Two-way split over solvency rules amendments

Date: 27/03/1997

NATIONAL governments appear divided over what advice to give the European Commission on changes to key rules which determine how insurance companies cushion themselves and their clients against a financial crash.

A two-way split has emerged on what amendments should be made to current solvency rules, as the clock ticks away before a summer decision by the Commission.

The recommendations made by national insurance advisory authorities when they meet at the end of April will play a crucial role in determining Financial Services Commissioner Mario Monti's final stand.

The Commission must decide by July how far the current solvency rules, which require companies to set aside a cash reserve in proportion to their premiums, need updating.

Any alterations would have major implications for insurance firms in altering the quantity of funds to be frozen rather than invested.

All sides accept that some tinkering with the figures is inevitable, if only to update them to take inflation into account. However, agreement appears to stop there.

Ahead of the 23-25 April meeting of national authorities, the UK and Denmark have already set out their stands, according to industry sources, with a demand for a substantial increase in the solvency margins.

Insurance companies should not be surprised by a large hike in such requirements, say UK sources, who add that member state delegations are divided on a series of issues surrounding the complex dossier.

The UK and Denmark are also looking for a big shake-up in how insurance company risks are estimated. Both countries are pushing for Europe to adopt a more sophisticated US method for evaluating an insurance firm's risk profile by focusing precisely on what activities it is involved in and attributing the appropriate solvency coverage.

This tailor-made approach using risk models is already being taken by the Commission over a revision of the capital adequacy rules which apply to Europe's banks.

The EU's insurance industry, through its lobby group the Comité Européen Des Assurances (CEA), says the tailor-made formula is often more costly in terms of own funds companies must keep and with regard to supervision.

The US experience has still to prove that it is more effective in cutting companies' risk exposure, said a spokesman. “We do not want to see much change in this revision,” he added.

The insurance lobby says UK and Denmark come to the issue anxious to see the power of their insurance supervisory authorities strengthened following a series of insurance company crises, including the collapse of Scandinavian group Baltica.

In this situation, it adds, a hike in the solvency requirements would not have helped since the fundamental flaw in the Baltica case was the inability of national watchdogs to have an adequate overview of the insurer's failing construction and banking arms which would have given early warning of difficulties.

The Commission is addressing that loophole with another equally controversial proposal on the supplementary supervision of insurance undertakings in an insurance group.

But the industry fears this will push up solvency requirements further by clamping down on double gearing, the practice under which insurance companies can use their stakes in counterparts to supplement their own funds.

Groups or holding companies should only be able to cover their solvency requirements with their own funds, says the Commission.

But the CEA warns that higher capital adequacy requirements would put Europe's insurance industry at a disadvantage compared with its rivals in other parts of the world.