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It is crunch time for Europe’s insurers. A long-awaited overhaul of financial safety standards is within sight, with far-reaching implications for the €8.4tn industry.

Investors would be forgiven for assuming that only minor details need to be finalised before the new regime takes effect in four months. After all, regulators have spent more than a decade planning it.

No such luck. Shares in Delta Lloyd have plunged 43 per cent after the Amsterdam-listed insurer said this month that its financial headroom under the new rules would be tighter than previously disclosed.

Its larger rival Aegon, which owns the US insurer Transamerica, also said that its capital surplus would be lower than expected. Aegon’s shares have lost 23 per cent this month.

The warnings have investors in other European insurance companies wondering whether they too are in for nasty surprises before the reforms, known as Solvency II, kick in at the start of January.

Igotz Aubin, head of prudential regulation at the trade body Insurance Europe, says many executives “are extremely concerned about the pressure which insurers face due to additional last minute requirements”.

Allianz, Axa and Aviva are among hundreds of companies that need to comply with the shake-up.

Executives at several big insurers have said that the new rules, designed in the wake of the financial crisis to ensure companies have strong financial buffers so they can meet claims, should be manageable. Yet behind the scenes, the industry is on tenterhooks. “They’re all absolutely petrified,” says a Solvency II consultant at a big four firm.

Brussels policymakers agreed the basis of the regulations months ago. But they set a tight implementation timetable. National supervisors still need to specify the capital requirements for each big insurer by taking into account the particular risks they run.

Regulators need to approve each company’s “internal model”, which amounts to sifting through gigabytes of arcane detail about their risk exposures. Without being able to use the bespoke version, companies must fall back on the cruder “standard formula” laid down by regulators, which may oblige them to hold more capital.

Watchdogs also need to grant insurers permission to use other crucial mechanisms that give them further relief from the most onerous regulatory demands.

Executives are holding crunch talks with their regulators to get the green light. But so far, only Germany’s Hannover Re, has secured model approval.

The disclosures by Delta Lloyd and Aegon underline the risks.

In particular, the warning from Delta Lloyd, which wrote almost €4bn of policies last year, has sparked concerns that the insurer may need to tap shareholders for more cash even though it raised €340m in an equity issue in March.

Soon after the fundraising, the company said it held at least 70 per cent more capital than the minimum required under Solvency II. But this month it warned the ratio had dropped to less than 40 per cent.

Investors get nervous about low ratios, and most companies target surpluses of at least 60 per cent. Reduced headroom means regulators are more likely to question insurer business models — potentially constraining expansion and dividend payouts.

Delta Lloyd blamed a more cautious stance by the Dutch regulator of its “operational risks”. The watchdog is requiring it to use the “standard formula” to cover such risks.

Aegon, which had previously estimated its capital surplus under Solvency II to be 50-100 per cent above the minimum, cautioned that this had deteriorated to 40-70 per cent.

Analysts say this is because regulators have made more conservative assumptions about Aegon’s operations in the US, the UK and the Netherlands.

Aegon’s difficulties are not as acute as Delta Lloyd’s. Still, says Ashik Musaddi, analyst at JPMorgan Cazenove, the group’s ability to return capital to shareholders could be undermined.

There are reasons to suspect the Netherlands is a special case. Although Solvency II is supposed to harmonise rules across the EU, the framework also gives considerable power to national authorities.

Executives regard the Dutch regulator as particularly tough — partly a legacy of the financial crisis. As recently as 2013, the Dutch government had to nationalise SNS Reaal to safeguard the financial system.

“The Netherlands are a tough insurance market — supervised by a tough regulator,” says Claudia Gaspari, analyst at Barclays.

Despite the uncertainty surrounding the outcome of Solvency II, analysts do not expect many insurers to have to raise additional capital solely because of the new regime. Even so, not all are convinced the risks are confined to the Netherlands. “Be prepared for volatility,” warns Niccolò Dalla Palma at Exane BNP Paribas of the next few weeks.

Share prices across the sector are vulnerable, says Gordon Aitken, analyst at RBC Capital Markets. “We see risk skewed to the downside from Solvency II,” he says. “Even in the best-case scenario of a benign result, we do not expect share prices to react positively.”

The secret nature of the talks between insurers and regulators — supervisors have forbidden executives from discussing the approval process publicly — has made it difficult for investors to determine which companies are at particular risk.

Yet there remain concerns about the UK, even though Sam Woods, the Prudential Regulation Authority’s director of insurance supervision, said in a speech last month that the watchdog had no plans to use the new rules to force the industry to raise capital.

Mr Aitken says that annuity writers in the UK are most at risk from unfavourable regulatory rulings. Last week, advisers at PwC, the professional services firm, cautioned that prices of “bulk annuities” were set to jump because of Solvency II.

The PRA, which is scrutinising the models of about 20 insurers, does not plan to say which have been approved until December — shortly before the regime begins to take effect.

“This is a very important time for the companies,” says Hugh Savill, director of regulation at the trade body the Association of British Insurers. “It’s heads-down time to get the approvals through.”

Jim Bichard, ‎partner at PwC, says: “Whatever happens, Solvency II has been and continues to be a huge distraction.

“Regardless of the outcome, people have expended a huge amount of resources, effort and time on this.”

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