Insuring the future: it’s all a matter of balance

Date: 04/11/04

Two MEPs discuss the need for transparency and consultation when the EU chooses to regulate

The insurance industry needs a rest-period from regulation by the Union, writes Othmar Karas

INSURANCE plays a key role in society and in the economy, assuming the financial burden of motor and household risks and providing pension and health insurance products for all of us, covering risks which would drive a company into bankruptcy if it had to bear them alone, helping governments absorb the cost of major losses, encouraging dynamic investment and maintaining and creating jobs.

But society's risks and needs are constantly changing - for instance, facing an ageing population and growing pension sustainability problems. Beyond doubt, at this juncture, the insurance industry has an important contribution to make - and yet, the private insurance sector can not be compared to social security, because the insurance sector is also facing new risks linked to environmental protection, food and product safety and liability developments, which offer the twofold challenge and opportunity of finding innovative solutions and developing new products. From a more economic point of view, following the Lisbon Agenda, Europe aims to become the world's most competitive economy. Therefore insurance, as a key financial services sector and one of the largest institutional investors, needs to be a crucial part of the whole project. Insurers' solvency margins must be adapted to the real risks encountered, financial reports must reflect the real business situation of an insurance company and supervisory practices should not prevent insurers from doing cross-border business. Regulation in this area should always consider the prevalent global environment.

There should be no doubt that a healthy and dynamic European insurance industry is in everyone's interest. The industry, in order to contribute to the well-being of society and to economic growth, needs appropriate regulatory conditions.

Over the past decade, insurers have been confronted with an EU regulation overload. This has forced companies to invest a great deal of money and energy in compliance, while having to carry on their core insurance business.

The fact is that the EU's legislation has given rise to complex and sometimes incoherent or contradictory legislation. For example, information requirements vary according to which sales method applies: face-to-face, telesales, or internet.

And what is rather worrying is that these regulations do not always work because they are not adapted to the realities of insurance.

Financial services generally - and insurances in particular - do need a rest period from regulation, firstly to implement existing insurance legislation and to reflect on and identify future goals and how to achieve them.

The period after the Financial Services Action Plan ought to be an excellent opportunity for this.

In the future, the overall guideline for EU regulation should consist of balancing the cost for industry and consumers against expected benefits.

This was not the case regarding the recent gender equality directive, where no proper impact assessment had been made.

As a result, the initiative, which tried to implement values uniformly defended, lacks the full support of national governments.

If the EU is to avoid becoming a blind regulatory machine, it is important that regulation is adopted in full transparency and that business needs are taken into account through systematic industry consultation.

With the introduction of the comitology procedure, the demand for transparency will be more important than ever to safeguard the quality of legislation.

There are many challenges facing the insurance industry.

It appears that it is important to understand that insurers' challenges and problems reflect those of society as a whole.

We have a common responsibility to meet our citizens' needs.

In the future, enhanced dialogue and cooperation between policymakers, the insurance industry and consumers is needed in order to create a better understanding of the consensual expectations, possibilities and limits.

• Austrian centre-right MEP Othmar Karas is a member of the European Parliament's committee on economic and monetary affairs, and a member of the committee on the internal market and consumer protection.

Regulation is needed but it should not impose unrealistic burdens on EU insurers, warns Peter Skinner

INSURANCE affects all of us, whether it is through the car we drive or the contents of our houses, even our health and pensions. These all depend on the insurance industry and its oversight.

Relying on the national level to get regulation right is frankly absurd. But where does the EU go from here?

We cannot ignore the challenges ahead nor the clamour made for a single market where one does not really exist.

The most obvious and perhaps far-reaching challenge is that someone got it wrong on the issue of demographics in the EU. The Union's ageing population underlines the need for unified action to develop and strengthen the insurance industry.

Governments are changing the state pension systems and encouraging private schemes. Insurance can help to make people more dependent on themselves than on state pensions and health care. It is clear that member states need to be coordinated and take complementary action to address future problems.

A common regulatory approach within the insurance market will not only develop market integration across the EU by making the market more transparent but, more importantly, will increase market efficiency and future development to deal with such widespread challenges.

Insurance regulation so far varies dramatically across the EU. While some of the new member states' insurance regulation may not be as advanced as others, some of the more established member states are considered to be over-regulated. Then there is the question of what type of legislation is ideal for a single market.

On a business-to-business basis, to what extent has there been any real effort to harness any cross-border activity? A common framework is necessary to allow insurance companies to operate freely, with improved risk management and transparency for investors, while ensuring the protection of customers. A new system based on risk capital that is proportionate and is neutral in terms of competition between firms must be created.

To put it mildly, everyone wants to know that their savings are going to be protected, but no one wants to lose out on the kind of growth that effective management of investment risk brings - the principle of the 'prudent person'.

The present system of capital allocation for insurance is not risk-based and is arguably too conservative. Models so far do not consider the real risks involved, particularly non-contractual risks. This begs a new approach to financial reporting standards focusing on the need to look at both sides of balance sheet. This must be considered and widened when involved with risk-management decisions within the insurance market.

Like the banking industry and the rules regulating their risk management functions, the insurance industry needs a level playing field to develop its own risk management models.

International rules on banking have fostered a genuine international mutual recognition regime; insurance is not in the same category but a few principles can be established.

The insurance industry needs legislation based on tested and realistic quantitative rules, it needs effective supervision where required and, of course, transparency.

Even where there is no real individual consumer and it is more business-to-business, such as in re-insurance regulation, it is necessary to ensure that markets are open both within Europe and across the Atlantic.

To achieve this the EU first needs to abolish the protectionist measures of collateral requirements. This recognizes that we need a "global approach".

So yes, a regulatory approach is required to meet these stiff challenges. But it need not be one which places unrealistic burdens on the industry.

Any EU framework must be adaptable and flexible, so that it does not prevent future changes. As legislators we should be ensuring that a new system based on risk capital is proportionate and is neutral in terms of competition between firms. All this must be subject to a proper cost-benefit analysis - but that is another challenge!

• Peter Skinner is a UK Socialist MEP. He is a member of the European Parliament's economic and monetary affairs committee and is rapporteur for the directive on reinsurance.

The insurance industry needs a rest-period from regulation by the Union, writes Austrian centre-right MEP Othmar Karas, who is a member of the European Parliament's Committee on Economic and Monetary affairs, and a member of the Committee on the Internal Market and Consumer Protection. Regulation is needed but it should not impose unrealistic burdens on EU insurers, warns UK Socialist MEP Peter Skinner, who is a member of the European Parliament's Economic and Monetary Affairs Committee and is Rapporteur for the directive on reinsurance.