AIG’s near collapse is a credit-crunch case study in how Europe can improve supervision of big cross-border insurers, a top EU market regulator said on Monday.
The American insurer has received nearly $180 billion in government funds to prevent a collapse, with the country’s taxpayers now owning 80 percent of the company.
The United States relies on a patchwork of state-level supervisors and the crisis has sparked fresh debate on the need for a central, federal aspect to supervision.
“AIG is a case study of the problems of fragmented regulation,” said Hector Sants of the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS).
He was speaking at the Reuters Global Financial Regulation Summit. CEIOPS is made up of national regulators from the 27 EU states and advises the bloc on insurance rulemaking.
Europe also has a patchwork of regulators as each European Union state has its own supervisor, though reforms adopted last week will force them to work more closely in so-called colleges of regulators for each cross-border group.
“One of the lessons of the AIG case which is relevant to the global and European debate is making clear the importance that, whilst you can have more than one regulator involved in the oversight of a firm, you do have to ensure one authority has an integrated view of all the risk in that institution,” Sants said.
“The fragmented U.S. structure in insurance does make global coordination and European coordination more difficult. The integrated risk profile of AIG was not readily visible to the U.S. regulators,” said Sants, who is also chief executive of Britain’s Financial Services Authority.
An immediate priority was to make colleges of supervisors, already established, work effectively.
“The critical point in terms of work going forward is that we now have to make live and real the colleges,” Sants said.
The Solvency II reform adopted by the EU last week will not come into force for around another two years, and Sants gave it only qualified support.
“We feel Solvency II is broadly fit for purpose,” Sants said
“We can do more work to ensure that off balance sheet risk is properly reflected in insurance companies’ balance sheets. Solvency II wording is somewhat general in that respect, so I think we need to do more work to make sure we really learn that lesson from the banking sector,” Sants said.
He does not expect a sector-wide crisis, as seen with banks, because of the variation in business models among insurers.
The main problems faced by the sector are more to do with fallout from the credit crunch such as nervous savers shying away from investing and unattractive bond yields.
“There isn’t a single level of corporate bond default rate expectation that would affect the entire sector,” Sants said.
The regulatory focus going forward will be on applying cross-over lessons from the banking crisis such as:
— reassessing how credit rating agencies are currently “hard wired” into the sector’s regulatory process
— improving consumer protection as there is no consistent or, in some cases, any full insurance compensation regime for consumers across Europe;
— working more on collecting data and information to make sure regulators have a good European overview. (Reporting by Huw Jones; editing by Simon Jessop)
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Topics USA Legislation Europe AIG
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