nations: first, regulators seek to ensure that insurers are solvent, so the money will be paid when it falls due; second, they mandate equitable treatment of annuity customers; third, regulators oversee the place of annuities within the broader picture of pensions and protections against elderly poverty--the safety net issue.
  
  One approach often employed toward the first of these three goals is asset restriction. Regulators might simply prohibit insurers from owning certain too-risky assets as part of the portfolios that underlie their annuities. But this approach has its drawbacks. It can limit the flexibility that insurers need, especially in an inflationary environment, for example.
  
  Asset restrictions appear to have backfired in Japan in the 1990s, because they encouraged insurers to hold bonds of low maturity, which, in the words of E. Philip Davis, a professor of economics at Brunel University in the United Kingdom, "led initially to insurers cashing in gains on securities, but later to actual solvency problems."
  
  

Fairness Regulation

• Three scholars at Vienna, Austria's European Centre for Social Welfare Policy and Research, Asghar Zaidi, Bernd Marin and Michael Fuchs, wrote about pension policy in 2006, and they noted that one important issue is that the participating countries have legislated gender-neutral annuity schedules. The biology of life expectancy pays no heed to legislation, remaining gender biased, so insurance companies are reluctant to offer products on this basis and "the market [is] proving to be difficult to kick-start."
  
  

Excessive Annuitization

• There are also concerns that some of the countries in the EU, especially Italy and Austria, have done too much to encourage the use of annuities, in part to take the burden off other elements in their social-welfare systems. Some individuals may have over-annuitized, and since annuities cannot be bequeathed, this works to the disadvantage of their family members.
  
  

Public Finance

• Annuity regulation is a matter of political controversy in many European countries, because as fiscal difficulties force governments to pull back some aspects of the public safety net, the availability of sound private pensions and annuities becomes an urgent issue.