Regulatory Efficiency and Effectiveness
Both insurance regulators and those they regulate agree on the desirability of efficient and effective regulation. However, achieving it is not always so straightforward.
Since its very beginnings, when Lloyd’s issued the first marine policies, insurance has been an international business. Yet, over the last decade perhaps more than at any other time, globalisation appears to have been the single most important phenomenon shaping our industry.
We see it in the increasingly global nature of risk (climate change, terrorism, technological innovation, etc), in the emergence and rapid growth of new economies such as China and India (and the liberalisation of existing markets such as Brazil), in the proliferation of new, low-tax ‘offshore’ financial centres and, above all, in the vast quantities of insurance and reinsurance business being written daily across international borders by a host of different multinational carriers, facilitated by global broking houses.
Insurance regulators have had to adapt to this new environment, and to take a global and increasingly joined-up approach themselves to supervision of insurance and reinsurance. The existence in 2008 of more than 30 insurance-related legislative, regulatory and supervisory bodies – excluding national regulators – is evidence that they are doing so. These organisations, led by the International Association of Insurance Supervisors (IAIS), are considering important regulatory themes and effectively setting the agenda for insurance and reinsurance regulation in the 21st century.
As the world’s leading insurance market and a champion of free cross-border trade, Lloyd’s has a keen interest in influencing this international debate and the regulatory policy flowing from it. With our long experience and unique perspective on providing insurance and reinsurance solutions around the world, we have become a respected and authoritative contributor at this level, and are establishing our credentials as a thought leader on issues of insurance and reinsurance regulation.
Lloyd’s maintains that efficient and effective regulation should:
• Favour broad, risk-based principles over prescriptive rules.
We frequently cite as examples of sensible risk-based regulation, the FSA’s Individual Capital Adequacy Standards (ICAS) regime governing the solvency of UK insurers, and the ‘cedant responsibility’ model of reinsurance supervision, where the regulatory onus is placed squarely on the ceding insurer to adopt a prudent approach to the purchase of reinsurance as part of its overall risk management framework.
• Promote regulatory convergence or ‘mutual recognition’ over conflicting or duplicative regulatory systems across different jurisdictions.
Lloyd’s believes that a regulator in a country where an insurer or reinsurer is operating (host-state regulator) should be able to ‘recognise’, and rely on, the supervisory activity performed by a competent regulator in the country where that insurer or reinsurer is domiciled (home-state regulator).
• Distinguish adequately between the different needs of corporate entities
and consumers.
Lloyd’s maintains, for example, that a lighter regulatory touch is appropriate for reinsurance, because the transaction is between sophisticated commercial insurance industry participants.
• Not impose burdensome capital/funding obligations on foreign insurers and reinsurers as a prerequisite for writing business in a particular territory. Lloyd’s contests that having to hold funds in many different locations increases operating costs, which are ultimately passed on to the insured. Furthermore, we maintain that it is the financial strength and quality of regulation of an insurer or reinsurer, rather than its location or that of its funds, that determine the protection it affords its policyholders.
• Encourage creativity, innovation and competition.
Lloyd’s believes that overregulation stifles creativity and competition, which is ultimately to the detriment of the insurance or reinsurance buyer.
These principles of efficient and effective regulation are consistent with those being promoted as a global standard by the IAIS. They also form the cornerstones of the EU single insurance market (now being further enhanced through the Reinsurance and Solvency II Directives), which was effectively the testing ground for the concepts of home-state supervision and mutual recognition, and which while not without its flaws, arguably remains the benchmark for the rest of the world to aspire to.
However, while there is wide conceptual recognition of the merits of a borderless global insurance market, where an insurer or reinsurer may operate in any other country without having to lodge funds – or perhaps even be licensed – locally, and where the host regulator can rely on the home supervisor’s regulatory system, the reality is that this remains a long-term vision. Some jurisdictions are unready, or unwilling, to move in this direction and, in the most extreme cases, doggedly cling to protectionist and discriminatory practices.
As long as this remains the case, the debate over regulation will continue to dominate the international insurance and reinsurance agenda. Lloyd’s will need to be an active contributor to the debate and proponent of efficient and effective regulation.
Last updated on 02 Jun 2008
