Insurers May Feel Left Out of Debate over Regulation

As the United Kingdom moves toward a new system of financial services regulation, the insurance sector may find itself struggling to be heard, according to Pollyanna Deane, a partner in the London law firm of Berwin Leighton Paisner LLP.

“It’s almost been assumed that insurance won’t have a role to play and that they are having to muscle their way into life at the top table,” Deane said.

Insurers are used to making their views known, particularly in regard to Solvency II in the European Union. But they “have not been great at blowing their own trumpet,” she added.

The performance of the U.K. insurance industry during the financial crisis has demonstrated its ability to deal with adversity, Deane said. “How are you going to learn from the fact that the insurance companies held up relatively well if you don’t actually have them around to indicate how they might do something?”

Under a plan introduced by the coalition government that came to power as a result of the May 6 general election, the financial Services Authority would cease to exist. The Bank of England would have authority over insurers and other financial services organizations through a Prudential Regulatory Authority. Brokers would be placed under the jurisdiction of the Consumer Protection and Markets Authority. And a new criminal investigatory and prosecution unit would replace the Serious Fraud Office.

The U.K. Treasury published its consultation paper on the proposed changes in July 2010. In the paper, titled, “A New Approach to Financial Regulation,” the Treasury noted the damage that had been done to the country’s banking system by the financial crisis.

“There were real and significant failings in the U.K. regulatory framework,” the Treasury wrote. “This meant that regulators failed in recognizing and responding to the problems that were emerging in the financial system.”

David Kenmir, a director in the regulatory practice of PricewaterhouseCoopers, said, subject to legal processes, the new structures should come into being around the beginning of 2013. While the details have yet to be worked out, Kenmir said, “The political direction is very clearly set.”

One criticism of the Treasury consultation document, Kenmir said, is that the Prudential Regulatory Authority “doesn’t seem to have the same accountability framework that the FSA currently does.”

Kenmir pointed to the suggestion that a role equivalent to the FSA’s Practitioner Panel will not be duplicated in the PRA. The Practitioner Panel offers a voice to insurers, he said.

“A lot of people said, ‘Hang on. That seems to make the PRA less accountable than its predecessor,’ which seems very odd,” said Kenmir, who expects the details of accountability framework to be the subject of parliamentary attention.

The U.K. insurance industry has argued since the start of the financial crisis that it was not responsible for what went wrong and should not be subject to aggressive regulation. At a briefing earlier this year, the International Underwriting Association, whose members are drawn from the London company market, displayed the slogan: “We are not Banks!” (BestWire, April 13, 2010)

Kenmir suggested that the insurers might be advised to direct their lobbying efforts to the European Commission, which, he said, has become the shaper of the regulatory policy framework throughout the European Union. Solvency II, for instance, was set in Brussels. “There’s very limited national discretion,” he said.

Insurers that follow regulation closely will understand this, Kenmir said. Those that have been distracted by the financial crisis or by preparations for Solvency II itself may “have missed the transfer of power.”

Solvency II, which will bring in a uniform capital adequacy structure for insurers and reinsurers throughout the 27-member EU, is due to take effect at the beginning of 2013.

In Kenmir’s view, the financial services industry should be aware of how political winds regarding regulation are blowing on both sides of the Atlantic in response to the financial crisis. “Regulation in general has become much more onerous and burdensome in all sectors of the market,” he said.

Shifts within the EU have also lessened the possible effects of tensions within the coalition government over attitudes toward regulation, Kenmir said. The government is dominated by the Conservatives, who are regarded as being inherently hostile toward regulation. Their junior partners, the Liberal Democrats, have the reputation of being pro-regulation.

Kenmir does expect to see eventual compromises on the issue of regulation. “It’s not clear what those compromises will be at this stage,” he said.

He would not predict how happy the insurance industry might be with the final regulatory structure that emerges in the United Kingdom. “There just isn’t enough clarity,” he said, “about how the PRA is going to operate, whether it’s going to give insurers a harder time than the FSA did, how it’s going to differentiate its supervision of insurance companies from its supervision of Banks.”

Deane suggested the creation of a regulatory committee of probably no more than 10 members, made up of four banks, three insurers, one reinsurer and representatives of two other sections of the financial services industry such as investment management. The insurers would be drawn from the life and nonlife sectors, she said.