Adam Smith Institute

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Solvency II

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solvency-ii

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’s “Path to Solvency II” 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’ 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’s prefers a “proactive” 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’s mission creep is more likely to increase or reduce the number of future insurer’s insolvencies. Finally, it is not a small task. This is why in the next months the FSA will recruit 460 new regulators to run the national insurance industry. As Hector Sants, FSA’s boss, puts it: “if society wants a more proactive approach it must accept that it will have a larger and more expensive regulator”.

In the most recent Z/Yen ranking of global insurance centres London dropped from the first to the third position. The London’s unique insurance business model (globally recognised as “The London Market”) withstood centuries of business cycles, natural catastrophes and political cataclysms. Let’s just hope it will survive the upcoming decades of “proactive” regulation.