A MINE, it is said, is a hole in the ground with a liar standing beside it. What, then, should you make of insurers—firms that sell nothing more tangible than folders full of promises? Not too much, thinks the European Commission's main insurance regulator, the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS). Its latest proposals in a grinding rewrite of insurance rules may force insurers to hold lots more capital than they do now.

The proposals, issued last month, underscore a marked shift in the perceived riskiness of insurance firms. Until recently insurers were seen as the plodders of the financial system. Now fears over systemic risk, heightened by the dismal failure of AIG, have alerted regulators to the dangers that they may present. Six big insurers feature on a list of 30 global firms that are likely to be subject to cross-border supervision under the watchful eye of the Financial Stability Board, according to the Financial Times. Jean-Claude Trichet, the president of the European Central Bank, has argued that pension funds and insurers can no longer be seen as shock absorbers but are themselves sources of systemic risk.

This view dovetails neatly with a five-year-old plan to drag their management of capital and risk into the modern age. Solvency 2, which is loosely modelled on the Basel 2 rules for bank capital, aims to set common standards for European insurers that will come into force in 2012. The new standards will introduce market valuations and risk-based measures of assets and liabilities when determining how much of a cushion insurers need to hold.

As such they promise to shine a light on an industry that for many years determined the value of assets and liabilities on actuarial estimates and expected rates of return, a method more accurately described as guesswork and wishful thinking than accounting. Tweaking an expected return here or a mortality rate there could magically bring both into balance, often without shareholders, policyholders or regulators being any the wiser.

In forcing firms to account better for the risks they face, the new rules should also prompt them to manage risks more intelligently, says Joachim Oechslin, the chief risk officer of Munich Re, the world's biggest reinsurer. Yet the latest proposals also signal a change of heart by CEIOPS over how much capital should be held in total. Previous tests of the rules showed that although firms would have to hold more capital against some risks, this would be balanced by reductions in other cases. The total amount of capital held by European insurers would not change much (an uncomfortable echo of the intended neutral impact of the Basel 2 regime). But now the regulators have turned the “calibration” knobs sharply. The latest rules could force insurers to hold 20-30% more capital.

British life insurers may be especially hard hit, because they sell many more annuities than continental European insurers. Valuing these liabilities is tricky because they stretch many years into the future and their current worth swings wildly in response to small changes in the “discount rate” used to value it. Earlier proposals by regulators to use a “risk-free rate” (such as that on government bonds) would have had the effect of increasing these liabilities, forcing British insurers to raise as much as £50 billion ($83 billion) in extra capital. Furious lobbying seems to have watered down that proposal. Insurers may be allowed to apply an “illiquidity premium” to the risk-free rate, because many of their investments, like the policies they have sold, cannot be cashed in immediately. The risk is that this could open the door to yet more accounting trickery.