Michael Barnier, EU internal market commissioner has responded to criticism from insurance companies that the new Solvency II capital rules are too conservative saying that the changes are needed to protect policy holders and improve an antiquated regime.

Michael Wainwright, partner at international law firm Eversheds, comments:
“The Solvency II directive will impose a new regulatory regime on insurers comparable to the Basel II banking regime. It will be an improvement on the existing directives, but it has the same fundamental weakness as Basel II, in that it concentrates on the strength of individual companies and does not address systemic risk in the industry as a whole."

There is a danger, he said, that it will increase systemic risk by imposing heavy and inflexible capital requirements on insurers, with the result that all insurers are forced to respond to market movements in the same way, thereby aggravating those market movements.

"This danger has been pointed out to the EU Commission, but they seem to have missed the point. The Commission’s announcement today confirms their intention to press ahead with plans to increase capital requirements on individual insurers. Instead, they should be looking to address systemic risk in the sector, including by the application of more flexible capital requirements.”

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