UK insurers must react to European supervisory regime says Hector Sants

In news that was welcomed by attendees at the Insurance Institute of London lecture yesterday the regulator said that future regulation of the industry should reflect the inherent difference between the insurance and banking sectors. He highlighted two key areas within Solvency II that the FSA would like to see amended. The regulator wants to ensure that the standard capital model of Solvency II is adequately calibrated and continues to press for a 12-year transitional period for the proposed illiquidity premium, he said. Mr Sants also gave details of the imminent changes to the supervisory structure in the UK and the three new bodies that the government plans to create to replace the FSA. hideWith the creation of EIOPA, the pan-European supervisory body, going forward the rules governing insurance regulation in the UK will be made in Brussels. As such the FSA and any supplanting bodies will essentially be a ‘supervisory arm’ of EU setting bodies, explained Mr Sants. “Gone are the days when the rules will be the FSA rules. The rules of the future will be European rules implemented through national bodies,” he said. It is therefore imperative that the UK organises itself to effectively influence decision making—not just in EIOPA but at a wider European level, continued Mr Sants. The FSA will invest time and effort to engage with the issues that are key to the UK insurance industry but we are just one of 27 member states, he continued. “Generally speaking on regulation it is one country one vote and therefore to drive things through we do need more than the UK alone. Mr Sants therefore urged the insurance industry to engage directly and fully with the European regulators and commission processes, in order to influence future regulation. “It is vitally important that the industry continues to invest time not just with EIOPA but also with the commission and the European parliamentary process,” he said. “The commission often puts more weight on views that come from industry than it does on views from individual national supervisors. It is vitally important that insurance firms both individually and in collective fashion through their associations put their views directly to the commission.” Mr Sants agreed with comments from the floor that the quality of consultations on European legislation could be improved but argued that influence can be asserted without a formal process. The UK needs to recognise that European legislation is formed by a different process than we are used to—this is a cultural change, he said. “The commission has a very large say in the creation of the directives and it is a process that you need to influence, cajole, or dare I say lobby…that maybe is not as clear and transparent as industry has been used to in the UK. It’s a different way of doing things and the UK must adjust if it is to have influence on the future rules,” the regulator encouraged. A concern of UK insurers, many of whom are internationally focused, is that many of the European member state regulators are focused on national level risks and issues to the detriment of the competitiveness of the European market as a whole. Stephen Catlin, CEO of insurer Catlin, who hosted the lecture, posed the question in relation to Solvency II. He asked how can regulators balance consumer protection against the risk of European companies becoming uncompetitive? Mr Sants agreed that historically in Europe many member state regulators have been very domestically focused, which reflects the focus of their industry, as opposed to the UK where the regulator and insurance industry is more internationally focused. “It’s a cultural challenge and we very much recognise the importance of EIOPA recognising that it does need to cater for all of the insurance community in Europe. Our job is to help make sure the international dimension is fully picked up,” said Mr Sants. On Solvency II Mr Sants said the FSA is committed to dealing with areas of over and under-calibration of the standard formula. We continue to press the commission for appropriate capital requirements adequately calibrated and have already highlighted non-life catastrophe risk as a particular area for further work, he said. Secondly the regulator is fully aware of the importance of the illiquidity premium to UK annuity writers, and continues to press the commission for both a 12 year transitional period for the back book of annuities, and a clear formula at Level 2 for the front book, he explained. Mr Sants also said that Solvency II is expected to cost the regulator around £100m to implement, which is at the low end of previously announced estimates. In a positively received comment Mr Sants said that banks and insurers are inherently different activities, which should be reflected by regulation. Insurers are different to banks in two key respects, he said. Their business models are different, and in reflection of this the failure of insurance firms is not as likely to be as systemically significant as that of banks, he explained. “The regulatory approach to insurers should in my view take into account the somewhat differing nature of prudential supervision in relation to insurers…Having spent some time discussing differences between banks and insurers I would, however, like to emphasise the Prudential Regulatory Authority (PRA) will base its supervisory interventions for both banks and insurers on a similar judgement-based risk assessment framework,” he said. Last year the UK government announced plans for changes to the structure of regulation in the UK. Specifically, the government plans to create three new bodies to replace the FSA, explained the regulator. The PRA will be a subsidiary of the Bank of England and responsible for stable and prudent operation of the financial system through the regulation of individual financial firms in a way which minimises the disruption caused when they fail. The Financial Policy Committee will sit alongside the Monetary Policy Committee in the Bank of England and, working with the PRA, will create a comprehensive and clear framework for addressing macro-prudential issues—the overall risk in the system. “It will have the ability to take away the punch bowl from the party. We have yet to determine exactly how it will do this; what its toolkit will be, but as well as using traditional interventions, such as changing capital requirements, we may intervene at the product level,” said Mr Sants. The third body will be the Consumer Protection and Markets Authority. It will be the successor body of the FSA and will have a primary objective of ensuring confidence in financial services and markets, with specific focus on protecting consumers and ensuring market integrity.

UK insurers must react to European supervisory regime says Hector Sants

Want to read this article?

Read Next

Munich Re reorganises P&C underwriting in Asia Pacific, Middle East & Africa

Climate change to cause ‘massive economic damage’

Two-paced upstream energy market falls in favour of buyers

Energy insurer Paratus launches brokerage division

Allianz sells its 51% stake in Allianz Saudi Fransi

Munich Re reorganises P&C underwriting in Asia Pacific, Middle East & Africa

Climate change to cause ‘massive economic damage’

Two-paced upstream energy market falls in favour of buyers

Energy insurer Paratus launches brokerage division

Allianz sells its 51% stake in Allianz Saudi Fransi

Want to read this article?

Read Next

Munich Re reorganises P&C underwriting in Asia Pacific, Middle East & Africa

Climate change to cause ‘massive economic damage’

Two-paced upstream energy market falls in favour of buyers

Energy insurer Paratus launches brokerage division

Allianz sells its 51% stake in Allianz Saudi Fransi

Related Articles