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E.U. lawmakers back insurer-friendly capital rules

E.U. lawmakers back insurer-friendly capital rules

LONDON (Reuters)—The European Parliament's economic affairs committee overwhelmingly backed a draft law to implement new capital rules for insurers, including a package of measures that will make the new regime less burdensome for the industry.

The vote, carried by a majority of 37 to 5, makes it virtually certain that the changes will survive into the final version of the new Solvency II rules, due to come into force in January 2014.

Parliament and European Union governments will meet next month to finalize the text. European Union states have already backed a version that includes the industry-friendly measures, regarded as critically important by insurers in Germany, France, Britain, Spain and Ireland.

"We have turned this around to a very sensibly balanced package," Peter Skinner, a British center-left member of the committee, said after the vote.

Prudential P.L.C., Britain's biggest insurer, has said it might relocate outside the E.U. because it fears Solvency II would penalize its lucrative U.S. operation, making the business less competitive against local rivals.

The industry-friendly package represents a mini-grand bargain among the biggest E.U. states, ensuring it will make it to the final law.

It allows for the continued use of matching premiums, which allow insurers to hold less capital than they would otherwise have to against annuities, products that are popular in Britain, Spain and Ireland.

They also allow insurers, especially in France, to smooth out the capital impact of short-term market fluctuations and to use extrapolation techniques to estimate future interest rates, a practice common in Germany.

Initially, the amendments were due to be ditched from the parliament's text, raising concerns among insurers in Britain, Ireland and Spain in particular.

Sven Giegold, a German Green Party member of the committee, reacted angrily to a last-minute U-turn to include the measures sought by the insurance industry, saying this was done despite strong scientific evidence this would be a bad move.

"We take additional risks over solvency of the insurance sector in Europe with these rules. I hope there are not additional costs to taxpayers because of this," Mr. Giegold said.

Insurers cautiously welcomed the vote.

The measures agreed on Wednesday "are far from perfect, but pave the way for a constructive discussion in the next phase of negotiations of Solvency II," said Otto Thoresen, director general of the Assn. of British Insurers.

Mr. Thoresen said the next stage of negotiations should focus on making sure the new rules do not make it harder for European insurers to compete against global rivals.

Solvency II could force insurers to hold extra capital against operations in countries deemed by European regulators to have less exacting rules.

The Solvency II regime, due to become law in January 2013 ahead of full implementation a year later, is 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 the new regime, expected to lead to higher capital requirements for many insurers, could force up the cost of insurance and pensions products for European consumers.

For in-depth coverage of this topic and related issues, visit our Solution Arc on Solvency II Compliance and Business Challenges for Insurers.

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