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New EU Insurance Rules: Solvency II

The New EU insurance rules, announced in 2013 and referred to as "Solvency II", is due to come into play in January 2014. The directive aims to harmonise EU insurance regulations, providing specific guidelines that companies must follow to reduce the risk of insolvency. The guidelines effect the way in which policies are managed, the resources insurers require before they can provide insurance and changes that will effect how a company approaches its risk management.

Why was the policy introduced?

The new EU insurance rules are an improvement on Solvency I. In light of severe economic downturn and turmoil with banks and insurers, these new rules aim to target risk management strategies insurers use to reduce insolvency and further economic downturn.

Solvency II doesn't just apply for insurance companies; it also extends to some banks and lenders, who may be also be at risk of insolvency for improper implementation of risk assessment.

Aims of the New EU Insurance Rules

Usually, insurance companies go into bankruptcy when they can't afford to pay out on demand because they lack enough assets to do so, or the company will refuse to pay causing review and closure. When this happens on a massive scale, economic downturn can be severe and begin to affect the rest of a country's economy, such as sales, international trade and healthcare.

The aim of Solvency II is to ensure companies employee better risk management techniques to avoid such mishaps. It also includes forcing companies to have a minimum amount of assets and capital behind them beforeoffering insurance to anyone.

Solvency II will also provide supervisors with prior warnings if an insurer is about to fail, allowing for earlier intervention and protects policyholders from severe hardship should the insurer fail to pay out.

The rules and regulations regarding how much capital a company needs before offering insurance is very strict and dependant upon what type of insurance offered. This applies to 27 countries within the EU, including the UK and Ireland.

Criticisms

The new EU insurance rules are very strict and specific. Some companies have expressed concern with the new rules, which will mean drastic changes to their policies which could adversely affect their customers. New risk management techniques may also result in harsher credit scoring for some customers, limiting the availability of insurance across the EU.

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