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New EU insurance rules moving away from what legislators intended, industry warns

Out-Law News | 13 Mar 2014 | 4:51 pm | 2 min. read

Detailed provisions under the new EU regulatory framework for the insurance industry risk preventing the industry from providing much-needed economic investment, a trade body has warned.

Insurance Europe president Sergio Balbinot, writing in the Financial Times, said that the 'delegated acts' currently being drawn up by regulators under the Solvency II regime "deviate[s] from the intention" of legislators. He said that differences in the treatment of long-term guarantees and third-country equivalence in particular could have "negative consequences" for the industry.

"If not corrected, the Delegated Acts would seriously limit insurers' ability to provide the long-term investment and stability Europe's economies need," Balbinot said. "They would have a major impact on the availability and price of insurance products, and would harm the ability of European insurers to compete internationally."

"In important areas of the current drafts of the regulatory details, the wordings and calibrations would not work as intended. Insurance Europe is concerned about the repercussions if the acts do not correctly assess the true risks facing insurers or recognise the advantages of their business model ... The industry believes that workable solutions exist to the outstanding problems with the Delegated Acts, without delaying the timetable for finalising Solvency II. In the interests of Europe's economies, we must get this right," he said.

Balbinot's letter was published shortly after the European Parliament voted to approve the Omnibus II Directive, which completes and finalises the new framework for insurance regulation and supervision in the EU. The delayed new regime is scheduled to come into force on 1 January 2016, pending formal adoption by member states.

The Solvency II regime sets out broader risk management requirements for European insurers and dictates how much capital firms must hold in relation to their liabilities. The Omnibus II Directive will set the date of entry into force of the new regime as well as the scope of the power of the regulator, the European Insurance and Occupational Pensions Authority (EIOPA), to propose technical standards and settle disagreements between national supervisors.

Approval of the legislation, which was originally scheduled to come into force in 2012, has undergone multiple delays leading to considerable confusion from the insurance industry and national regulators. The final text contains compromises on the size of the capital buffer insurers would need to hold as guarantee against long-term liabilities, and will allow EIOPA to declare that the rules of a 'third country' are "provisionally equivalent" to those in the EU for at least 10 years, where this is necessary to avoid market disruption and allow a smooth transition to the new regime.

Insurance Europe has identified eight "areas of concern" in the delegated acts, particularly with the 'discount rates' used to calculate insurers' capital requirements and the "unnecessarily high" risks assigned to long-term investments such as infrastructure. It is also concerned that the regulatory text concerning third country equivalence does not reflect the compromise agreed by the Commission and European Parliament.

"Insurance promotes economic activity by providing policyholders with the risk cover and the confidence they need to make investments or to engage in business that they might otherwise consider too risky," Balbinot said in his letter.

"Insurers are also major suppliers of the long-term savings and pension products needed to supplement straining state pension schemes. Last but not least, insurers are the largest institutional investors in Europe, with €8.4tn of assets under management. Europe can – literally – not afford to damage the economic benefits provided by insurance," he said.