EU lawmakers pass diluted insurance reform

By Huw Jones

LUXEMBOURG (Reuters) - A panel of European Union lawmakers adopted an overhaul of the bloc's 7 trillion euro ($9.5 trillion) insurance sector on Tuesday but diluted measures to streamline how big insurers are supervised.

The reform is seen as the first test of the commitment of member states to shake up a nation-state-based system seen as flawed during the current financial crisis.

EU states and the bloc's assembly have the final say on the Solvency II measure authored by the European Commission that will change how cross-border insurers such as Generali (GASI.MI), Aviva (AV.L), Allianz (ALVG.DE) and Axa (AXAF.PA) put aside capital to cover risks and protect policyholders.

Parliament's economic affairs committee voted 22 in favour and seven against, with four abstentions in a first-reading vote.

The reform introduces colleges of supervisors for big cross-border insurers to give the home regulator the last word on how much capital the insurer must set aside to cover risk, including for offshoots in other EU states.

A similar reform has been proposed for cross-border banks.

However, 12 states fear their regulators, which oversee many of these insurance offshoots, will become powerless if they want a subsidiary to increase its capital to safeguard local policyholders in troubled markets.

British socialist Peter Skinner, steering the reform through parliament, said lawmakers had watered down the European Commission's draft text to reassure local or host supervisors.

"We have enhanced the role of the local supervisor, working together with the group supervisor to provide a good platform for supervision at EU level," Skinner told Reuters.

"The spirit of this is the local supervisor has a much stronger role in demanding a capital add-on," Skinner said.

Lawmakers introduced a mechanism for resolving disputes between supervisors and forcing a home regulator to pay more heed to regulators from elsewhere, though the home watchdog would still ultimately have the last word.

"This appears to be a positive step and reflects the constructive approach the European Parliament has taken in this directive," said Peter Vipond of the Association of British Insurers.

"This is in contrast to the Council of Ministers, where some members' narrow nationalistic focus means they have not accepted the need for an EU-wide solution in Solvency II," Vipond said.

EU finance ministers meeting in Luxembourg on Tuesday also aim to adopt a "general approach," or preliminary agreement, on the reform, but the issue of supervision may scupper this.

"It looks a bit premature," a diplomat at the meeting said.

EU president France hopes a joint deal with parliament at first reading can be reached by the year-end.

It has proposed that states can opt out of group supervision altogether, a move some lawmakers say would create a "two speed" supervisory system.

(Reporting by Huw Jones, editing by Dale Hudson)