Proportionality and competitive support key from regulator, says London Market Group

The UK regulator needs to look more closely at proportionality and make refinements to the regulations, including helping to make the market more competitive, according to the London Market Group (LMG). It said, as an example, that the UK has missed an opportunity to build a captive market as a result of a one-size-fits-all regulatory approach. Speaking at the House of Lords Industry and Regulators Committee’s inquiry into commercial insurance and reinsurance, Caroline Wagstaff, chief executive officer of the LMG, said: “There is a lost opportunity with captives, which are companies that build their own insurance companies. That is a different type of risk. We think that these are all easy to identify and are done in different places, so we could learn from other markets and regulators, but we do not feel that any of it is really seen on a day-to-day level when we look at how the regulators are behaving.” She was responding to a question about what improvements could be made to the UK’s regulation of the London market. She said an understanding is needed from the regulators that there is proportionality, that not all insurance companies will pose the same risk to the financial services system. “You tend to see that reinsurance companies are treated like insurance companies, and that large customers, which are sophisticated buyers, are treated as if they are the buyer of a motor policy and are doing that online from an aggregating site. That complete lack of appreciation of the risks posed by four different types of clients and different types of insurers is something that we think needs some in-depth work,” she told the committee. She also said the market would like the regulators to help it to be more competitive. “We think they need to take that into account when they look at how they set new regulations and impose existing regulations. Having done that, they need to be held accountable for it. At the moment, a lot of what we think is being proposed is great in theory, but a lot of it allows the regulators to mark their own homework. We think there needs to be some third-party accountability for what they are doing and how it is getting done, both before they implement things and afterwards,” she said. She gave the example of the insurance-linked securities (ILS) market, where the players worked with regulators to create “a really good environment for that here in the UK”. But Singapore, which used the UK regulation, has outpaced London considerably, said Wagstaff. “That is $700m of income that could have come to London but did not. To us, that is a living, breathing example of how you can put in the best thing in theory, but if it does not work in practice it is not helpful. It does not work, because the regulators treat the ILS market like any other insurer, even though it poses a lot less risk, all the money for the claims that come in is in the bank, the investors are very sophisticated and it is a completely different beast,” she said. Wagstaff noted that the captive sector is a $64bn market. “It would be great to have a UK captives market. We spend a lot of time talking to captive managers about what would persuade them to come to the UK. One of the positive things they talk about is that, increasingly, they are worried about the reputation of where they keep their captive insurance company. One of them said to me: ‘We’re moving it from A to B, because A is seen as a bit regulatorily light and has some tax reputational issues. We want to be somewhere that’s seen as strongly regulated and has a really good reputation.’ The UK ticks a lot of boxes for that, and also ticks boxes because people have their HQ here, they can share services and lots of captive management expertise sits in London,” she told the committee. She added: “We know that there is a great opportunity. We know that the UK has something to offer. There are UK public bodies such as TfL and the Corporation of London that have captives themselves but they are offshore. They are not in the UK. That seems a bit daft. We want to solve the problem.” Wagstaff concluded by noting that UK regulation is incredibly well respected. “The point we keep making is that this is not about some regulatory race to the bottom. We do not want wholesale changes to the regulations themselves but we think that some refinements are needed. This is a great opportunity to do so, as we have the opportunity to look again at all our legislation to check that it really is fit for purpose going forward,” she said.

Proportionality and competitive support key from regulator, says London Market Group

Captives an example of a lost opportunity, LMG tells House of Lords Committee

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