Investment by insurance companies in Europe grew by 3.2% in 2013. However, the sector fears that long-term investments may be adversely affected when tighter prudential regulations come into force in 2016.
Insurance is a thriving sector in Europe. In 2013, investments by insurers represented 8,500 billion euro, an increase of 3.2% on the previous year, according to a report published on 1 September by Insurance Europe, the European insurance and reinsurance federation.
Insurance Europe, which brings together the national federations of Iceland, Liechtenstein, Norway, Switzerland, Turkey and 27 EU member states, (the exception being Lithuania), states that the European insurance market remains the largest in the world, occupying 35% of the global market, ahead of both the North American and Asian markets, at 30% and 28% respectively. The European insurance sector directly employs around 1 million people and consists of over 5,100 companies, whose investments have been growing consistently since 2008.
Driving the economy
Despite this significant growth in investments, Insurance Europe remains cautious; the new European regulatory framework, Solvency II, comes into force on 1 January 2016.
The new rules, designed to ensure that insurance companies stay out of the red, require insurers to adapt the levels of capital they hold to the risk of their investments: the greater the risk, the more capital they must lock up. The implementation of the new rules has been delayed several times in the course of strenuous negotiations between the insurance sector and European decision-makers.
“Insurers make a huge contribution to the European economy by promoting growth and stability through long-term investments equal to around 60% of Europe’s GDP,” Michaela Koller, director general of Insurance Europe, commented.
Long-term investments at risk
Insurers fear that long-term investments could come under threat from the European directive, which they believe may force them to trap too much capital.
Although the European Union is making efforts to encourage investment, some “aspects of the directive and how it is implemented will still require insurers to hold inappropriately high amounts of capital against their long-term investments,” the director general protested.
Being forced to lock up large amounts of capital will cause the sector to reconsider its investments, and could mean that companies simply back away from larger investments in the future, which may be harmful to the economy.
“This will make it more expensive for insurers to invest in long-term government and corporate bonds, as well as growth-stimulating activities, such as infrastructure projects,” Koller warned.
1 January 2016: Solvency II comes into force
In July 2007 the European Commission proposed a complete revision of the 30 year-old rules governing the financial activities of European insurers. This initiative is called Solvency II, after the current regulatory framework, Solvency.
Solvency II offers a new approach based on risk to replace the current flat-rate system: the greater the risk an insurer takes, the more capital they will have to put aside as a guaranty against failure.
The directive also aims to reform the monitoring process in order to aid cooperation between national auditors of multinational companies, but also demands greater transparency from insurance and reinsurance companies.
- 1er janvier 2016: entrée en vigueur de Solvabilité II