Insurers faced with asset fire sales to meet Europe's new solvency rules

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Life insurers are €50bn (£34bn) short of meeting new solvency requirements and will have to dump equities and close to new business to stave off a capital crisis, according to a survey published yesterday

The report, by the consultancy firm Mercer Oliver Wyman, says insurers are "significantly undercapitalised" and will have to drastically alter their businesses to meet tough new solvency requirements set down by the European Union. Selling billions of pounds of equities last year had already halved a €100bn deficit at the end of 2002, but the size of the deficit still poses problems.

The report suggests that capital requirements under the new test, which are set to become European law by the start of next year, are three times higher than the current regulatory minimum requirements. The rules have already caught out Standard Life in Britain. It is having to raise £750m and consider a stock market listing to help it meet the regulations.

"Companies whose hidden reserves and other solvency reserves have been depleted, have a high level of guarantees and whose investment strategies have been aggressive will suffer the most," said Anthony Stevens, the author of the report. The new regime measures a company's "economic" capital, which values assets at market levels and treats guarantees more stringently.

Sandy Crombie, Standard Life's new chief executive, is now raising charges to cover the cost of guarantees it has offered.

Britain is one of the countries most affected by the new rules, according to the survey, which estimates that up to 50 per cent of UK institutions will fail to meet the tests. Raising capital, however, will be difficult for all but a "handful of companies", Mr Stevens believes, as shareholders have already bailed out a number of companies.