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This week a political com on Solvency II is in danger of damaging the whole rationale for having the directive. Smaller EU nations, lead by Poland, have refused to accept the group supervision principle, with the result that it is proposed to implement Solvency II without insurance groups being able to consolidate their capital requirements.
On Tuesday, the finance ministers of the 27 EU nations, meeting at their regular ECOFIN council, supported a watered down solution to the home/host supervisory proposals of Solvency II. Smaller countries have been worried that, in making major decisions on the capital requirements of multi-country insurers, they will be ignored. The original proposal had the home regulator supervising the large insurers – generally headquartered in London, Frankfurt, Paris and the Netherlands – and the smaller EU member states fear that they will be ignored, particularly in the event of financial crises.
Bodies such as the European Union, the Association of British Insurers and the CEA, the European insurance federation, have reacted with dismay and hostility. The ABI expressed its disappointment at the failure to support the home supervision principle and said that finance ministers were ignoring the cross-border nature of how insurance companies operate. Stephen Haddrill, the Director-General of the ABI said “This does not make sense and needs to change for a successful Solvency II that protects consumer’s interests. The Council has put at risk five years of hard work by insurers, the Parliament and Commission, who are all agreed on the importance of the group proposals. It is vital group support is reinstated to ensure a system of regulation fit for the 21st century. Without these provisions the directive is a waste of time.” Strong words.
There is a fire-fighting initiative under way, lead by the former IMF director general and ex-governor of the Bank of France, Jacques de Larosiere, which will attempt to defuse the situation by accelerating cross—Europe financial regulation proposals. But this has only been in the investigative stages and, although the idea gained some support from the smaller countries, it would be wrong to assume that it can provide a short-term solution.
And where will this leave the EU’s version of Basel II, the Capital Requirements Directive (CRD)? The same home/host discussion is simmering there. Will the smaller nations, emboldened by this success, now target the CRD?
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