By Huw Jones

LONDON (Reuters) – The European Union proposed changing the bloc’s capital rules for insurers on Wednesday to release 120 billion euros ($141 billion) for repairing an economy hit by COVID and to meet climate goals without eroding policyholder protection.

Britain is the largest commercial insurer market in the world and has been out of the EU since December last year. It’s also started to review the Solvency II capital rules. This review will look at how Brussels’ changes might affect London’s competitiveness.

In order to prevent financial instability, the EU proposed a framework that would allow for swift and ordered closures of insolvent insurers. This is similar to a move made with banks after the crisis.

Mairead McGuinness, EU financial services commissioner, stated that today’s proposal would help insurance to step up and take full advantage of the EU economy.

We are encouraging investment for the recovery and beyond.

In 2016, the Solvency II capital rules, which were applied by Allianz (DE), Generali (MI) and AXA to the sector of 10.4 trillion euros in 2016 have been introduced.

These rules were not due for routine review, but they became urgent because of the necessity to rebuild an economy that was devastated by the pandemic as well as to invest in green infrastructure so we can meet our net zero carbon goals.

It was also necessary to address the persistence of low interest rates that were undermining insurers’ business models. Solvency II rules must be better tailored to smaller and less risky insurance companies, while some are now out of reach.

BALANCED REVIEW

Brussels proposed easing the impact of the so-called volatility adjustment, which mitigates the impact of short-term market moves on insurer solvency.

Insurers will be able to receive preferential capital treatment of around 10.5 million euros for investing in long-term assets such as infrastructure and greening the economy.

This will decrease the amount of risk, which is money required to transfer the company to another enterprise in an emergency.

According to the EU’s executive European Commission, “Overall the goal is to reach a balanced assessment and to prevent a deterioration in insurers’ solvency situation at EU level.”

According to the Commission, rule changes that require approval by EU countries and the European Parliament would allow for 90 billion euro in short-term and 30 billion long-term.

It said that the EU’s insurance watchdog EIOPA would conduct comprehensive climate stress testing of the sector.

($1 = 0.8524 euros)