In the run-up to the Insurance Summit on February 27th in London, industry experts scheduled to speak at the event share their views on the important challenges and opportunities facing the industry. Bart De Smet, Chief Executive Officer of Ageas, explains his views on regulation.
Regulation of the insurance sector is absolutely vital. But it must be fair, well-thought-through and universally applicable. Protection of the consumer is fundamental and regulation geared to do that is important. But while the burden of implementation rests with the insurer, the cost of regulation will ultimately be borne in some part by the consumer. Therefore, consumer benefit is the most important consideration with new regulation.
The role of the insurer, in a nutshell, is to insure risks for the client at a fair price. Consumers gain confidence when the right regulation is in place – this reassures the client that the insurer will intervene when required, protects the client against abuses and encourages healthy competition within the insurance sector. In the case of the changes to statutory regulation of the European insurance sector that we are now facing, however, there are several issues that could cause the regulation to overshoot its target.
Firstly, there is the issue of timing and the pace of change of national regulation in various European and non-European countries. The immediacy of several imminent European initiatives, such as Solvency II, MIFID, IMD and PRIPS, as well as the potential risk of a second round of revisions, is almost by definition at odds with the international environment in which insurers operate today. How can insurers with international ambitions compete on a fair and equal basis with insurers in Asia or America, where local competitors are not (yet) subject to the same national regulation? It is an uneven playing field and hence no surprise that the impact of complex and ever changing regulation is considered the number one risk for insurers today. Paradoxically, we have got to the stage where it is no longer macro-economic trends or natural disasters that top the league table of risks.
Additionally, regulation threatens to bog down insurers’ core activity with a misplaced focus on short-term issues alone. Insurers run the risk of losing sight of the challenges and opportunities of tomorrow. All too often, the solutions chosen create more red tape and resolve only an extremely limited number of cases overall. Insurance and short-term thinking remain extremely difficult to reconcile. New regulation is invariably accompanied by extra administration (costs) and management. This red tape extends from product development through to the boardrooms of the insurer, distribution and the end-user. It is doubtful whether all end-users benefit from the added value in the same way, certainly given that insurers will inevitably have to pass on some of the extra costs to the end-users.
It also remains questionable whether the continuous increase in additional compulsory communication with consumers is beneficial. Are the interests of the end-user well served if regulation leads to an unnecessary information overload for the consumer? Ultimately what consumers want is simple, transparent communication, not footnotes and small print.
Finally, insurance regulation must reflect the specific challenges of the sector. Insurers differ from banks. While both seek to serve and protect the purchasing power and wealth of consumers over the short and long term, this is achieved through very different business models. Banks collect deposits, issue loans and provide other fee-based services, but tend to have a short-term perspective. Insurers take a longer-term view as they focus on risk pooling and risk transformation, and are funded by their policyholders. The balance sheets that support these models, the funding strategies and the risk profiles are all quite different. The interconnectivity that exists between banks is also less evident in the insurance industry. In short, insurers and banking businesses do not face systemic risk in the same way, and regulations should reflect this.
Solvency II takes account of the full risk spectrum of an insurance company and as such, if properly implemented, will be beneficial to the sector. The ongoing harmonisation of insurance regulation across Europe remains an important objective and is best achieved through collaboration. The insurance sector has a good track record in working in a cooperative manner to create the best framework. Continuing in the spirit of open dialogue with peers and regulators will create more certainty and a higher probability of success for all parties concerned.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.
