• FSA Library
  • Communication documents
    • Speeches

Speech by Sarah Wilson, Insurance Sector Leader, FSA
HMT Insurance Summit
7 November 2007

Good afternoon. I would like to start by thanking the Economic Secretary for inviting me to speak at this Insurance Summit meeting. It is welcome opportunity to debate some of the challenges facing the wholesale and commercial insurance markets. In that spirit, I would like to focus my remarks on some of the changes we have made to our approach, in an effort to ensure that London, indeed the UK, is seen as the regulatory platform of choice.

I want to start by saying a few words about why we will not enter into a regulatory “competition”, simply reducing without question regulatory burdens on the industry. As regulators we are of course charged with meeting certain objectives through the Financial Services and Markets Act and, put straightforwardly, we believe that there are significant social and economic benefits to regulation, which has a proper role to play where industry solutions do not or cannot succeed. Indeed I know also that good regulation is recognised by many in the industry as beneficial to them. We are sometimes accused of weighing the benefits wrongly against the costs of regulation, notably in the area of our implementation of the insurance mediation directive, and we welcome such challenges. We do, however, always remind ourselves and others of the work we do to take full account of the principles of good regulation set out in legislation. These principles require us to have regard not only to the desirability of being risk-based and proportionate in our regulation of the market, but also the benefits of innovation, and the impact of what we do on UK’s competitive position as a financial centre.

We also recognise that regulation is far from the only matter that informs decisions about the location of capital. The UK enjoys a comparative advantage in a number of areas relevant to the insurance sector, including skilled personnel and support infrastructure, use of the English language and legal system, a centrally-located time zone, and many years’ experience of providing insurance coverage to ease the process of trade. Against this in firms’ thought processes must be weighed the costs of doing business, including, perhaps most importantly, tax.

Whatever the drivers, there is some evidence to show that the UK has not been the domicile of choice for reinsurance capital in recent years. Following the 2005 hurricane season, some $21bn was raised by the reinsurance industry, some admittedly for balance sheet repair, but significant quantities for the exploitation of new underwriting opportunities. Whilst more than eight per cent of this was raised on UK-regulated exchanges (plus more through UK private equity and other sources), less than half of one per cent was invested in UK insurance vehicles.

All of the above has led us to believe that, irrespective of tax and other drivers, there is scope for improvement, both in our Handbook and in our processes. And you will be aware that, in making any such change, in addition to being risk-based and proportionate as I have already mentioned, we increasingly adopt a Principles-based approach. While maintaining (if not enhancing) standards, this approach to regulation enables the market to reduce costs by allowing individual firms to develop the most cost-effective means for them to deliver a desired regulatory outcome. There are two excellent examples of this relevant to our discussions today.

First, we recently proposed changes to our conduct of business rules for insurance - rebalancing our regime to focus more on the outcomes that matter and less on the methods used to arrive at those outcomes. We are currently reviewing responses and will publish our conclusions shortly. (Our related work on the case for mandatory commission disclosure is also nearing completion.)

Second, we have modernised the prudential regime for insurers in a principles-based fashion – requiring firms to produce their own assessment of their individual capital needs given their risk appetite (as long as this exceeded a minimum). In mid-2007 we completed, on target, our first round reviews of all insurers’ capital assessments, and in a recent Insurance Sector Briefing we noted the very substantial progress that had been made both on risk measurement and on risk management as a result. Firms have welcomed this piece of regulation and the very clear benefits arising from it – not least, it puts UK insurers in a good position to meet the challenges of Solvency 2, albeit there will be further work to fully develop the functionality and use of models so that they can be approved for capital purposes in the future.

I should add in the context of prudential regulation that we have also devoted resources to arguing the case for an amendment to existing US reinsurance regulation whereby non-registered, mainly ‘alien’, reinsurers must post collateral regardless of their rating or quality of home supervision. It seems to us that this is approach creates unnecessary costs for the insurance sector and ultimately the consumer and it distorts the efficient allocation of capital and competition. There are strong arguments for allowing the market to decide when additional security is needed. We will continue to argue strongly for reform.

As I mentioned, we have been looking at our processes as well as our Handbook. In particular, we have announced a number of improvements to our authorisations process, specifically aimed at the insurance industry. As from 2006, we committed to dealing with insurance applications in times of market stress, within one month of receipt of the application where we have prior knowledge of the group and within ten weeks where we don't. Thankfully, reasonably stable market conditions have prevailed for insurers but this commitment remains if needed. And in the meantime, I am pleased to note that we currently process insurance authorisation applications in between 12 and 16 weeks, where we have sufficient information to fulfil our statutory obligations.

We also thought carefully about authorisation, and indeed our whole approach, when implementing a regime for insurance special purpose vehicles (ISPVs) as part of our early implementation of the Reinsurance Directive. We recognise the potential benefits of these financing vehicles, where the risks are fully thought-through and appropriately managed. Under our new regime the authorisation requirements are proportionate to the lower risks to our objectives resulting from the structure of ISPVs. As such we have tailored our information requirements to take this into account and place greater focus on self-certification than for a traditional insurer or reinsurer. Following authorisation we plan to supervise the ISPV through our supervision of the ceding insurer, which will ensure that an adequate level of consumer protection without additional (unnecessary) regulatory burden. As you will be aware there has been a slow start to the market, in part we understand due to uncertainty in tax treatment (which HMT has been addressing), but we have recently authorised the first ISPV under this regime.

As I said earlier, regulation has a role where there is a market failure. As a part of Principles-based regulation, we have however found on a number of occasions that it is possible for the regulator to promote a market solution – with benefits all round in terms of reaching a required standard in a cost-effective manner. In this context, the market's achievement in reaching and exceeding its target of 85% contract certainty by the end of 2006 is testimony to how a collaborative approach between market participants can lead to the right outcome for the industry, customers and regulators alike. The market has made further progress during 2007 in continuing to meet and exceed this target. – a sign that the change that the market introduced was cultural and long-lasting. (Of course, well run firms will now have systems in place to ensure that contract certainty is an automatic part of the business process, and it will remain a supervisory priority for us to check that this is the case and act where it is not.)

Contract certainty has acted as one catalyst for change and the efforts of the Market Reform Group to modernise and drive through efficiency are to be commended. Where regulatory interest is relevant, we continue to encourage market-driven approaches which achieve the right outcomes while limiting industry compliance costs. And in such cases, if the industry wants to and certain published criteria are met, it is also now able to apply to the FSA for ‘confirmation’ of its own guidance – so ensuring that we will not take action where a firm complies with industry-based material in the circumstances for which it was intended.

I have set out some of the key reforms of relevance to London’s competitive position that we have implemented over the last few years. I hope you agree that we have taken seriously the challenges you face and introduced changes of significance and lasting value. Thank you.

Back to top