10 June 2008

Insurers fear political delay to EU reform

Big insurance companies are becoming increasingly concerned that a planned overhaul of supervision in the European Union could be thwarted by political opposition.

A key plank in the EU’s proposed Solvency II legislation – sweeping new capital rules for insurers due to come into force in 2012 – is the concept of “group supervision” for companies that have cross-border operations.

This would involve a lead, or group, regulator in a company’s home state which would set capital requirements across the whole of an insurance group. The lead supervisor would co-operate with local regulators in the states in which the group has subsidiaries.

But the plan has run into considerable opposition in Brussels, particularly from smaller and newer EU states, which fear they will play second fiddle to regulators in the bigger states – such as France, Germany and the UK – where many insurers have their headquarters.

Industry observers in Brussels say the concerns have surfaced most strongly in ministerial council discussions, where countries such as Spain and Poland have voiced opposition. About a month ago some estimates suggested almost half the EU member states had some reservations about the group supervision plan.

However, some negotiators believe there have been signs of progress more recently, as details are worked through and aspects of the legislation clarified.

Charlie McCreevy, internal markets commissioner, said last week that negotiations were “at a delicate stage” and acknowledged there were “a considerable number” of member states opposed to the proposals. But he reaffirmed that the Commission would persevere with the talks.

When France takes over the rotating EU presidency in July it is expected to focus on moving the legislation forward.

One insurance executive said that, in order to reach agreement on group supervision, states would need to make other concessions. These include a relaxation of the rules governing how much capital insurers must hold to back equities, as well as compromising on the extent to which insurers can count surpluses in life funds towards their capital.

Another outstanding issue is how far the principles of Solvency II are applied to pension schemes that fall outside the scope of the directive.

“It is like a horse market right now. Everyone is trading off. All the big companies absolutely want group supervision and the Commission wants group supervision. Some of the big countries are holding back from giving support for it, saying ‘we will only give support for it if you give us something else’. It will go through, but there may have to be other compromises,” the executive said.

Teddy Nyahasha, director of group solvency at Aviva, the UK’s biggest insurer, said the uncertainty was hampering preparations for Solvency II.

By Nikki Tait in Brussels and Andrea Felsted in London

© Financial Times