Draft European Union solvency rules that could push Britain's insurers into a 50 billion pound ($80 billion) capital raising are likely to be watered down, eliminating a drag on the sector's shares.
Analysts and senior British industry figures say key aspects of the so-called Solvency II regime, initially opposed by UK insurers in the main, are now attracting criticism in continental Europe, increasing the probability they will be altered.
"The industry is working together to get a sensible outcome," John Pollock, director of annuities at Britain's Legal & General said.
"I think that's much more likely now than it was before the debate started."
A key test of support for an easing of Solvency II comes on Oct. 29 and 30, when regulators from all 27 EU countries meet in Berlin to agree on recommendations for final legislation which will be submitted to the European Commission early next year.
While further revisions are possible before final legislation is agreed in June 2011, British insurers are hopeful their concerns will be reflected in the regulators' advice.
The European insurance federation, the CEA, said earlier this month that the latest Solvency II proposals amounted to "a crude ratcheting up of financial requirements," confirming fears over their impact are spreading.
"Most companies we talk to say it's (Solvency II) just unworkable in its current form, and there is no chance of it going through," said ING analyst Kevin Ryan.
CAPITAL PUNISHMENT
Analysts say a redrafting of Solvency II would lift shares in British life companies, which face a capital shortfall under the rules of as much as 50 billion pounds, according to an estimate from the Association of British Insurers.
The FTSE index of British life insurance stockshas fallen 7.5 percent in the past year, against a flat performance from the wider FTSE 100 share index.
"It is a negative issue at the moment for UK insurers, there's no question about it," said Nomura analyst Nick Holmes.
"It's not surprising when investors hear people talking about insufficient capital, or a need for 50 billion pounds' capital."
Investors' worries centre on Solvency II's treatment of annuities, insurance contracts that offer policyholders a fixed monthly sum until death in return for a lump sum.
As currently drafted, the proposals would force insurers to hold extra capital to make up for a drop in the market value of the corporate bonds they use to fund payments to policyholders.
That would weigh disproportionately on British life insurers, who sell far more annuities than their continental rivals because the UK's lower state pension makes consumers there more dependent on private retirement products.
British insurers say the proposals are overzealous, arguing that since annuity holders are not allowed to cash out their policies, the prospect of life companies being forced to sell their corporate bonds at a loss is remote.
They add that the measures would make annuities more expensive, piling further pressure on hard-up pensioners, while denting demand for corporate debt at a time when many companies are facing a credit drought.
PENSIONS PRESSURE
Solvency II's threatened capital squeeze is also influencing attempts at industry consolidation in the UK.
Clive Cowdery, the entrepreneur whose Resolution takeover vehicle bought insurer Friends Provident in August, said at the time he was "very conscious" of the new capital rules when deciding on future acquisition targets.
Teddy Nyahasha, solvency director at Aviva, Britain's second-biggest insurer, said the continental European industry's concerns reflect a realisation that it may become heavily exposed to annuities in future as ageing populations force governments to slash generous state pensions.
"If you look forward, particularly in countries on the continent where the population has tended to rely on state pensions, you can see there will be a need for the private sector to step in and supplement," he said.
"That message is finally getting through, and that's why we're a lot more optimistic."
Solvency II, designed to make insurers financially resilient by matching their capital reserves more closely to the risks they face, has been under discussion since 2002.
Analysts say industry objections to the project have intensified partly because of a tightening up of the draft proposals following the global financial crisis of 2007/08.
