EU Agreement Paves the Way for Solvency II

An agreement reached by the European Commission (EC), European Parliament (EP) and Council of the European Union (EU) in Brussels should pave the way for final adoption of the Solvency II capital adequacy regime.

The agreement “will reduce taxpayer exposure to risks of the insurance sector by establishing EU-wide requirements for this industry on similar lines to those for banks,” according to a statement issued by the EU Parliament.

Solvency II aims to harmonise the way insurers allocate capital against risk and was originally scheduled to come into effect last year. Its introduction was delayed several times over issues such as calculating capital needed for liabilities for products with long-term guarantees, which include annuities and investments such as government bonds. Insurers and regulators now plan to implement the rules on 1 January 2016 with a transitional period, should an agreement be reached in time.

“After years of hard work it’s good news that a sensible and workable agreement has finally been reached, which will ultimately benefit consumers and savers across Europe,” said Matthew Fell, the Confederation of British Industry’s (CBI) director for competitive markets.

“The removal of regulatory uncertainty in the insurance sector should free up a major source of long-term investment in the UK and Europe, which will help to boost growth.”

Insurers are Europe’s biggest institutional investors with €8.4 trillion under management, but lag behind banks in adopting a framework to help them withstand losses in any repeat of the 2008 financial crisis. Solvency II will replace regulations that were developed in the 1970s and have since been superseded by a patchwork of national laws.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.

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. Most of the biggest EU-based insurers have opted for internal models.

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