30 SECOND GUIDE TO ... SOLVENCY II

A very boring sequel? We’re talking insurance regulation, not a very niche film. Solvency II is a new European rule which comes into effect in January.

It will force insurance companies to hold more capital so they can survive a major financial crisis or natural catastrophes that force them to pay out huge claims. Why should I care? When a big company collapses it can trigger chaos – just look at what happened with Lehman Brothers and Northern Rock. Insurance companies that are forced to raise more capital could pass on these costs to customers, in the form of higher premiums. Are insurance companies safe? That’s what the Bank of England’s stability watchdog, the Prudential Regulation Authority, is trying to find out.

Solvency II is forcing insurance firms to take a more realistic view of both their assets and liabilities – and how much capital they can set aside to cover losses. Around 25 firms have applied to use their own models to work this out, rather than a standard one established by the European Insurance and Occupational Pensions Authority. Tomorrow the PRA will publish the names of firms which have been given permission to do this, and those that haven’t. So what? Analysts predict firms that are rejected will see their share price fall sharply on Monday because shareholders will assume there are problems with their finances.