21 November 2012

Bloomberg: EU splits leave single insurance rules plan on sidelines

The European Union's 12-year push to introduce a common set of rules for the region's insurance industry is close to being sidelined, as some of the biggest Member States prepare to introduce the regulations piecemeal.

Lobbying by German, British and French insurers over the impact of the rules on long-term savings products has already delayed the introduction of Solvency II beyond its original start date of this year. The regulations, designed to make firms across the region allocate the same capital reserves against the risks they take, may not come into force before 2016, according to executives as they reported third-quarter earnings.

European policy-makers intended Solvency II to be for insurers what the Basel Committee on Banking Supervision’s capital rules are for banks: a common set of rules across the EU. They will replace regulations developed in the 1970s that had been superseded by a patchwork of national laws.

Solvency II is made up of three key parts, or pillars: capital requirements for individual companies, a regulatory assessment of a particular firm’s risk, as well as the regulator’s broader supervision of the marketplace.

German, British and French insurers have criticised the proposals, saying they will make it costlier to sell savings products with guaranteed long-term returns. European life insurers made about €540 billion ($691 billion) in revenue from selling guaranteed products in 2010, the latest available annual figures show, according to Insurance Europe.

The Frankfurt-based European Insurance and Occupational Pensions Authority, or EIOPA, the EU agency tasked with drafting Solvency II before it is approved by the European Parliament, recognises that there is a risk countries will regulate unilaterally due to the delay. “To prevent the unintended consequences of national solutions, namely lack of convergence and harmonisation, we need joint work”, Carlos Montalvo, EIOPA’s executive director, said by e-mail. “We are approaching the delay as an opportunity for better preparation and not as an excuse not to do anything.”

Like Basel II, the levels of capital reserves required under Solvency II can either be determined by the regulator’s so-called standard model or a firm’s internal model, which must be approved by the regulator. Nearly all of the biggest EU-based insurers have opted for internal models.

“It’s a game of cat and mouse that no one can win”, Andrew Haldane, the Bank of England’s executive director for financial stability, told UK lawmakers at a committee on banking standards in London on November 7. “It’s certainly a game that the regulator can’t win because they’ll always be one step off the pace.”

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