Insurers, regulators at odds on bid to break capital rule deadlock

FRANKFURT/LONDON Mon Jun 17, 2013 12:54pm EDT

FRANKFURT/LONDON (Reuters) - European insurance regulators remained at odds with the industry on Monday after proposals last week on how to supervise the long-term risks associated with life insurance products offering lengthy guarantees.

Proposals to regulate such products, which echo efforts to boost the banking sector's capital ratios, have been a bone of contention for months, because many in the industry argue they incorrectly assume insurers will always be affected by short-term market volatility.

Lawmakers said proposals published on Friday by the European Insurance and Occupational Pensions Authority (EIOPA), the EU's insurance watchdog, would help secure a wider deal on risk-capital rules for the sector.

But EU industry trade body Insurance Europe called EIOPA's report "disappointing," saying the latter's ideas did not take sufficient account of the long-term nature of insurance business.

"The measures proposed would not work as intended," Insurance Europe said in statement.

At issue is how insurers should set aside capital to cover payment promises they make on long-term products. The impasse has already brought talks to a standstill over a sweeping EU reform of insurer rules, known as Solvency II, which is being considered by EU states and the European Parliament.

Europe's big insurers such as Allianz (ALVG.DE), AXA (AXAF.PA) and Generali (GASI.MI) are considered to be well prepared for Solvency II's sophisticated risk management requirements, but some smaller insurers are worried they face undue extra administrative burdens from the rules.

Burkhard Balz, the European Parliament's lead negotiator on the reform, welcomed EIOPA's proposals.

"I am confident that EIOPA's report will lay the ground for sensible conclusions to be reached in the political negotiations afterwards," Balz said.

UPBEAT VIEW

The European Parliament was ready to re-launch negotiations as quickly as possible and has suggested they start in July, Balz added.

His upbeat view was echoed by fellow EU lawmaker Peter Skinner, who is also a key negotiator on Solvency II.

"It is clear that a lot of hard work has gone into this report and I believe it will be useful for our deliberations," Skinner said.

Insurers are caught in a bind between the low yields they can earn from their investments and the high guaranteed returns they have promised to their customers, with the gap becoming more acute the longer interest rates stay rock bottom.

German insurance association GDV said the report's underlying data pointed to different conclusions than those found by EIOPA.

Other observers doubted a quick deal was possible for Solvency II, which EIOPA hopes could take effect in 2016.

Nomura bank said in a note to clients it was not convinced EIOPA's guidance will make reaching a final deal easy as it will not satisfy industry and differences of opinion persist between national regulators and between the watchdog and the European Parliament.

"Our best case remains for a soft introduction of Solvency II," Nomura's Paul Fulcher said.

Credit rating agency Fitch said EIOPA's findings offered "no prospect" of ending the battle between regulators and insurers.

"We expect the latest proposals will be just a starting point for more negotiations, potentially leading to further impact studies before any final decisions are made," Fitch said in a note, adding that this risked delaying Solvency II.

The debate was unlikely to have any significant effect on insurers' balance sheets or credit ratings in the next few years because the rules would be phased-in, Fitch added.

(Additional reporting by Alexander Huebner; Editing by David Holmes)

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