11 July 2007

FT: EU insurance shift 'will hit US'

The biggest overhaul of EU insurance regulation in 30 years will boost the competitiveness of European groups against rivals from abroad and set a benchmark for the rest of the world, the European Commission claimed yesterday.

Charlie McCreevy, internal market commissioner, said the planned reform - which introduces a risk-based system for calculating insurers' buffer capital and cuts regulatory burdens - would come as a blow to US insurers in particular.

'There is growing nervousness in the US about the EU surging ahead while the US itself is stuck with highly fragmented insurance regulation. This proposal represents yet another opportunity to give European enterprises a head start in the global economy,' he said.

The new regime, known as Solvency II, will allow insurers to match the amount of capital they have to hold to cover their liabilities with the true risks they face. This will benefit large and diversified insurers such as Allianz, Axa and Aviva, because it will recognise the fact that the spread of their businesses lowers the group's overall risk.

According to European Commission officials, the recognition of these diversification benefits may allow big groups to shave up to 40 per cent of their solvency, or buffer, capital - and so free up vast sums for more profitable investment.

Mr McCreevy said the new regime would ease the regulatory burden by introducing the concept of 'group supervisors' located in an insurer's home country.

Groups with businesses in several member states currently have to deal with multiple regulators. 'Groups today are faced with unnecessary administrative burdens. Supervisory effort is being duplicated,' Mr McCreevy said.

The group supervisor approach is the first time the EU has tried to introduce such a system, and it is expected to face hostility from smaller member states whose regulators lose out.

But Mr McCreevy held out the possibility the system might be extended to other sectors, such as banking. 'This might possibly become a template for supervision in other areas,' he said.

Aviva, the UK's biggest insurer by market capitalisation, welcomed the proposal.

By Tobias Buck in Strasbourg and Andrea Felsted in London

© Financial Times