EU insurance directive on knife-edge

European politicians fail to reach agreement on Solvency II as Brussels talks end in deadlock

A European directive that will force insurers to hold vast sums of capital of their balance sheet is "50:50" to hit its tight timetable following stalled negotiations in Brussels last week.

Top European sources said that everybody involved with thrashing out the details of what is known as Solvency II, now believes that hitting the 2014 implementation deadline is now on a knife-edge.

Although insurers such as Prudential have threatened to relocate their businesses away from London to outside of the European Union if Solvency II turns out to be unfairly onerous, many more are simply fed up with the lack of clarity over the new regime. They have poured time and money into developing business and technology models to meet the rigorous systems that are expected to be introduced.

The directive would force insurers to hold more cash in order to ensure that they have enough protection in the event of another financial crisis. This is controversial among insurers as the industry is generally considered to have weathered the credit crunch well, unlike banking.

Plans for Solvency II have existed in one form or another for years, but Brussels has vowed to get a directive ready for a soft launch in about 18 months' time. However, talks have broken down in the 'trialogue' phase, which is when the European Commission, the Council of Ministers and Parliament try to agree a final version of Solvency II.

This trialogue has now met seven times without coming up with a final blueprint. Thursday's meeting was considered vital, as European politicians started their recess at the end of last week, meaning that no further formal discussions will take place until September.

It is understood that the problem is in the Council, with member nations Italy and France wanting to make some changes that would benefit financial products in their home insurance markets that other parties believe would not fully reflect their risks.

A source close to the talks said: "If the Council can sort out the differences between themselves on this bit of an extraordinary proposal then there is a chance of still hitting the timetable. However, everyone thinks it's about 50:50 we'll make 2014."

A second senior European source said: "If the trialogue isn't agreed when everyone gets back from recess we won't see the 'soft' launch of Solvency II in 2014. Maybe the summer will allow everyone to cool off."

It is generally agreed that there is already very little time spare to allow for any delays in negotiations, which would mean the earliest possible implementation would be 2015. By then, some of the starting assumptions of insurers' models could be out-of-date, meaning that more time and money would have to be put into finessing their systems.