Insurers face regulator overhaul

Insurance companies may soon be able to operate cross-border without being subject to host country regulatory controls, according to solvency rules to be proposed next month (10 July).

Internal Market Commissioner Charlie McCreevy will endorse the controversial principle of lead country supervision for the pan-European insurance market.

The UK regulator, the Financial Services Authority, has led the call for a light-touch approach. Under the proposed system, firms would be encouraged to develop internal risk-management models monitored by regulators usually located in their country of origin. The approach is aimed at reducing the burden of multiple reporting and compliance for major firms currently operating in a fragmented EU market.

A draft of the so-called Solvency II legislation, seen by European Voice, describes the lead supervisor approach. "A single group supervisor, responsible for co-ordination and exercise of group supervision, shall be appointed from among the supervisory authorities of the member states concerned, including those of the member state in which the insurance holding company has its head office."

McCreevy will face the wrath of smaller member states which fear that their policyholders might be exposed to the kind of fall-out experienced after a crisis at UK-based group Equitable Life in the late 1990s. MEPs this week (19 July) endorsed a damning report on Equitable Life, which left more than one million EU customers, mainly in Germany, Ireland and the UK, in the lurch.

Lithuanian Liberal MEP Margarita Starkeviciute said: "I just want to know who will pay the bill. It’s becoming a key issue, especially with the story of Equitable Life. Who will be responsible for what? Liquidity management responsibilities are not well defined [in the proposals]." Starkeviciute said that she "sympathised" with the position of smaller countries fearing a loss of regulatory authority over companies operating in their markets.

Lack of trust is a key element of detractors’ concerns. One industry insider said that smaller countries would like to be able to demand collateral to offset risks faced by national policyholders, a provision that does not appear to figure in McCreevy’s plans. Such measures are seen by industry as being heavy-handed.

UK Socialist MEP Peter Skinner, who is preparing a report on the matter for the European Parliament, rejected claims that that the proposals would see power flow to financial services hubs such as London, Paris and Frankfurt. He insisted that the approach would be a pan-European one, based on the sharing of experience and best practices. "This is meant to be an evolution, not a revolution. All regulators are still on a learning curve," he said.

Both critics and supporters of the lead country supervisory approach claimed that approval of the Equitable Life report, which calls for the strengthening of prudential supervisory and regulatory standards throughout the EU, justifies their very different attitudes towards oversight of the insurance industry.

Solvency II is supposed to replace current Solvency I rules, which date from the 1970s, by 2010.

Insurance companies may soon be able to operate cross-border without being subject to host country regulatory controls, according to solvency rules to be proposed next month (10 July).