The Federation of European Risk Management Associations convened its bi-annual conference in Prague, the capital of the Czech Republic, on Monday, welcoming some 1100 attendees, and two new members.
Newly installed president, Peter den Dekker, Corporate Insurance Risk Manager for the Netherlands Stork B.V., was clearly pleased at the record numbers, as he announced that the risk management associations of Spain and Turkey had become the 17th and 18th members of FERMA in the year of its 35th anniversary.
For once the global recession didn’t dominate the conference, although it was certainly on the agenda. Some rather familiar concerns for the risk managers continue to attract the most interest, namely: Solvency II, the European Commission’s (EC) redrafting of regulations on insurers’ capital adequacy, the Block Exemption Regulation (BER), which exempts certain insurance cooperation measures from EU anti-trust laws, and, somewhat surprisingly, the possible reintroduction of contingent commissions, seemed to be the main topics of interest.
However, the keynote speaker, Daniel Thorniley, Senior Vice President of the Economist Group, returned to the economy with a vengeance. By his estimation some $50 trillion has been lost by bankers, largely as a result of “human stupidity,” and “they still haven’t apologized,” he said. Thorniley ruled out a “V-shaped” recovery. Where the figures fall then rise. It could be either “W-shaped,” where it goes up, then down again before recovering, or “U-shaped,” with a prolonged period of negative growth in most countries. He also added the scary possibility that it could be “L-shaped,” somewhat like Japan’s, where it goes down and stays there.
“Credit is the main problem,” he said. Although the banks have received huge amounts from their governments in most countries, at virtually zero interest, “they aren’t following properly.” With the exception of China, banks continue to refuse to renew loans and credit lines, let alone make new ones in an effort to rebuild their balance sheets. As a result many companies, especially small and medium sized firms can’t get the funds they need to continue in business, further exacerbating the economic crisis.
Reports and observations on some of the other subjects were a bit less bleak. The EC announced that it would reverse its decision, announced last year, and agreed to the renewal of certain parts of the BER, which is scheduled to expire in March 2010 otherwise. FERMA’s lawyer, Guy Soussan of the Brussels-based firm of Steptoe & Johnson, explained that agreements on setting premiums would continue to be exempt, as long as the substance of those agreements were “disclosed to consumers”.
The exemptions on policy wording won’t be renewed; however, because the EC said it didn’t see a need for it, as it’s common practice among banks to standardize their wording, and insurers should be able to do the same thing. Exemptions for pooling arrangements, involving co-insurance and reinsurance will also be renewed, but with a number of restrictions, most of which are opposed by FERMA and the ComitÃƒ© EuropÃƒ©en des Assurances (CEA), an industry lobbying group. They will have until November to try and get the EC to change its mind.
Solvency II remains the major concern. The economic crisis has induced the Committee of European Insurance and Occupational Pension Supervisors (CEIOPS) to consider increasing capital requirements and the regulations for testing them. This has added to concerns that the new regulations, already seen as burdensome and expensive to comply with, will become even more so, driving many smaller companies into the arms of larger ones.
“It won’t work,” said Eric Bloem, Group Insurance Manager for Heineken, and Vice-president of the European Captive Insurance and Reinsurance Owners Association (ECIROA). “You’ll have less capacity, higher pricing, and only the biggest [insurance companies] will survive.” Although seldom expressed, Europe’s risk managers, brokers and insurance companies are basically worried that Solvency II will become the EU version of Sarbanes-Oxley, which is widely viewed in Europe as hugely expensive and essentially useless.
Much of the distress is focused on the regulations regarding captives, and whether they should be treated in a special way, or be subject to the full extent of the new regulations. One of the key sticking points is whether a captive assumes liabilities only for its “mother company,” i.e. it has one policyholder, or whether in effect it assumes liabilities for third parties, as in workers compensation programs and employee benefits.
Den Dekker was adamant that the question of contingent commissions be settled as soon as possible. The subject has resurfaced as a result of actions in Illinois and New York, but it was never really definitively settled in Europe either.
Den Dekker and most FERMA members aren’t asking for a blanket prohibition on contingent commissions, but rather for transparency from the brokers they deal with. “We want full disclosure,” den Dekker said. Brokers should detail, “not just the basics, but also how much they receive as commissions, from whom, and what is the basis of the payment.” He added that if this information was provided, “it would be a major step,” and indicated that FERMA will be working with EU broker associations to try and achieve it.
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