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Insurers win concessions in E.U. capital debate


LONDON (Reuters)—Tough new capital rules for the European Union's insurance industry are set to be made less onerous, potentially saving the sector billions of euros, thanks to a last-minute agreement on Thursday between senior lawmakers.

Under the proposed deal between the E.U. Parliament's two biggest parties, a package of measures easing the capital burden for insurers will be reinserted, with some alterations, into draft legislation in time for a key vote next week.

Lawmakers had omitted the measures from a compromise proposal that was to have been voted on by the assembly's Economic Affairs Committee on March 21, drawing criticism from insurers, with one industry source saying the document was a "complete non-starter."

Analysts say it will be harder for insurers to influence the shape of the rules, known as Solvency II, after the vote, as the proposals then become the subject of three-way talks between the European Parliament, Commission and member states.

The measures agreed on Thursday will shield insurers from the capital impact of market fluctuations and provide added protection to policyholders, Peter Skinner, a British socialist member of the European Parliament, told Reuters.

"The sovereign debt crisis in the euro zone could have been exacerbated without this deal," he said.

"Insurance companies would have moved away from holding sovereign debt without these measures in place. But there are safeguards also in place for policyholders that any temporary adjustments are in line with their expectations."

Mr. Skinner said the deal with Burkhard Balz, a German centre-right MEP who has been steering the legislation through parliament, included the continued use of "matching premiums", of critical importance to insurers in Britain and Spain.

These allow annuity writers to hold less capital in recognition of the fact that since their customers cannot cash in their policies, market-driven losses on the bonds they hold to fund annuity payments need never be crystallised.

Under the deal, matching premiums would be replaced by a mechanism known as a matching symmetrical adjuster or MSA, Mr. Skinner said.

"After several weeks of uncertainty, it appears that Peter Skinner may have negotiated an agreement that could be a turning point for future U.K. pensioners who need confidence that Solvency II will protect their retirement income," said Hugh Savill, Director of Prudential Regulation at the Assn. of British Insurers.

The ABI estimated that without matching premiums, Solvency II could reduce the income pensioners get from annuities by up to a fifth as insurers seek to recoup extra capital outlay.

The deal also allows insurers to hold so-called countercyclical premiums to smooth out the capital impact of short-term market fluctuations, and to use extrapolation techniques to estimate future interest rates.

Those are important concessions respectively to the French and German industries, which include region's two biggest insurers—Allianz S.E. and Axa S.A.

An E.U. diplomat involved in the Solvency II negotiations said there was already agreement among member states on the three elements which make up the so-called long term guarantee package. "They allow for specificities in different member states and a level playing field when accounting for them."

Solvency II, due to become law in January 2013 ahead of full implementation a year later, was designed to make insurers hold capital in strict proportion to the risks they underwrite, replacing a patchwork of less sophisticated national rules.

The industry has said that the new regime, expected to lead to higher capital requirements, could force up the cost of insurance and pension products for consumers.

There are fears also that E.U. insurers with operations in countries deemed to have less exacting regulations could be forced to hold extra capital against their local subsidiaries, potentially making them uncompetitive.

Britain's biggest insurer, Prudential Assurance Co. Ltd., and Dutch group Aegon N.V. have both said they might relocate outside the E.U. because they fear Solvency II could harm their businesses in the United States.

The industry is worried that any delays in the E.U. legislative process could lead to the start date, already postponed from 2012, being put back again, prolonging uncertainty over their long-term capital requirements and deterring investors.

Under Thursday's agreement in the European assembly, all three concessions would be reviewed by the European Commission, the European Systemic Risk Board, and the European Insurance and Occupational Pensions Authority, to check they were "fit for purpose" after an as-yet undecided period, Mr. Skinner said.

Combined, the centre right EPP party and the socialists hold a majority in parliament.

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