EU will direct insurers to hold more capital

European insurance companies will be required to increase the amount of capital they hold as a buffer against unexpected events, under new rules to be approved by the European Union. The new regime, which could be agreed by EU member-states tomorrow, will give regulators extra powers to intervene when the financial position of an insurance company is deteriorating.

The changes are aimed at protecting policyholders when insurance companies are hit by higher-than-expected claims. The two directives, one for life assurance and one for general insurance, are part of the European Commission's plan to achieve a single European market in financial services by 2005.

Insurance experts say they will affect smaller insurers as most large groups already hold more than the minimum required by the new rules. Under the rules, that will have to be applied from 2004, companies will be required to hold:

A minimum of £3 million sterling (€4.87 million) in buffer capital, compared with the current range of £200,000 to £1.4 million;

Capital equal to 18 per cent of premiums on the first £50 million of premium, up from £10 million. Above £50 million, the solvency margin will be 16 per cent.

Reserves equal to 26 per cent of claims on the first £35 million of claims up from £7 million. Above £35 million the margin will be 23 per cent. All margins will be indexed in line with inflation.

Most large insurance companies have solvency margins well above this threshold. Syndicates at Lloyds, the London insurance market, have an average margin of 50 per cent.

However, the new rules will prevent smaller insurers from taking on too much risk without having enough capital to cover sudden changes in their investment or claims position.

Regulators will be given extra power to intervene when an insurer is facing financial difficulties even though they meet the margin requirements. Approval by the European Council would mean that the directives have been passed by the European Commission, the European Parliament and the council in just more than a year. Normally it takes much longer to agree on such legislation.