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STRASBOURG, FranceThe European Commission last week formally adopted the proposed Solvency II framework directive, with a 2012 implementation deadline that is two years later than previously planned.
The biggest overhaul of European regulation for insurers and reinsurers in more than three decades, Solvency II aims to modernize the way regulators evaluate insurers' financial soundness and make these companies more competitive abroad.
And some risk managers with captive operations could be directly affected by the framework. As drafted, Solvency II would apply to captive insurers with more than E5 million ($6.8 million) in annual premiums.
Annette Olesen, director of PricewaterhouseCoopers L.L.P. in London, said: "At the moment, there is no distinction made for captives (in Solvency II), so these should be affected in similar fashion to other insurers, depending on their size."
Current pan-European solvency rules stipulate minimum amounts of financial resources that insurers and reinsurers must have. However, many member states have determined those requirements are not sufficient and have implemented their own, creating a patchwork of regulatory requirements, the European Commission said in a statement.
The proposed Solvency II regime will introduce economic risk-based solvency requirements across all E.U. member states for the first time.
"The new requirements move away from a crude 'one-model-fits-all' way of estimating capital requirements to more entity-specific requirements," the European Commission said.
While existing E.U. solvency requirements focus "mainly on the liabilities side (i.e. insurance risks), Solvency II will also take account of the asset-side risks." In addition, entities now will also have to hold sufficient capital for "market risk," including investment losses, credit risk and operational risks.
Experts said the proposal, which must be approved by European Parliament and Council, would likely benefit large groups. Very small insurers, with less than e5 million in annual premiums, would be exempt.
The directive could mean that insurers are required to hold less capital for certain lines, sources said. And this could translate into lower premiums charged to buyers, they contend.
Jacques Aigrain, chief executive of Zurich-based Swiss Reinsurance Co., said in a panel discussion at the International Insurance Society Inc.'s annual conference in Berlin last week that by providing insurers and reinsurers with potentially lower capital requirements, Solvency II should translate into benefits for policyholders, in the form of lower prices.
Also speaking at the IIS event, Karel Van Hulle, head of the insurance and pensions unit at the European Commission's internal market and services directorate-general, noted the proposal's objective of increasing European insurers' competitiveness. Better capital allocation by insurers may ultimately benefit policyholders in the form of lower premiums, he said.
But the directive could also lead to consolidation among smaller players, resulting in reduced choice for European insurance buyers, sources said.
"Medium-size groups with less diversification will face more of a challenge," Ms. Olesen said. "I think (they) will actively be looking at their structures and considering the possibility" of mergers and acquisitions.
Speaking in Brussels before the proposal was passed, Mr.Van Hulle said: "Monoliners that have some small specialty fill an important role. However, undercapitalized companies will probably want to consider joining another company or leaving the business altogether."
The Comite Europeen des Assurances, which represents European insurers and reinsurers, welcomed the proposed regime.
Michaela Koller, director general of the Brussels, Belgium-based CEA, said Solvency II "provides the most transparent and effective framework and is fair to all forms of insurance undertakings, big and small, mutual and shareholder owned."
The implementation date for the directive has been set back two years to 2012, noted Mr. McCreevy.