UPDATE 1-EU watchdog to test viability of insurance capital rule

Mon Jan 28, 2013 1:58pm EST

Related Topics

* Industry has nine weeks to test Solvency II options

* Test may lead to re-drafting of some risk-capital rules

* Rules mustn't hinder long-term investment-industry

By Jonathan Gould

FRANKFURT, Jan 28 (Reuters) - The European Union's insurance watchdog has launched a new study of proposed capital and risk management rules which insurers fear will make some of their staple products unviable.

The European Insurance and Occupational Pensions Authority (EIOPA) on Monday set a nine-week deadline for insurance companies to test what impact changes to the so-called Solvency II rules would have on their operations.

Insurers expect the study to show that a major rewrite of rules applying to life insurance will be needed, adding to repeated delays in the introduction of the new regime.

EIOPA expects Solvency II will come into force no earlier than Jan. 1, 2016 but Germany's insurance watchdog has already said that a 2017 start may be more realistic.

"If these seemingly technical details of the new regime are not correct, the impact on the European insurance industry, its clients and the economy would be severe," said Olav Jones, deputy director general of Insurance Europe.

Some life insurance companies have said that Solvency II would make their products unworkable because they would be forced to hold so much more capital in exchange for selling products guaranteeing returns to customers.

With traditional guaranteed life insurance products, the insurance company bears the risk of covering the future guarantee, as opposed to index-linked life insurance, where the consumer bears all the investment risk.

The former type of products are particularly popular in Germany, France and Spain.

"Solvency II must not create unnecessary barriers to insurers providing guarantees for customers and investing long-term, not least because the insurance industry is by far the largest institutional investor in Europe, with over 7.7 trillion euros in assets," Jones added.

European life insurance premiums totalled 633 billion euros ($853 billion) in 2011, according to industry trade body Insurance Europe.

FURTHER DELAY

Auditing firm KPMG said the long-term guarantee test and the analysis of its results meant a key European Parliament vote would probably take place after the parliament's summer recess, months later than expected.

"The time required for EIOPA to produce its report, expected in the second half of June, could itself result in further delays to the Solvency II timeline," KPMG said in a statement.

In the meantime, EIOPA hopes to bring forward parts of the rules where there is widespread agreement.

The Chairman of EIOPA said in a statement on Monday that the study would provide a "reliable basis for an informed political decision" on what requirements for long-term guarantees will be included in Solvency II.

"It is essential for policyholder protection and financial stability that Solvency II appropriately reflects the long-term financial position and risk exposure of insurance and reinsurance undertakings carrying out insurance business of a long-term nature," Gabriel Bernardino said in the statement.

Insurers are not required to participate in the assessment but EIOPA said it hoped as many as possible would take part.

Big insurers like Allianz, Axa and Generali are expected to be well-prepared for Solvency II, but many smaller insurers feel the rules are too complex or should not apply to them to the same extent.

Industry representatives on Monday complained the long-term assessment would sap resources just as companies were preparing their year-end accounts.

Insurers have until March 31 to carry out the assessment, with national supervisors reviewing the data in April and May before handing them over to EIOPA and the European Commission for analysis and a final report in the second half of June.

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