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European Commission Solvency II

The European Commission has proposed shaking up how the EU’s insurance sector covers risk.

Solvency II aims to protect policyholders better and spur competition in the 27-nation European Union while making more efficient use of capital in the industry.

The rules should help avoid debacles like the near-demise of Britain’s Equitable Life, which hit the savings of 1.5 million policyholders in several EU states.

Solvency I dates to the 1970s and can result in too much capital being set aside. Methods for calculating risk have moved on and more sophisticated products emerged, such as securitization, where insurers pool some risks and sell them in the form of bonds. A more efficient use of capital to cover risk should enable insurers to compete better and put downward pressure on the cost of insuring cars, property and people.

All insurers will have to use the method laid down in the rules to calculate the value of their assets and liabilities, and tell supervisors how much capital they have to cover risk. Supervisors will be able to intervene as soon as a company’s solvency capital falls below an early-warning level.

Many of the big firms have already moved or are moving to the risk-based approach laid out in Solvency II. The European Insurance Federation (CEA) estimates it will cost the EU industry a one-off �2-3 billion ($3.1 to $4.65 billion), and �0.3 to �0.5 billion ($0.465 to $0.775 billion) annually thereafter.

EU member states and the European Parliament have joint say on the final content of the new rules, which are expected to come into force around 2012.

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