Much less focus has been on Solvency II, the European Directive which will dramatically change the way insurers are regulated, due to be implemented at the end of 2012. This is, of course, to be expected. Attention will always focus on where the greatest problems occur. However, there is much to be learned in both the principles and development of Solvency II for all regulators and politicians.
Indeed the crisis has reinforced the key messages of Solvency II – that by itself capital cannot protect against all risks and all negative outcomes. At the heart of Solvency II is the message that if you understand and manage your risks you can run your business effectively and receive the benefits of a lower capital requirement. This will ultimately benefit consumers.
However, there is a very real risk that the ripple from the banking crisis is still creating difficult waves across the whole financial services sector. I see two major risks. First, that insurers will be over-regulated, either because regulators will insist on gold-plating requirements, or because of inappropriate read-across from the banks. The second, connected risk, is that consumers will simply lose faith in the products we provide. This is not because they believe insurers will fail, but because we are forced by Solvency II to change the products we provide to such a degree that they no longer meet the needs customers at a price they can afford. The ABI is working with the Treasury and European partners to push back hard on this. We cannot let the fallout from banking regulatory failures drive insurance regulation.
There is still much to play for. Recognition of the benefits of holding assets over the long term (the liquidity premium), how Solvency II recognises subsidiaries of European insurers based abroad and how groups are treated are some of the main areas of focus. There is time to solve these and I remain optimistic we will – with the support and cooperation of the Commission, governments and European insurance regulators.
As an industry we have been working on Solvency II since 2000. It is already rightly recognised as potentially a leading global standard for prudential regulation. It is far in advance of the Basel II requirements and already includes many of the tools needed to address the risks identified following the financial crisis. It is attracting attention from around the world, as other countries realise the advantages it will give to European insurers.
The danger is that insurance regulators read across from what is happening in the banking world and try to squeeze in banking rules for insurers. Solvency II was designed to go beyond this. Despite the crisis, we must keep on that road for the benefit of insurers and consumers alike.
Maggie Craig is acting director general, Association of British Insurers.