Insurance premiums set to rise dramatically as result of new EEC ruling.

September 4th, 2009 by tom | Filed under Daily News, Money Management, Retail.

financial news

Insurance companies in the UK are fearful that they risk under-capitalisation and will be forced to raise at least a further £50 billion in equity if legislation being debated by the European council is passed: rules that will lead to a dramatic increase in premium rates.

Leading figures in the UK industry, as well as representatives of the Association of British Insurers (ABI) trade body, have written a strong letter to UK Chancellor of the Exchequer warning that the extreme measures proposed could destabilise the industry, not only in the UK, but across all of Europe.

The letter urged Mr. Darling to intervene and to approach his colleagues at the European Commission over the threat, explaining that their new and unwelcome legislation might cause irreparable damage to the industry and its customers.

ABI director-general Stephen Haddrill explained in his letter to Alastair Darling that the new proposals require that insurance companies in the UK alone would need to increase their working capital and their reserves by £30 billion in order to reach a £70 billion minimum figure. Insurance companies and associations throughout Europe who are legislated by the European Commission would be required to raise similar amounts.

Haddrill went on to explain in his letter that in the UK, the impact of abiding by such legislation is like the equivalent of raising fresh equity capital that equals the industry’s total current market capitalization that is now more than £50 billion. If the legislation is passed, fears are that the insurance industry will be unable to raise the additional equity and this ultimately could lead to the collapse of the insurance industry, a situation that is untenable.

The new rules, laid out in the Commission’s “Solvency II” directive, are scheduled to come into force in 2012, with implementation standards due to be set by the end of 2010. The directive’s intention is to improve transparency in the insurance industry, as well as establishing standardised capital requirements for the insurance industry across the European Union.

However insurers in the UK and across mainland Europe are convinced that the regulators are inclined to place insurance companies in the same category as banks, even though the insurance industry has weathered the financial downturn fairly well.