Europe may be nearing an agreement on rules that aim to make insurance companies safer after 13 years of wrangling between politicians, companies and regulators.

Insurers and European Union officials are working out a compromise on the capital they need to ensure they can make good on long-term products such as annuities, according to Ralph Koijen, professor of Finance at the London Business School, citing recent draft accords he has studied.

Insurers from countries including Germany, the U.K. and France have criticized the so-called Solvency II proposal, saying the rules could make savings products excessively costly as more capital would be required to cover risks for longer-term investments.

“The rules for discounting insurers’ long-term liabilities seem to have been watered down, allowing calculation on the basis of a risk-free rate with a liquidity premium, rather than actual marked to market valuation,” Koijen said in a telephone interview from London yesterday.

Representatives from the European Commission, European Parliament and Council of the European Union convene for talks starting in Brussels today that firms including Allianz SE, the continent’s biggest insurer, say could bring an accord for implementing Solvency II.

Insurers are Europe’s biggest institutional investors with 8.4 trillion euros ($11.3 trillion) under management. They are lagging behind banks in adopting a framework to help them withstand losses in any repeat of the 2008 financial crisis. Aegon NV, the owner of U.S. insurance firm Transamerica Corp., and reinsurance company Swiss Re were among firms that received financial support after the collapse of Lehman Brothers Holdings Inc. and the U.S. bailout of AIG.


Solvency II, intended to harmonize the way firms allocate capital against risk, was scheduled to come into force last year. Its introduction was delayed several times over issues such as calculating capital needed for liabilities for products with long-term guarantees such as annuities and investments such as government bonds. Insurers and regulators now plan to implement the rules on Jan. 1, 2016 with a transitional period, should an agreement be reached in time.

“I very much hope that a compromise can be reached now — we can’t keep this project in a half-implemented state,” Dieter Wemmer, chief financial officer at Allianz, said on a call with journalists last week. “We now either get it right or we should leave it. It has been in the works for too many years and it has cost too many billions of euros.”

Deals reached in so-called trilogue meetings such as today’s talks on Solvency II require approval by parliament and the council, which represents the EU’s 28 member states. Further meetings are often held at short notice before draft agreements are reached.

Capital Compromise

Solvency II is important for Europe’s financial stability as insurers such as Allianz, with 1.81 trillion euros under management, control more than half of all institutional investments on the continent. Pension funds follow with a 24 percent share, according to Insurance Europe, a federation of 34 national insurance associations. UBS AG, the world’s biggest manager of money for the rich, manages 1.4 trillion euros at its wealth unit.

As Europe continues to debate Solvency II, global regulators are developing a common framework for supervising internationally active insurance groups. The International Association of Insurance Supervisors, or IAIS, is creating a risk-based global insurance capital standard to be introduced by the end of 2016, with full implementation scheduled for 2019.

Agreement Near

“We are not quite there yet but we are very close to an agreement,” Chantal Hughes, spokeswoman for Michel Barnier, the EU’s financial services chief, said by telephone from Brussels. “We’ve made a lot of progress, and are urging all sides to work together in a spirit of compromise to take this over the finish line.”

The IAIS’s discussions “are probably also putting a bit more pressure now on the European institutions to come to an agreement,” Aegon chief Executive Officer Alex Wynaendts said. That would “make the discussions in the context of a global framework easier.”

Regulatory Uncertainty

Last year, speculation increased that the regulations would be sidelined by some EU countries as they prepared to introduce some of the rules piecemeal.

National regulators, who are developing Solvency II led by the Frankfurt-based European Insurance and Occupational Pensions Authority, or Eiopa, are urging politicians to complete the accord now.

“An agreement on the final shape and on the date of implementation of Solvency II is urgently needed to enhance consumer protection, increase financial stability and avoid market fragmentation,” Gabriel Bernardino, Eiopa’s chairman, said. “We cannot continue with the current regulatory uncertainty.”

Policy makers intend Solvency II to be for Europe’s insurers what the Basel Committee on Banking Supervision’s global capital rules are for the continent’s banks — a common set of rules applied across the EU. They will replace regulations developed in the 1970s that had been superseded by a patchwork of national laws. Current Solvency I rules concentrate mainly on insurance risks, while Solvency II also takes account of investment risks.
Bonds Lead

Insurers invest 42 percent of their money in bonds and other fixed income securities, 30 percent in shares and other variable-yield securities and 11 percent in loans, according to Insurance Europe. To cope with low interest rates that are pushing down returns, insurers have increased their exposure to higher-yielding real estate and infrastructure projects such as renewable energy plants.

Like Basel III, the levels of capital reserves required under Solvency II can either be determined by the regulator’s so-called standard model or a firm’s internal model, which must be approved by the regulator. Nearly all of the biggest EU-based insurers have opted for internal models.

The new rules are made up of three key parts, or pillars: capital requirements for individual companies, a regulatory assessment of a particular firm’s risk, as well as principles for the regulators’ broader supervision of the marketplace.

Seventy-eight percent of German insurers expect they will need to make further “significant investments” to comply with new reporting standards including the so-called Own Risk and Solvency Assessment, which requires each insurer to calculate its own risk capital needs based on individual stress tests, according to a survey by consulting firm Steria Mummert.

‘More Optimistic’

Europe’s 40 largest insurers spent as much as 4.9 billion euros last year complying with new regulations, according to estimates by Deloitte. The consulting firm said that the total cost of compliance from 2010 to 2012 may be as much as 9 billion euros, with the average cost for each insurer exceeding 200 million euros.

“I’m more optimistic now about the date of Jan. 1, 2016,” Aegon’s Wynaendts said. “Everybody now knows that if by the end of November there is no agreement, then the target date becomes really impossible.”

–With assistance from Jim Brunsden in Brussels. Editors: Mark Bentley, Frank Connelly