Insurance shake-up 'costs £3bn'

Talks on changing EU rules have lasted for years and the bill keeps on growing

Britain's insurance industry has spent more than £3bn preparing for new European rules they believe will never be implemented, it has emerged.

FTSE 100 insurers told The Independent on Sunday that the cost of red tape and compliance work undertaken in preparation for the introduction of Solvency II has soared beyond the £1.8bn estimated by the Financial Services Authority in 2011.

The EU claims Solvency II will protect insurers from major financial shocks by forcing them to hold more capital against their liabilities. However, talks over the rules, which were originally estimated to cost €2bn (£1.7bn) to €3bn across the continent, have rumbled on for almost a decade with no end in sight.

One industry source said: "Billions have been spent on Solvency II, with a high probability that the UK will end up with a regulatory regime not much different from the current one, which after all worked perfectly well even through the financial crisis."

The rules have been widely criticised in recent years and the Prudential has even threatened to quit the UK over the issue.

On Friday, the accountancy firm Deloitte warned the changes could force insurers to raise more capital and charge more for annuities, resulting in lower pension payments.

Tamsin Abbey, an insurance partner at Deloitte, said: "Solvency II has been several years in the making and brings many benefits, particularly in the way insurance companies manage their risks and hold capital against them. However, one of the key stumbling blocks in the negotiations has been the treatment of annuity liabilities and the implications for customers at retirement.

"Consumers could also be affected because annuity rates could fall by between 5 and 20 per cent, and that will effectively make retirement a lot more expensive."

Last month, the Association of British Insurers admitted it still had no idea when Solvency II was going to be introduced. Hugh Savill, the ABI's director of regulation, said: "The earliest date it could now happen is January 2016, and that's pushing it because we'll go through key political changes in Europe before this. We are looking at a substantial interim period."

News of the £3bn hit to UK insurers is likely to spark fresh debates over the amount of red tape generated in the 27-member-state bloc, already a central feature in the debate over the UK's membership of the EU.

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