EU Splits Leave Single Insurance Rules Plan on Sidelines

The European Union’s 12-year push to introduce a common set of rules for the region’s insurance industry is close to being sidelined as some of the biggest member states prepare to introduce the regulations piecemeal.

Lobbying by German, British and French insurers over the impact of the rules on long-term savings products has already delayed the introduction of Solvency II beyond its original start date of this year. The regulations, designed to make firms across the region allocate the same capital reserves against the risks they take, may not come into force before 2016, according to executives as they reported third-quarter earnings.

European insurers are meeting in Frankfurt today as regulators in Germany and the Netherlands weigh whether to introduce parts of the rules themselves, jeopardizing European attempts to create a level playing field. Policy makers are also questioning Solvency II’s use of insurers’ own risk models, a method used by banks that helped trigger the financial crisis.

“The biggest risk we see at the moment is balkanization, with each country introducing their own changes to the rules,” Oliver Baete, chief financial officer of Allianz SE, Europe’s biggest insurer, said in a conference call earlier this month. “This can’t be in the interest of Europe and it’s certainly not in the interest of Allianz.”

National Interests

European policy makers intended Solvency II to be for insurers what the Basel Committee on Banking Supervision’s capital rules are for banks: a common set of rules across the EU. They will replace regulations developed in the 1970s that had been superseded by a patchwork of national laws.

“With the financial and debt crisis, national interests gained more and more importance,” Burkhard Balz, a German lawmaker in the European Parliament and member of the Economic and Monetary Affairs Committee, said by e-mail two days ago. “We need a credible and realistic timetable.”

Solvency II is made up of three key parts, or pillars: capital requirements for individual companies, a regulatory assessment of a particular firm’s risk, as well as the regulator’s broader supervision of the marketplace.

After the European Commission already postponed introducing Solvency II until next year, delays in getting approval from the European Parliament have led to talks about further delays. EU lawmakers rescheduled a plenary vote needed to agree on capital requirements to March 11 from Nov. 20.

Concept Debate

“Solvency II is all over the place,” Ference Lamp, chief financial officer of SNS Reaal NV, the third-biggest Dutch life insurer, told investors on Nov. 15. “Not only are we debating around the concept itself and all its calibrations, there is also significant debate around the implementation date.”

Nikolaus von Bomhard, chief executive officer of Munich Re, the world’s biggest reinsurer, and Sergio Balbinot, chief insurance officer at Assicurazioni Generali SpA, Italy’s biggest insurer, are among executives meeting at today’s conference to discuss future regulation.

“The insurance industry has always been supportive of Solvency II, we’re not against it,” said Balbinot, who is also president of the Insurance Europe industry trade association. “When Solvency II was developed, nobody thought of the volatility that the financial crisis would bring” to market interest rates and that’s why policy makers should make sure they don’t focus too much on it.

Germany, France

German, British and French insurers have criticized the proposals, saying they will make it costlier to sell savings products with guaranteed long-term returns. European life insurers made about 540 billion euros ($691 billion) in revenue from selling guaranteed products in 2010, the latest available annual figures show, according to Insurance Europe.

Lobbying efforts by insurers are pushing back implementation of Solvency II, Thomas Buess, CFO of Swiss Life Holding AG, said in a conference call on Nov. 13.

“There is one country that is delaying it very heavily because its whole business model is endangered by Solvency II, and that country is Germany,” he said.

German life insurers typically sell policies that have lifetimes of a decade or more and guarantee customers a minimum return, about 1.75 percent. That’s more than the 1.42 percent yield of 10-year German government bonds. Under the Solvency II rules, such long-term guarantees would carry higher capital charges, which German insurers say are too high and prevent those policies being sold.

Capital Requirements

That concern is also shared by U.K. and French insurers. London-based Legal & General Group Plc said in 2009 the price of an annuity, a product that provides a fixed annual payment until death, would rise 20 percent as a result of Solvency II.

“We may have something in the U.K. which is called Solvency II eventually,” Nigel Wilson, Legal & General’s CEO, said in a conference call with reporters on Nov. 1 from London. “But I suspect it will look more like the ICA regime that we currently have than Solvency II necessarily.”

ICA is the British regulators’ existing Individual Capital Assessment used to measure insurers’ capital.

Prudential Plc, Britain’s biggest insurer, has threatened to move to Hong Kong because Solvency II will introduce extra capital requirements on its U.S. business. The proposal means European insurers need to hold extra capital reserves against their American units.

‘Unintended Consequences’

Jackson National Life, Prudential Plc’s U.S. business, generates 37 percent of the company’s premiums. Prudential hasn’t disclosed how much extra capital the division will require because the rules are not yet finalized.

The Frankfurt-based European Insurance and Occupational Pensions Authority, or Eiopa, the EU agency tasked with drafting Solvency II before it is approved by the European Parliament, recognizes that there is a risk countries will regulate unilaterally due to the delay.

“To prevent the unintended consequences of national solutions, namely lack of convergence and harmonization, we need joint work,” Carlos Montalvo, Eiopa’s executive director, said by e-mail. “We are approaching the delay as an opportunity for better preparation and not as an excuse not to do anything.”

To test the impact of the proposed new rules on insurers’ long-term guarantees to customers, Eiopa has been asked to conduct a long-term guarantee impact study. A timeline for it hasn’t yet been decided.

‘Closely Watched’

That assessment “will be closely watched as a test case for the future of the whole project,” said Markus Enk, Solvency II service head at BearingPoint in Dusseldorf. “If this test runs smoothly, then it’s a good sign, especially as long-term guarantees are a key issue for German life insurers.”

Solvency II may not be introduced until 2016 or even 2017, Elke Koenig, president of Germany’s financial markets supervisor, BaFin, said in Frankfurt on Nov. 19.

Some countries are weighing whether to enact it in parts. The U.K.’s Financial Services Authority will allow insurers to use their own internal models to calculate capital reserves, Julian Adams, the FSA’s director of insurance, said in a speech in London last month.

Like Basel II, the levels of capital reserves required under Solvency II can either be determined by the regulator’s so-called standard model or a firm’s internal model, which must be approved by the regulator. Nearly all of the biggest EU-based insurers have opted for internal models.

“It’s a game of cat and mouse that no one can win,” Andrew Haldane, the Bank of England’s executive director for financial stability, told U.K. lawmakers at a committee on banking standards in London on Nov. 7. “It’s certainly a game that the regulator can’t win because they’ll always be one step off the pace.”

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