EC working on framework for capital requirement rules

Insurers have been warned to wake up to the debate on capital requirement before changes are imposed by the European Commission (EC) in four years' time.

Under Solvency II proposals insurers in the EU will be required to set aside more or less capital depending on the risks they face.

The EC is formulating a framework Directive, which is due to be issued in July 2007. The full implementation of Solvency II is not expected, however, until 2010.

Paul Bennett, a director of business advisers Mazars, said: "An important study is going on at the moment with the EC carrying out consultations on proposals, methods and calculating capital requirements.

"Now is the time for insurers to take an interest in Solvency II rather than complaining that they don't like it in three to four years time."

The legislation is expected to take a more "risk-focused approach" to the prudential regime for insurers, according to Bennett.

He said: "The idea is that insurers will focus much more on their own risk management to the extent that, if they have risk management processes and systems in place, they will be required to have less capital for solvency purposes."

Henri de Castries, chief executive of AXA, has predicted that Solvency II will serve as "a turning point in the industry", but insisted that "too few people are recognising it".

He said: "Why do we have regulation forcing us to keep unnecessary capital? It is not good for the shareholder and not good for the customer.

"In the insurance industry there are well-equipped people who are coming down to the level of the less equipped people."

He added: "Solvency II, if properly handled, will be a unique opportunity to make the industry more efficient."