European insurance groups such as Allianz and Axa are set to benefit from a radical overhaul of European Union regulation that will place them under the scrutiny of a single "group supervisor" and potentially free up some of their capital.
The new regime, known as Solvency II, will be unveiled by the European Commission next week.
Insurance groups exposed to high risk will be forced to increase their provisions, but the majority - especially if they are big and diversified - are expected to be able to cut the amount they set aside. Some industry observers believe the new regime will lead to lower premiums.
The latest draft of the proposal says the goals of Solvency II are to "enhance protection of policyholders and beneficiaries, to deepen the integration of the European insurance market (and) to improve the competitiveness of European insurers and reinsurers".
Though the industry believes the new regime will impose compliance costs of €2 billion to €3 billion upfront, it has backed the drive to introduce a more flexible solvency model.
In the first significant update of the EU's insurance laws since the early 1970s, pan-European groups will also be allowed to fulfil the bulk of their regulatory duties with the supervisor in their home country.
While national regulators will retain some powers, this new "group supervisor" will be responsible for assessing the group's financial strength and risk control procedures - freeing insurers from the burden of scrutiny in this area by up to 27 different national regulators.
"The lead supervisor system will definitely reduce the cost of supervision," Raj Singh, chief risk officer at Allianz, said yesterday.
Peter Vipond, director of financial regulation and taxation at the Association of British Insurers, said: "If it is true, it is good news. There is an enormous and fascinating supervisory challenge for the insurance sector. But there are big wins for the European economy if this is done successfully."
The fragility of the insurance sector was last exposed seven years ago, when the near-collapse of Equitable Life, a UK life assurer, left more than one million customers with losses worth several billion pounds. - (Financial Times service)
