MUNICH (Bloomberg) — European insurers may not have to raise capital to comply with tightened proposals for industry rules, the head of the supervisory body advising the European Commission on new regulation said.

"Most insurers in Europe will be able to meet the stricter capital requirements tested under the fifth impact study," Carlos Montalvo, secretary general of the Committee of European Insurance and Occupational Pension Supervisors, or Ceiops, said in an interview in Frankfurt. "Recently expressed concern about overly high capital requirements under current proposals is definitely not fully consistent with our calculations."

Frankfurt-based Ceiops, together with local regulators, is advising the EU Commission on developing a new regulatory regime for insurers including Allianz SE and Axa SA. The Solvency II directive, scheduled to take effect at the end of October 2012, is designed to align insurers' risk with the amount of capital they hold to improve protection of policyholders.

"There are lessons that we learned from the financial crisis and we have to make sure that Solvency II not only works in years like 2006 but that it also works in years such as 2008," Montalvo said.s

Ceiops's suggestions on the fifth impact study, which were adjusted to reflect the impact of the financial crisis, have been criticized by the European insurance and reinsurance federation CEA as foreseeing "excessively prudent capital requirements". The Association of British Insurers called them "intensely frustrating". The fifth quantitative impact study, or QIS5, is set to begin in August.

"Under QIS5, required capital will we believe increase by about 70 percent on average," London-based JPMorgan Chase & Co. analysts including Duncan Russell and Michael Huttner wrote in a report to clients dated Jan. 19. Insurers "will appear to be materially undercapitalized" under the proposals at that time, they said.

Standard & Poor's said in a Feb. 2 note that, on average, European insurers' capital needs would increase by about 70 percent based on the advice provided by Ceiops up to Nov. 10, compared to the levels tested during the fourth quantitative impact study.

This "would result in substantial industrywide capital raising," S&P wrote.

Ceiops said in its final advise on QIS5 to the EU Commission on April 8 that it "generally lowered" factors on how to calculate insurers' minimum capital requirements.

"Governments in Europe need to make sure their Solvency II plans don't backfire," said Fred Wagner, a professor for insurance management at the University of Leipzig, who is also a member of the advisory committee of financial market regulator BaFin and a member of the German accounting standards board's insurance working group. "There is a strong need for private old age provisioning, but higher capital requirements will translate into higher capital costs."

"The overall impact of our final proposals is definitely not material if you take into account the capital relief from lower technical provision requirements," Montalvo said.

Under Ceiops's final advice, technical provisions, or funds insurers must set aside to cover future liabilities, will be lower "because we are getting rid of the implicit prudence" included in current regulation, he said.

According to the EU Commission's Solvency II timetable, the specifications for QIS5 will be published in June. Insurers will then have until mid-November to submit their results, which Ceiops plans to publish in April 2011. Some preliminary results may be disclosed in January 2011, according to Montalvo.

"Insurers are definitely right when they say the financial crisis was not an insurance crisis," he said. "Let's test in QIS5 if the current proposals work; there is sufficient time for changing assumptions and calibrations if they don't work."

Under the proposed regulation, insurers will have to hold own funds to cover their solvency capital requirements. Those funds will be classified in a three-tier approach, where tier 1 will represent an insurer's most secure capital, directly linked to loss-absorbency criteria.

Funds that are recognised as tier 1 capital will need to meet the requirements of "subordination and permanent availability," Montalvo said, adding that the current value of future cash flows could only be accepted as tier 1 capital if it meets both elements.

A clear picture on Ceiops's advice on the grandfathering of existing capital instruments could be expected following a request from the EU Commission, Montalvo said, responding to the question which capital instruments among those issued before the introduction of Solvency II would be accepted as own funds for a transition period under the new rules.

"In any case, we will aim to avoid disruption and regulatory arbitrage," he said.

"As Solvency II moves from the Ceiops working parties to the European Commission for implementation, we believe investors will appreciate that this is a constructive evolution of the regulatory process for the industry, rather than a catalyst for a solvency crisis," William Hawkins, an analyst at Keefe, Bruyette & Woods Ltd., wrote in an April 12 industry report.