UK insurer warns on EU capital rules delay

Thu Aug 1, 2013 7:08am EDT

Related Topics

* RSA says EU rules must be agreed this autumn

* UK pushes extra safeguards ahead of EU rules

* Former regulator says goal-post moving for insurers

By Huw Jones and Chris Vellacott

LONDON, Aug 1 (Reuters) - New European Union rules forcing insurers to hold enough capital must be finalised this year to avoid prolonged delay and uncertainty for markets, a top UK industry executive said.

Simon Lee, chief executive of RSA, was confident the insurer can meet the new Solvency II rules which will assess a firm's ability to meet payouts on customer policies.

"Our biggest concern is the delays we're experiencing and the fact those delays show no sign of abating," Lee told Reuters as the company announced results on Thursday.

The European Parliament and EU member states meet after the summer break to negotiate how much capital is needed to cover products offering guaranteed returns over several years.

If there is no deal this autumn, the 2016 start date will be "well nigh impossible" given a legislative hiatus next year when the European Parliament goes to the polls, Lee said.

British insurers have become increasingly frustrated with the mounting costs of preparing for a new regulatory regime that has spent a decade in the making. Another year's delay would likely only add to those costs.

Former UK insurance supervisor Stuart King told Reuters global moves just underway to make insurers hold enough capital could make Solvency II less relevant and prolong the regulatory "fog" even further.

Britain is introducing extra capital safeguards on insurers because it doesn't trust in-house models insurers will use to calculate capital requirements under the EU rules.

Andrew Bailey, chief executive of the UK Prudential Regulation Authority which regulates banks and insurers, has said the extra safeguards, which he terms "early warning indicators", flash if capital is too low.

"Our use of early warning indicators is precisely because we have learned the hard way with banks that excessive reliance on modelled capital requirements lends itself to cutting capital levels too low," Bailey told insurers in July.

Britain is imposing a leverage ratio on banks or a cap on their balance sheets relative to capital held, forcing Barclays this week to announce plans to raise more capital.

Former UK insurance supervisor Stuart King said the new indicators will be a leverage ratio for insurers.

"It seems to me to be an important part of the Solvency II caravan moving on. You can draw an analogy to the leverage ratio in the banking regime. They are a backstop," said King, now with regulation consultancy Promontory.

Britain now wants the global Financial Stability Board (FSB) and the International Association of Insurance Supervisors (IAIS) to adopt similar capital safeguards across the world.

"Solvency II is likely to prove the high watermark internationally for the modelling approach to setting capital. Now we are moving to modelling plus a simple cross check. This is potentially moving the goal posts for insurers," King added.

Bailey has said he wants a "simple backstop capital regime, perhaps of the early warning indicator type" on a global basis.

The FSB has just published plans for nine top global insurers like Britain's Aviva and Prudential, to hold more capital though they have yet to be adopted.

The IAIS said it will develop "straightforward, backstop capital requirements" for top insurers by 2014 and is also working on the first global capital standard for insurers.

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