EU insurance rule phase-in impractical - Towers Watson

FRANKFURT, June 28 Thu Jun 28, 2012 11:31am EDT

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FRANKFURT, June 28 (Reuters) - A European Parliament plan to give life insurers more time to adapt to Europe's tough new Solvency II capital rules would create a raft of new problems and is impractical, risk management consultancy Towers Watson said.

"The idea of using grand fathering for old policies is contradictory to the way business is managed and creates new technical problems," Towers Watson Director Michael Kluettgens said on Thursday.

Under a plan drawn up by Burkhard Balz, the German lawmaker tasked with steering Solvency II through the European Parliament, life insurers would be allowed to phase in the capital requirements for their existing policies over seven years, several sources told Reuters last week.

The transition period would give insurers more time to adjust, easing fears they could face a sudden hike in their capital reserves when the rules take effect in 2014.

Insurers remain concerned the rules as they now stand would make their regulatory capital requirements more volatile and hurt their business, although big insurers like Allianz , Axa and Generali are seen as well-prepared for the new regime.

Analysts saw the Balz transition proposal as helpful because it could take away pressure on insurers' capital requirements in the short term.

But Towers Watson's Kluettgens said supervising existing policies under the outgoing Solvency I rules, while applying Solvency II only to new policies, did not conform to the way life insurance business was run in Germany and elsewhere in Europe.

Insurers would have to artificially create a separation between their old and new policies if the Balz proposal goes through, as they are currently managed as a single book, as are the investments that are used to match the insurance risks, Kluettgens said.

Furthermore, separating old and new business would inevitably result in discrepancies in risk management, and companies would still have to make the IT and management effort to put Solvency II in place, even if the Balz proposal meant the rules would apply only to a part of the business, he said.

It was also difficult to see how reinsurers would handle business from insurance company clients that included both old and new insurance policies, Kluettgens added.

A more sensible and helpful solution for insurers would be to continue applying Solvency I capital rules during the transition period and require insurers in parallel to report key Solvency II data to national supervisors.

"This would give insurers and regulators the chance to gain realistic experience with Solvency II," Kluettgens said. (Reporting by Jonathan Gould; Editing by Elaine Hardcastle)

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