European politicians reached an agreement paving the way for new rules designed to make insurance companies safer after 13 years of wrangling with the industry and regulators.
The European Commission, European Parliament and Council of the European Union yesterday agreed on rules on how to assess capital insurers need to set aside to meet future obligations while taking into account market volatility, the Lithuanian Presidency, representing the EU Council, said in a statement on its website today.
Insurers are Europe’s biggest institutional investors with 8.4 trillion euros ($11.3 trillion) under management. They are lagging behind banks in adopting a framework to help them withstand losses in any repeat of the 2008 financial crisis. Aegon NV, the owner of U.S. insurance firm Transamerica Corp., and reinsurance company Swiss Re were among firms that received financial support after the collapse of Lehman Brothers Holdings Inc. and the U.S. bailout of American International Group Inc.
The deal, completed after eight hours of talks in Brussels yesterday, allows for the new Solvency II regulations to become operational on Jan. 1, 2016 after final approval by the EU Council and the European Parliament, the Lithuanian Presidency said in the statement.
‘Practical Solution’
“On the long-term guarantees we have gone for an effective and practical solution, and the packet of measures will to our mind ensure that insurance companies will be able to operate even under difficult market conditions,” Burkhard Balz, a German lawmaker in the European Parliament and a member of the Economic and Monetary Affairs Committee, said at a news conference in Brussels today.
Solvency II, intended to harmonize the way insurers allocate capital against risk, was scheduled to come into force last year. Its introduction was delayed several times over issues such as calculating capital needed for liabilities for products with long-term guarantees such as annuities and investments such as government bonds.
“With the knowledge of today, we do not see any issues in terms of recapitalization for the insurers that we cover, since the directive has been substantially watered down over the last few years,” Maarten Altena, a London-based analyst at Mediobanca SpA, said in an e-mail.
Transition Period
The Bloomberg Europe 500 Insurance Index, a gauge of 30 companies in the insurance industry, rose 0.9 percent as of 12:50 p.m. today in London.
According to the agreement, insurers will get a transitional period of 16 years to adjust existing life insurance contracts to the Solvency II regime, Balz said.
“The Solvency II package that we’re getting now looks viable and is fundamentally good news for the industry,” Prudential Plc Chief Executive Officer Tidjane Thiam said in a conference call with journalists today.
Last year, speculation increased that the regulations would be sidelined by some EU countries as they prepared to introduce some of the rules piecemeal.
‘Important Step’
Policy makers intend Solvency II to be for Europe’s insurers what the Basel Committee on Banking Supervision’s global capital rules are for the continent’s banks — a common set of rules applied across the EU. They will replace regulations developed in the 1970s that had been superseded by a patchwork of national laws. Current Solvency I rules concentrate mainly on insurance risks, while Solvency II also takes account of investment risks.
“This agreement is a very important step toward the introduction of a modern and risk-based solvency regime for the insurance industry in Europe as of Jan. 1, 2016, making it both safer and more competitive,” Michel Barnier, the EU’s financial-services chief, said in a statement.
The agreement deviates from some recommendations by the European Insurance and Occupational Pensions Authority, or Eiopa, Balz said.
“We have agreed on higher values for calibration, but at the same time we have introduced important qualitative requirements for example the obligation to have a liquidity plan and proper supervision,” he said.
Like Basel III, the levels of capital reserves required under Solvency II can either be determined by the regulator’s standard model or a firm’s internal model, which must be approved by the regulator. Almost all of the biggest EU-based insurers have opted for internal models.
“Years of intensive lobbying have paid off for the insurance companies of the largest member states,” Sven Giegold, economic and financial spokesman of the Greens and a member of the European Parliament, said in statement on his website. “The deal between Council and the majority of the European Parliament ignores the advice of European Systemic Risk Board, academics heard by the Parliament and of Eiopa.”
–With assistance from Jim Brunsden in Brussels and Sarah Jones in London. Editors: Steve Bailey, Mark Bentley