October 2011 saw the latest draft of Solvency II, the European Union’s code for regulation of the insurance industry. This column argues that the latest proposals need to be drafted again, urgently.

The October 2011 Solvency II draft introduces the possibility of a countercyclical premium. Upon declaration by the regulator – the European Insurance and Occupational Pensions Authority – that distressed market conditions exist, an additional wedge is to be added to the risk-free term structure to value all insurance liabilities subject to fair market valuation.1

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