The European Union's Council of Ministers has adopted two directives designed to increase cash safety margins for insurance companies, writes Clare O'Dea

The new regime will gave regulators extra powers to intervene when the financial position of an insurance company is deteriorating.

The directives, which were welcomed by the Irish Insurance Federation (IIF), require European insurance companies to increase the amount of ready capital they hold in reserve to protect against unforeseen events.

Mr Michael Kemp, chief executive of the IIF, said the new directives would provide additional assurance that higher thresholds were applied across the European Union.

"However, the increased solvency margins will not significantly affect Irish insurers as they already operate well above these new minimum levels," he says.

Under the new rules, which will apply from 2004, European companies will be required to hold a minimum guarantee fund of €4.87 million.

There are then two possible formulas for working out how much capital in total they hold as a buffer against unforeseen events.

The first option is to hold capital equal to 18 per cent of premiums on the first €63.49 million of premium. Above this sum, the solvency margin will be 16 per cent.

The second option is to hold reserves equal to 26 per cent of claims on the first €44.44 million of claims.

Above €44.44 that level, the margin will be 23 per cent.