European Union lawmakers last week hammered out details of

new rules to reduce the risk carried by insurance firms.

Members of European Parliament, representatives from

the European Council and member states came to an informal agreement on the so-called Solvency II

legislation, which sets up a similar set of rules for insurers that banks

already face. Officials said the changes – under debate for 13 years -- ultimately

will protect taxpayers from exposure to risky investments. The legislation,

which still needs approval by the full parliament in plenary session, is

expected to take effect 1 January 2016.

The Solvency II legislation requires the EU's €8 trillion insurance industry to put in

place capital buffers large enough to cover investment risks. Lawmakers said

they took into account the longer-term nature of insurers' investment

portfolios and adjusted the rules accordingly.

“The agreement will ensure a system which takes investment

risk better into account in the future,” MEP Burkhard Balz of Germany, the

rapporteur for the legislation, said in a statement. “The new rules needed to

be ambitious because greater security was necessary. But we have also ensured

that insurance companies will be able to continue to fulfill their role as

long-term investors, even in difficult economic situations.”

Lawmakers said the biggest hurdle in the negotiations was

the size of the capital buffer insurers would be required to keep for long-term

investments. The rules reflect that insurers tend to hold longer-term investments

and because of that are less affected by “sudden and severe market shocks.”

Insurers would be forced to have a greater capital buffer than they do

currently, and take a more realistic view of their liabilities. They also will

be required to take into consideration the effect financial market volatility

could have. Also new would be continuous monitoring and controls to ensure the

regulations work appropriately.

The agreement brokered last week also boosts the authority

of the European Insurance and Occupational Pensions Authority (EIOPA), which

was created in 2011 to supervise the insurance sector. Under the proposed

legislation, EIOPA will be able to determine when exceptional circumstances

exist to warrant a relaxation of the regulations. The authority also would have

a stronger role with national regulators, and would be authorized to keep tabs

on member states' implementation to ensure compliance.

Provisions also were agreed to regarding third country systems,

allowing the European Commission to deem a third country's system “provisionally

equivalent” to the EU's system for a 10-year period. The commission would be

allowed to renew its decision. Lawmakers said this change will help insurance

companies that conduct business in other countries to function effectively if

those countries are determined to have equivalent regulations in place.

Internal Market and Services Commissioner Michel Barnier praised Balz and the other members for

their work on the directive.

“This agreement is a

very important step towards the introduction of a modern and risk-based

solvency regime for the insurance industry in Europe as of 1 January 2016,

making it both safer and more competitive,” Barnier said in a statement. “In

practice it makes the implementation of Solvency II possible.”

In particular, Barnier praised the legislation because it

will enable insurance firms to continue their practice of offering long-term

guaranteed products like life insurance policies, which he called an essential

part of retirement planning for many individuals. He also said the rules will

help small and mid-sized insurers by easing their reporting requirements.

EIOPA Chairman Gabriel Bernardino said the legislation was long awaited and will help strengthen

supervision of the insurance industry in Europe.

“This agreement is of extreme importance for EIOPA as a

European institution, because it allows the authority to fully perform its

tasks related to the promotion of supervisory convergence and consistent

supervisory practices,” Bernardino said in a statement.

Topics