EU could push up insurance premiums

by Ed Bowsher on 02 September 2009  |  0 comments
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New EU proposals on the insurance industry could lead to dramatic increases in premiums for all of us.

I'm very concerned about a report in today's FT on new European rules for the insurance industry. These rules could lead to higher insurance premiums for all of us.

Basically , the EU wants to force the insurance companies to stash more money in the bank in case things go wrong for them.

That sounds fine in theory. We all wish that the big banks had been more prudent and kept more capital on their books - then the taxpayer wouldn't have had to hand over so much money to the banks over the last year.

But there's a problem. If the insurance companies have to carry more capital, their profitability will fall. And that could push insurance companies to jack up premiums or offer less generous annuities to new pensioners.

If that doesn't make sense to you, think of it this way. Let's imagine two businesses: Company A and Company B. Both businesses are making a profit of £1 million a year, but Company A was set up with an £100,000 investment whilst Company B was set up with a £500,000 investment.

In this example, Company A is clearly the better business because it needed less capital. The EU wants to make insurers more like Company B rather than A. Shareholders won't like that and they'll try and redeem the situation by getting more money from customers.

The really annoying thing about this proposal is that I think it's unnecessary. We've just been through an incredible financial storm, yet the big UK insurers didn't need government bailouts. If they've survived the last year without help, they can probably survive future crises. So do we really need to increase capital requirements for the insurance industry?

Don't panic!

I should stress, these rules aren't due to come into force until 2012. According to the FT, the UK insurance industry is pressing Alistair Darling to get these rules changed. Let's hope the Chancellor gets this sorted out as soon as possible.

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