STRASBOURG (Reuters) – The European Commission unveiled a radical overhaul yesterday of how insurers cover risk, seeking to avoid debacles like the Equitable Life crisis that left over a million policyholders nursing battered savings.

The draft measure, which needs approval from the European Parliament and EU countries to become law, also updates a 30-year-old regime for supervising the 7-trillion-euro ($9.5 trillion) industry.

The new Solvency II regime would introduce more sophisticated solvency requirements for insurers to guarantee they have sufficient capital to cover floods, storms or big car accidents.

Currently insurers only have to cover insurance risks but under the new rules they will also have to hold capital against credit and market risks, such as a fall in the value of investments they hold.

Companies would have to adopt a more active approach in considering which new risks they faced that needed covering.

EU Internal Market Commissioner Charlie McCreevy said the new rules would make the single market in insurance work better and improve supervision.

“Consumers, the industry and the EU economy and financial stability will all benefit. Our aim is to have this new system functional by the end of 2012,” McCreevy told reporters.

“Risk-based solvency requirements, together with the establishment of early-warning mechanisms and strengthened governance requirements, should help to avoid unfortunate incidents like Equitable Life,” McCreevy added.

Solvency II tackles some of the problems that emerged from the Equitable crisis in 2001, such as creating an early-warning mechanism so supervisors can intervene sooner when things go wrong.

“Solvency II is needed to deliver more appropriate solvency requirements, both quantitative and qualitative, for insurers, and harmonization in the requirements of national supervisory authorities,” CEA Director General Michaela Koller said.

The International Association of Insurance Supervisors said the reform would lead to more efficient and effective supervision and the development of global solvency standards.

“Of special interest are those measures that take into account the importance of adequate supervision of small and medium-sized insurance companies,” IAIS said.

A core measure is a radical shake-up of how cross-border groups will set aside money to cover risk and be supervised.

“A dedicated group supervisor will be appointed for each group, with real decision-taking powers and coordination responsibilities,” McCreevy said.