EU pushes for Solvency II as turmoil hits insurers

As the financial turmoil begins to spread to insurers, with the giant American International Group (AIG) in deep trouble, the European Commission is pushing for a rapid agreement to be struck in long-standing negotiations over Solvency II, the set of rules aimed at changing the EU insurance landscape.

Despite the series of collapses registered in Wall Street in recent weeks, a spokesperson for Internal Market Commissioner Charlie McCreevy confirmed that the Commission does not plan to change the substance of ongoing negotiations in Brussels over the future of the EU insurance sector.

Indeed, he pointed out that the situation of EU insurers is still different from that of their US counterparts. The increasing default risk of the American insurer AIG is in fact the result of the bank-like investment strategies it adopted, which are a lot less common in Europe, he said. The European insurance federation (CEA) also made this point in a statement released on Tuesday (16 September).

Need for speed

Nevertheless, the exposure of big EU insurers to US financial actors in deep crisis or overt collapse, such as Lehman Brothers or Merrill Lynch, is a source of concern. The general fall in equity prices caused by the turmoil also clearly impacts upon insurance.

In this context, Brussels is pushing for a quick deal on what is already on the table. Concerning Solvency II, McCreevy’s spokesperson underlined: “We have not got much time left and, if we fail, we will not have a second chance for a long time.”

However, as the European Parliament prepares to vote on the new EU insurance rules in November, a number of issues remain disputed, with supervisors warning of the risks of the foreseen reform and the industry pressing for wider changes.

Assessing the risks

Supervisory authorities, represented by CEIOPS, the Committee of European Insurance and Occupational Pensions Supervisors, insist that the increase in competition in the insurance sector proposed in the new draft legislation will have unwanted consequences, such as insurance companies taking riskier approaches, leading to potential bankruptcies (EURACTIV 07/03/08).

On the other hand, the main insurance groups at European level say Brussels is being overly cautious by requiring that risk assessments of assets be calculated over one year only. They argue that holding equities for long periods is less risky than would be apparent from the analysis of one-year horizons because stocks are more volatile in the short term than in the long term. A short deadline would thus discourage equity investment by insurers in favour of seemingly less risky bonds. They further stress that reducing equities in their portfolio would increase inflation-related risks because it would force them to expand bonds and other fixed rate financial assets’ exposure.

A regulatory framework for pensions?

The biggest players in the industry, such as AXA or Generali, are also seeking to include pension funds in the scope of the directive, or at least to regulate them more than is currently the case. They fear that with Solvency II in force and no other revised regulatory framework for pension funds, there will be a distortion of competition to the disadvantage of insurers.

Small insurers forgotten?

However, smaller insurers, such as mutuals – where those protected by insurance (policyholders) have certain ownership rights – fear that the reform of the insurance sector focuses too much on the interests of big companies. 

While they accept that the proposed new principles of group supervision and geographic diversification also be applied to mutuals, they also want to be allowed to maintain a different status. In substance, they believe the opportunity to spread risk among subsidiaries should also be given to mutuals, even if they do not actually have any subsidiaries, only relationships with equal partners.

Cross-border supervision issues

Cross-border supervision also remains a key issue under negotiation, with many states opposing the principle of group control, which they fear would imply a loss of power for national authorities.

Internal Market Commissioner Charlie McCreevy commented: "The number of issues remaining on Solvency II has been reduced to a manageable amount and I am confident that appropriate solutions will be found over the coming months. Discussions are now very advanced in the European Parliament. This has opened promising perspectives for the French Presidency, which has the challenging task of concluding the discussions with the Council and Parliament. The prize is a big one. If we succeed, we will have established what I hope will be the best up to date risk based insurance supervisory system in the world, which I believe will be a model for other countries. The EU will be ahead."

Socialist MEP Peter Skinner, rapporteur of the European Parliament on Solvency II, highlighted the "key importance of an agreement on group supervision" and the need to adopt global standards "to allow European companies to compete at global level".

Speaking at Eurofi conference in Nice on Friday 12 September, Asmo Kalpala, president of the 
Association Internationale des Sociètès d’Assurances Mutuelles (AMICE)
, spoke out in support of small insurance groups: "I feel that the work done with Solvency II ignores the smaller actors a bit," he said. He recommended "a more pragmatic approach". He called for the threshold for defining a small insurer to be raised to €10 million instead of the proposed €5 million, to allow mutuals to grow while maintaining a different regulatory regimes form the big companies.

Tommy Persson, president of CEA, the European insurance and reinsurance federation, showed support for Solvency II: "We can and we must reach an agreement." Reacting to increased fears of failure triggereed by American insurer AIG, a statement from CEA  reads: "In the turbulence that has affected global financial markets, European insurers have inevitably been affected by the general fall in equity prices and by limited exposures to writedowns in some asset classes. However, although the CEA cannot comment on the position of individual companies either here or in the US, the overall situation for European insurers is not comparable with that of US insurers."

Henri de Castries, chairman of the management board at AXA, is pushing for extensions in the one-year regulatory period proposed for assessing the volatility of assets, arguing that the current suggestions would prevent insurance firms from investing in equities. "If you invest in bonds the capital requirements are one sixteenth than for equities. This will lead only actors as hedge funds to invest in equities. This is not going to increase the stability of the system," he said.

In July 2007, the European Commission proposed a general revision of 30-year old rules governing European insurers' financial positions. The initiative has been labelled Solvency II, in reference to the current regulatory framework Solvency.

Solvency II proposes a new risk-based approach as an alternative to the existing "flat rate" system. According to this new methodology, the higher the economic risk an insurer takes, the more capital the company would have to hold as a guarantee against default. 

The proposal also aims to reform supervision procedures, with the intention of increasing cooperation among national supervisors, especially for multinational companies. It requests more transparency from insurer and reinsurer groups.

  • 7 Oct. 2008: The Committee on Economic and Monetary Affairs of the European Parliament votes the amended proposal on Solvency II Directive.
  • Nov. 2008: Plenary vote on Solvency II planned in Parliament.
  • End 2008: Proposed deadline for agreement in the Council on Solvency II.
  • Oct. 2009: Proposed adoption of the directive by the Parliament and the Council.
  • 2010: Deadline for the presentation of implementing measures by CEIOPS.
  • 2012: Deadline for the adoption of the implementing measures and transposition of the directive in member states.

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