Insurers are facing stricter capital rules that may prove difficult to comply with
The European insurance industry may be in for a shock from revised capital rules that will take effect in January 2016. ASR Nederland N.V., a Dutch insurance provider, announced last week that its available capital fell drastically below the standard imposed by the new rules. Other companies have reported similar issues, which may show that the European insurance industry is relatively ill-prepared to comply with the new rules once they go into effect.
Insurers may be forced to sell off assets in order to comply with new capital rules
As the deadline to comply with the capital rules comes closer, several European companies are examining their capital reserves. Insurers need these reserves in order to cover the costs associated with significant events that lead to major losses. This capital is also used to return money to shareholders in the form of dividends. For some insurers, selling off assets in order to raise capital reserves may be the only option to comply with the new capital rules. Several European banks have already been forced to do this, with 12 banks raising a combined total of $16.78 billion in order to address capital shortfalls.
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Regulators believe insurers will be able to dispel doubts about their capital issues
European regulators believe that the insurance industry will respond in a favorable way to the new capital rules, though insurers have already issued concerns and complaints. Insurers may begin feeling pressure to address their capital issues more publicly as markets begin to show wariness in their ability to comply with solvency rules. Addressing the issue more publicly may dispel some doubt among these markets.
Insurers are forced to comply with stricter rules in order to remain solvent
Under the new capital rules, the insurance industry is required to express their capital levels as a ratio against what is required to cover potential liabilities. Insurers must use operational, underwriting, and asset risks in order to assess this ratio. Regulators believe that the new capital rules will hold the insurance industry to a higher standard, which may enable them to be better prepared for potential catastrophes.