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.