ABI director general Stephen Haddrill told Darling the impact of the proposals due to come into force in 2012 would mean insurers would have to increase their capital reserves by between £30bn and £70bn.
Haddrill said: “In the UK, the impact is close to requiring fresh equity capital equal to the industry’s current market capitalisation [more than £50bn]. It is hard to see how such a massive recapitalisation could be achieved.
“This huge over-capitalisation will mean investment returns in insurance will fall. Companies will exit the market, prices will rise, cover will reduce and innovation will lessen.”
CMS Cameron McKenna partner Paul Edmondson says: “Solvency II applies Basel style regulation to insurance companies. The concern in the insurance industry now is that Basel reforms, which will be at aimed at preventing a repeat of the banking crisis, will also be applied to insurers when this is just not appropriate. Adair Turner accepts there is no need for a revolution in insurance regulation, particularly in relation to insurer capital.
“If the figures quoted by the ABI are correct, let’s hope Europe agrees as otherwise the consequences for the industry and the consumer could be severe.”