New EU insurance solvency regime back on track for 2012

The vote on 22nd April followed a long period of intense negotiation that at one point threatened to jeopardise the timetable for the whole project. The Directive is now expected to be formally adopted by the Economic and Financial Affairs Council on 5th May, with a view to full implementation in October 2012.

Agreement has not come without compromise, principally the sidelining of the European Commission's proposal for a system of cross-border support for insurance groups in the EU.

Solvency rules dictate how much capital insurers must hold in relation to their liabilities. The original draft Directive included provisions that would allow part of a subsidiary's capital requirement to be met by a guarantee from the parent company that funds would be transferred from the group if required. The capital adequacy of the group as a whole would be supervised by lead supervisor in the group's 'home' member state.

Group support was strongly opposed by some member states and was eventually removed from the text last November. The wording that has now been agreed, however, includes a review clause that will allow the European Commission to return to the issue three years after the directive comes into force.

Even though the final text does not go as far as it would have liked, the Commission said in a statement to the press that the Directive included "significant improvements" in the way insurance groups are supervised compared to the current system.

It hopes to revive group support "when progress in a number of other areas … will have been made and will have brought about a more favourable environment for further reforms on cross-border co-operation between home and host supervisors".

This refers to recommendations made in February by a high level group on financial supervision chaired by Jacques de Larosière.

The de Larosière report called for tighter regulatory supervision of cross-border financial groups and urged the rapid adoption of Solvency II as an important part of that process. The European Commission is expected to present proposals for reforming the European financial supervisory system to the European Council in June.

Internal Market and Services Commissioner Charlie McCreevy welcomed the European Parliament's vote.

"We need Solvency II more than ever as a first response to the present financial crisis," he said. "We need regulation that requires companies to properly manage their risks; that increases transparency; and that ensures that supervisory authorities cooperate and coordinate their activities more effectively".

"However, I considered the group support regime to have been one of the most innovative aspects of the proposal and a key element in the modernisation of the supervisory arrangements for cross-border insurance and reinsurance companies," said McCreevy. "I personally regret that it is not now part of the package. I hope however that this will be rectified in due course.”

Stephen Haddrill, Director General of the Association of British Insurers said the removal of group support was a missed opportunity.

"The crisis has shown that the lead supervisor for a firm needs to look across boundaries and ensure risks across the group are properly managed and capitalised as a whole," said Haddrill. "As the de Larosière report outlined, we need supervision that reflects the cross-border nature of businesses. A directive with group support would have been world-leading. This Directive is not.”