What is Europe's new 'Solvency II' regulation?
From 2012 all European insurance business will be subject to new regulation called Solvency II. Initially, the main objective of Solvency II was to create a single European risk based capital requirements regime and hence to increase trans border competition in the European insurance market. We are yet to see if this outcome will be achieved. In the meanwhile other aspects of Solvency II already became apparent.
The FSA鈥檚 鈥溾�� explains that, under the new regime, insurance capital supervision is not just about ensuring that sufficient capital is held by insurers. Instead FSA endorses the very broad approach to risk supervision designed in Brussels. The regulator may now be interested in insurers鈥� internal risk models, business model, governance, decision making processes, content of board meetings, capital raising, dividend decisions, pricing, strategy and even employee remuneration.
In numerous industry meetings, the FSA representatives usually make clear their preference for the broad interpretation of their new role. Unsurprisingly, FSA鈥檚 prefers a 鈥減roactive鈥� approach to risk management supervision. But since insurance businesses are all about risk management, a holistic approach gives FSA a mandate to be involved in all decisions insurers make.
This is a dangerous role for any regulator to undertake. It is not clear if FSA鈥檚 mission creep is more likely to increase or reduce the number of future insurer鈥檚 insolvencies. Finally, it is not a small task. This is why in the next months s to run the national insurance industry. As Hector Sants, FSA鈥檚 boss, puts it: 鈥渋f society wants a more proactive approach it must accept that it will have a larger and more expensive regulator鈥�.
In the most recent of global insurance centres London dropped from the first to the third position. The London鈥檚 unique insurance business model (globally recognized as 鈥淭he London Market鈥�) withstood centuries of business cycles, natural catastrophes and political cataclysms. Let鈥檚 just hope it will survive the upcoming decades of 鈥減roactive鈥� regulation.
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