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European trade body warns on Solvency II capital burden

Beefed-up capital requirements due to come in with Solvency II will make the insurance industry less rather than more stable, according to Europe's insurance and reinsurance trade body.

In a detailed response to the latest proposals, the Comite Europeen des Assurances (CEA) said that the benefits of the new capital requirements would be "vanishingly small".

The CEA argues that the enhanced capital requirements are a blunt instrument to achieve the directive's original goals, referring to them as "excessive" and "unjustified" in their conservatism.

Instead, the organisation urges European regulators' body Ceiops to concentrate on pillars 2 and 3, which promote improved business processes and corporate governance.

Recent industry estimates, the authors state, place the increase in capital requirements between 65 and 75 percent (see graph - first presented by Swiss Re board member Martin Albers at the February Insiderscope event). The CEA expects these increases to coincide with a 20-50 percent reduction in the available sources of capital.

Tommy Persson, president of the CEA, said: "The insurance industry has serious concerns about the effect of some of the current proposals, as they would be bad for consumers, bad for Europe's economy and bad for the insurance industry."

Individual insurance companies may scale back their underwriting operations, particularly in more volatile lines like natural catastrophe, while the changes could trigger a rates increase of between 5 and 20 percent, the authors believe.

Higher capital charges also have the potential to dilute shareholder returns - which is likely to depress capital investment in the industry and increase funding costs, the CEA argues.

Policyholders would suffer from less favourable rates and terms, the report says. It further predicts that the existing proposals would hurt the macro-economy by, among other things, restricting the role of the insurance sector as a risk-absorber and scaling back its part as an institutional investor.

The CEA emphasises that the European insurance sector's business model is "fundamentally different" from the banks and "intrinsically more resilient to short-term financial turmoil".

It goes on to point out that the sector "arguably weathered the storm of the financial crisis remarkably well", with very few institutions requiring support from governments or central banks.

In returning to its central point about the misplaced focus on capitalisation, the report said: "One of the key lessons learnt from the 2001/02 crisis was that reliance on capital requirements alone is insufficient.

"Indeed, analysis of the history of insurance company insolvencies has shown that the vast majority of insolvencies were preceded by either internal management or governance shortcomings or some external trigger event."

The CEA wants a renewed focus on "qualitative" regulatory requirements like good governance and full disclosure as a compliment to stiffer capital requirements.

The heavy lobbying, combined with the scheduling of a new meeting by Ceiops, has led to suggestions that the implementation date of October 2012 will be put back to 2013.

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