Known as Solvency II, the legislation will overhaul the rules that determine how much buffer capital insurers must hold. Its goal is to better match the capital the risks insurers face today, and will replace a patchwork of local regulations with rules designed better to protect policyholders.
The European Union directive is expected to give large, diversified groups the edge, because their operations across different markets should make them less risky. Solvency II will allow these groups to reduce their provisions in line with the lower risk arising from diversification, potentially freeing up billions of euros in capital for more profitable investments.
Niche companies, with a competitive edge in their home markets, should also be able to win capital advantages.
"The medium-sized companies are the ones who are likely to feel the threat the biggest from Solvency II," said Bryan Joseph, a partner at PwC. "We think there will be further consolidation across the industry. In Europe there are lots of insurance companies of medium size, and because their prize is becoming bigger, people will need to consolidate up. The market itself will be reshaped. We would expect lots of mergers and acquisitions."
The Solvency II package, which will be unveiled by Charlie McCreevy, EU internal market commissioner, is one of the unique examples of EU regulation that has found almost universal agreement among the industry.