EU Plan to Shake up Insurance Industry

June 11, 2008

The European Commission has proposed shaking up how the European Union’s insurance sector covers risk.

Solvency II aims to protect policyholders better and spur competition in the 27-nation European Union while making more efficient use of capital in the industry.

The rules should help avoid debacles like the near-demise of Britain’s Equitable Life, which hit the savings of 1.5 million policyholders in several EU states.

HOW WILL SOLVENCY II BE DIFFERENT?
Solvency I dates to the 1970s and can result in too much capital being set aside. Methods for calculating risk have moved on and more sophisticated products emerged, such as securitization, where insurers pool some risks and sell them in the form of bonds. A more efficient use of capital to cover risk should enable insurers to compete better and put downward pressure on the cost of insuring cars, property and people.

WHAT IMPACT IS IT EXPECTED TO HAVE?
All insurers will have to use the method laid down in the rules to calculate the value of their assets and liabilities, and tell supervisors how much capital they have to cover risk. Supervisors will be able to intervene as soon as a company’s solvency capital falls below an early-warning level.

If adopted, big insurers will take a group-wide approach to allocating risk capital rather than the current system of treating operations in each country individually.

WHY ARE SUPERVISORY CHANGES SO CONTROVERSIAL?
Just just 14 cross-border firms collect about 85 percent of all insurance premiums. Supervision is carried out by each national watchdog overseeing their turf. The final calculation of a cross-border group’s capital requirements would be overseen by the home watchdog to cut compliance costs. Supervisors of a group’s subsidiaries in other countries fear losing power to peers in Frankfurt, Paris or London, where many of the big groups are based.

HOW MUCH WILL THIS COST COMPANIES?
Many of the big firms have already moved or are moving to the risk-based approach laid out in Solvency II. The European Insurance Federation (CEA) estimates it will cost the EU industry a one-off €2-3 billion ($3.1 to $4.65 billion), and €0.3 to €0.5 billion ($0.465 to $0.775 billion) annually thereafter.

WHAT HAPPENS NEXT?
EU member states and the European Parliament have joint say on the final content of the new rules, which are expected to come into force around 2012.

(Compiled by Huw Jones; Editing by David Holmes/Elaine Hardcastle)

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