Association of British Insurers Warns of Regulation ‘Contagion’

June 4, 2009

The Association of British Insurers has issued a statement warning that regulators and governments “must not harm other industries, such as insurance, as they deal with the banking crisis.”

In a new report, “Restoring Market Confidence”, published ahead of its biennial conference, the ABI said that any changes should tackle the problems that arose in the banking sector, not apply a “one size fits all” set of remedies to the rest of the financial services sector.

The report also argues that “regulation must not inhibit the ability of firms to offer competitive products for consumers, or add unnecessary costs to businesses.” Its publication comes ahead of the deadline for consultations to the Turner Review on June 15, and in the midst of an ambitious regulatory program covering UK, EU and international initiatives.

The ABI noted the following areas of concerns to insurers:
— Lack of recognition for the advanced, sophisticated prudential regulation of UK insurers, and the developments, under Solvency II, of modern, risk assessment modeling across the EU;
— suggestions that remuneration structures designed for bank dealing rooms can be applied to other parts of the financial services sector where business conditions and risk horizons are wholly different
— the cross-subsidy element of the Financial Services Compensation Scheme (FSCS), which has been used to compensate for banking failures and is paid for by other financial services, such as insurers.

Stephen Haddrill, the ABI’s Director General, added: “Insurance is not banking and should not be regulated in the same way. We need targeted sector-specific changes, and not a lazy adoption of banking rules to other parts of the financial services sector.” he warned that if this happens, “UK-based insurance companies will suffer the damage to profitability, prosperity and innovation for a generation. As a global leader and major UK employer, the consequences of this would be felt throughout the British economy and beyond.”

The report also comes ahead of the ABI’s Biennial conference, Today’s Challenges, Tomorrow’s Opportunities, on 9 June, where speakers include George Osborne MP, Lord Turner Chairman of the FSA and Paul Tucker, Deputy Governor, Bank of England (Financial Stability).

The report’s other findings discuss:
— The case for a Macro-prudential Committee based at the Bank of England: This would identify and act on systemic threats to the economy, in the same way that the Monetary Policy Committee focuses on monetary policy.
— Increased transparency of market practices (short selling/hedge funds): This proposal focuses on avoiding regulation that’s “not related to the cause of the crisis.” For example instead of the “protectionist approach of the EU directive on Alternative Investment Funds, a better solution would be the registration of hedge fund managers and targeted prevention of conflicts of interest.”
— Establish a global, European and national basis for regulation: The ABI supports better supervision of cross-border groups and more consistent standards for the Single Market, which “could be achieved through an EU body that would act as a supervisor of supervisors. This would need to consider drawing in third country supervisors (such as those in Japan or Australia) to ensure Europe’s framework of regulation is outward-facing.”
— Encouraging capital investment and the tax regime: In order to maintain access to capital, it’s necessary to restore confidence in the UK. To do so, the ABI said the government “should consult more openly at the early stages of policy development.” It should also look at the “tax treatment of debt versus equity and the administrative burden of the tax regime.”
— Further measures to help boards to function effectively: These would help to assure that “necessary skills are in place.” The ABI also suggests that “thought should be given on how to improve the accountability of directors.”
— Executive pay reform must be targeted: Developing a “code of practice,” as proposed by the Financial Services Authority is a good idea, but the ABI “calls for the differences in financial sectors to be recognized as the nature of the roles and risks are different.”
— High quality financial reporting needed: As regulators have demanded, investors must have transparent accounts, which need “to be backed by accounting standard setters being allowed to pursue global standards free from carve outs by the EU or others. The G20 is right to look at the issue of fair value and appropriate risk provision, but this cannot be easily done in the six months set by the G20. The IASB should also be established in international law.”

Source: Association of British Insurers – www.abi.org.uk

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