EU Insurers’ Capital Charges May be Cut to Boost Loans

By Huw Jones & Jonathan Gould | September 28, 2012

Capital charges for insurers in the European Union could be cut to encourage lending for long-term projects and help boost the flagging economy, the bloc’s executive body said in a high profile policy shift.

The European Commission has written to the European Insurance and Occupational Pensions Authority (EIOPA) to look at cutting the amount of capital insurers must set aside to cover some types of investments.

“European insurers are a potentially powerful financing channel for long-term investment in growth and job enhancing areas,” Jonathan Faull, head of the commission’s internal market unit, said in a letter to EIOPA, dated Sept. 26, and published on the executive body’s website.

The Frankfurt-based watchdog derives its authority from the commission which can endorse or reject its rules.

Faull said at the end of 2010 insurers had assets worth €7.4 trillion [$9.524 trillion], equivalent to more than half the bloc’s output.

Faull gave EIOPA until February to respond, given the “urgency” of the need to lift economic growth by helping to fund small businesses and infrastructure.

This could be done through securitization of debt, a sector which has been moribund since the 2007-09 credit crunch when securitized debt based on U.S. home loans turned toxic.

The review of capital charges dovetails with the finalizing of new EU rules for insurers to cover risks on their books, known as Solvency II.

EIOPA said on Friday said it was aware of the commission’s letter but it had yet to arrive.

“After we receive the letter, we will carefully examine it and provide the Commission with our feedback,” EIOPA said.

Banks welcomed the review, saying lower capital charges for insurers would help kick start securitization.

“We believe high quality securitizations will need to continue to play an important role in the long term financing of the real economy,” said Rick Watson, head of capital markets at the Association for Financial Markets in Europe, a banking industry body.

Cash-strapped governments have pinned their hopes on the insurance sector to fund long-term economic development as banks curtail their lending for big projects in response to tighter bank capital rules.

For their part, insurers have been looking to diversify their investments away from low-yielding government bonds and into stable energy and infrastructure projects, but say they are being held back by the Solvency II rules.

 

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