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* In Malta Watchdogs Assess Risks of Solvency II







Supervisors have raised concerns about the potentially higher financial risks derived from the reform of the insurance sector proposed by the Commission with its Solvency II package. In July 2007, InternalMarket Commissioner Charlie McCreevy launched a fundamental overhaul of the EU insurance and reinsurance sectors. The proposed Solvency II directive aims to modify the delicate rules that prevent insurers from going bankrupt. According to the plans, the current flat-rate system is to be replaced by an economic risk-based assessment method. Insurance companies will not be forced to put aside a share of their capital in order to cover clients’ requests. The new requirements will allow them to keep the minimum amount considered sufficient to cover the risks undertaken.
Complex calculations will establish companies’ exposure to market, credit and operational risks. The insurance sector in Europe employs over a million people.

Solvency II is supposed to replace the current Solvency Directive, which dates from the 1990s. Thousands of insurance companies across Europe will be affected by the reform. The new risk-based system introduced by Solvency II presents a concrete advantage for companies that can invest higher amounts of money and compete in an increasingly globalised market. One of the predicted consequences of the new rules is a merger and acquisition boom in the sector.
The Commission argues that a more dynamic insurance market will make European companies more robust and more capable of facing difficult periods, bringing clear advantages for customers. However, supervisors fear that increased dynamism could also bring about higher competition and thereby cause more bankruptcies as an unwanted consequence. “We realise that a risk-free system does not exist,” acknowledged Mick McAteer of CEIOPS, the Committee of European Insurance and Occupational Pensions Supervisors. “However, in a system based on the principle that one company out of 200 will go bust every year, we have to underline that even only one bankruptcy affects consumers’ confidence,” he said. Mr McCreevy reiterated that the proposed directive is based on “the best approach” and that it should remain unchanged. In a recent speech he also underlined the “fundamental differences between banking and insurance”, made evident by the recent financial turmoil, which affected banks but not insurers.