VHI, the country's largest health insurer, is to propose taking a €100m loan from the government to be paid off after five years as part of attempts to bring its solvency ratio up to 40% ahead of a 1 September deadline. The health insurer is to propose a type of 'call and put' option, allowing the government to have the loan repaid at an agreed price.

The insurer wants to introduce two new products, a life assurance offering and a savings product which could be ready within a year. However the company requires a licence from the Financial Regulator to offer either and this means bringing its solvency ratio to 40%.

It is understood the company has come up with three options to get it over the solvency barrier which it regards as a "strategic imperative". The first would see the VHI offloading some of its customer accounts to a re-insurer, but its mature customer profile could make this difficult.

Another option is to take on a certain level of subordinated debt, but regulations allow subordinated debt to make up only 25% of the solvency capital.

With those two limits on its capital-raising, attention is now turning to a commitment from the Department of Health. It is understood preliminary discussions have begun, although the budget deficit leaves the government little room to manoeuvre.

The VHI has had a derogation from becoming a regulated entity for decades, but this can no longer be maintained. The Financial Regulator requires a 40% capital reserve (as a proportion of premium income) compared to between 28% and 30% in other jurisdictions. A new European regime called solvency 11 will ensure consistency across Europe and will be closer to 30%.

The company believes its rivals are able to re-insure a large part of their customer base, which has a younger profile than the VHI's, and that way they do not have to put aside as much capital.

The company's solvency levels are actually very high, with €737m in financial assets on its balance sheet. Its deficit after tax last year rose to €65m.