There is wide acknowledgement that the UK regulator, the Financial Services Authority (FSA), is interpreting the rules of Solvency II much more harshly than its regulatory peers across the rest of Europe. Allied to this sense of injustice, there is growing resentment at the spiralling costs associated with Solvency II.
The new capital regulations are slated to come into force next year, but that seems unlikely to most observers and practitioners in the sector. Many believe that 2014 is a more realistic start date.
While this may be welcome relief to insurers who are unprepared for 2013, for the likes of the Pru, which has spent millions getting ready for Solvency II, further delays inject more uncertainty and cost to proceedings.
Insurers across the UK have put together expensively-paid teams of Solvency II experts in recent years. Demand for these experts comfortably outstrips supply at present, which means salaries for these teams are increasingly high. Solvency II is an expensive business.
I’ve read the argument that Prudential’s statement is nothing more than a shot across the bows of the regulator – the benefits of staying in London outweigh the advantages of having its HQ in Asia. The Pru is going nowhere.
But Mazars’s work with some of the UK’s biggest insurance firms tells me that this is more than posturing or grandstanding.
The Pru is one of several insurance companies considering whether to move its head office to faster-growing markets. UK insurance stalwart, Brit, is already headquartered in Amsterdam, while Aviva increasingly conducts business out of its Irish subsidiary.
Of course, it’s not easy to simply quit London. Tidjane Thiam, Prudential’s chief executive, will be aware of the considerable obstacles to moving East. But with nearly half his firm’s business conducted in Asia, it would be remiss of the Pru’s top man not to evaluate all the available options.
On top of Solvency II, life insurers are having to grapple with another raft of regulation, the Retail Distribution Review (RDR), which will fundamentally change the way insurers sell their products in the UK.
RDR has been in the pipeline for a long time, but it is far from perfect. The law of unintended consequences always comes into play at some point. But as with Solvency II, the regulator has shown a worrying intransigence. Sensible requests for moments of reflection have fallen on deaf ears.
In the current political climate, the FSA isn’t for turning. But the regulator should be careful not to alienate an industry that has performed strongly throughout recent crises. There are few sectors where the UK is seen as a truly global leader. The UK taxman continues to benefit from a considerable and reliable stream of revenue from the industry and this could be hit in the future. Prudential’s warning should be heeded. This is no idle threat.
Craig Scarr is head of insurance at Mazars.