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The process of the European insurance companies' solvency reform has entered into an extremely active phase. The European Commission drafted a Framework to guide the process, which it amended over the summer of 2005. In parallel with the release of this Framework, the Commission launched three waves of consultations. To understand what is at stake with this reform, it is useful to begin by reviewing the reasons that led the Commission to initiate Solvency II in the first place, upon completion of Solvency I, and the conditions under which the process should be conducted. Then, we will turn to the principal orientations of the reform, with particular emphasis on six of them. Finally, we discuss seven of the most salient economic and financial issues at this point in the discussion. The fact that the Commission's work was not preceded by in-depth technical work, as was the case for the Basel Committee when it undertook banking solvency reform, gives us some idea of the magnitude of the task facing the Commission, which must not only invent new legislation better adapted to the realities of the European insurance industry, but also resolve a number of technical, economic and financial matters for which little or no consensus exists today. [ABSTRACT FROM AUTHOR]

In the last 20 years, economists and financial analysts have reacted to Keynesian and post-Keynesian analyses by turning away from macro-economics or by focusing more narrowly on inflation and structural factors, rather than on liquidity. At the same time, they have not really called into question the basic assumptions of the Keynesian paradigm, according to which the central bank controls economic liquidity by controlling money supply. Recent financial crises have quite understandably shaken their convictions. First of all, the crisis that rocked the economies of South-East Asia underscored the importance of liquidity in driving market efficiency, and the pivotal role that financial institutions could play quite independently of the central banks. Secondly, the Japanese crisis has called attention to the special role played by the insurance industry in ensuring economic liquidity, a role that is often insufficiently understood. Of particular significance is the fact that, although the insurance industry cannot play a counter-cyclical role with respect to global demand, it can nonetheless play just this role with respect to financing the economy. This article explores and develops the role of insurance in supplying liquidity. After defining a few useful terms, we will turn to the role played by insurance in supplying macro-economic liquidity. We will then attempt to gain a better understanding of how insurance contributes to micro-economic liquidity, a subject of analysis that we believe is both fruitful and largely underexploited. [ABSTRACT FROM AUTHOR]