FERMA Forum 2011
Tuesday 4 October
Panel Session (14:00 – 15:15)

Guy Soussan, European legal advisor to FERMA

There is a “radical expansion” of European insurance regulation, but there may be shortcomings in its implementation and unforeseen impact on the insurance industry and its customers, Guy Soussan, European legal advisor to the Federation of European Risk Management Associations (FERMA) stated today (Wed) during a panel discussion on regulatory issues at the 2011 FERMA Risk Management Forum in Stockholm.

According to Soussan, a partner in the law firm Steptoe & Johnson, the insurance industry and its commercial customers still need to be convinced that however desirable the objectives of these new regulations that they will be successful in achieving them.

A risk manager – just like an insurer or a broker – needs to anticipate the regulatory changes emanating from the EU institutions, he advised. ”However, they need to be absolutely convinced that the regulatory changes in question are introduced taking into account the cost of compliance. They also need to be sure that the change represents an improvement and provides added value to the status quo. They can certainly share the policy objectives underlying each piece of EU proposed legislation but the method for arriving there and the technical aspects make the whole difference. In other words, the devil – as always! – is in the details.”

For this reason, said Soussan, risk managers and the insurance industry must maintain pressure on the EU institutions to come up with sensible regulations. He then cited some examples from current EU initiatives, where the best intentions might be at odds with the on-the-ground expectations of industry.

His remarks follow:

First, the new supervisory architecture: The creation of a single European insurance supervisory authority – EIOPA – has been presented as a means to promote supervisory convergence and a European supervisory culture. This is a fine and laudable objective, except that the market needs to be convinced that EIOPA, as an independent authority with its own legal personality, will truly emancipate itself from the selfish interests of individual Member States.

Second, the application of a Single Rule Book: The EU institutions have explained to the market that Solvency II will create a Single Rule Book that will guarantee the uniform application of European law. Again, another fine objective, but will the legal framework become clearer and more certain? Think about this: Solvency II is a “Framework Directive” which sets out the principles.

It is addressed to Member States for implementation. Under the Lamfalussy legislative process, it will need to be followed by implementing measures and, ultimately, by technical standards adopted by EIOPA. This means three layers of legislation – in length almost 1000 pages of legal texts – that will need to be applied and enforced at national level. What will be the appetite of the Commission and EIOPA under its new powers to enforce them?

Focussing on Solvency II in particular, we have been told that the requirements under Solvency II will be tailored to take into account smaller insurance companies and captives, in particular under the principle of proportionality. This is also fine except that the market is still in the dark as to which specific measures are intended. Many captive owners are becoming increasingly nervous about the final regulatory regime for their captives and would like to see some prompt guidance.

The external dimension of Solvency II: The promotion of international convergence is a specific objective of the Solvency II project. This is a fine objective since it is not every day that the EU plays the role of a global standard-setter. Each third-country jurisdiction transacting significant insurance business in the EU has to consider the offer of becoming a “Solvency II equivalent jurisdiction” in respect of reinsurance, group solvency calculation and group supervision.

The problem is that, while the equivalence test has not been set as a mirror image test, the standards which were applied by EIOPA in its assessment of Bermuda (for example) create some doubts and set a wrong precedent for other candidate jurisdictions.

Also, the lack of a clear framework for EU captives to date can hardly be an incentive for off-shore captive jurisdictions to accept the offer to become equivalent. No wonder that some jurisdictions have already turned down the offer and speculate on a migration of EU captives to their domicile. And no wonder that the EU is now proposing a transitional regime for third countries, such as the US which otherwise would have no chance and no political interest in successfully passing an equivalence test.

Transitional measures. There have been a lot of rumours about the date of entry into force of the Solvency II project. The initial target date was October 2012 which was then pushed back, a first time, to January 2013 and is now expected for January 1, 2014. The objective is to provide more time to the regulators and companies to get prepared through different transition dates – a fair objective again.

The problem is that the transitional measures are not adopted yet and will not be so before the beginning of 2012. They require a vote of the European Parliament and, once adopted, the Commission will still need to adopt implementing measures. The precise content of these measures is still unknown. This creates great uncertainty as to the effective entry into force of a Solvency II regime.

In addition to Solvency II, there are at least two other EU measures which are contemplated as part of the regulatory package.

First, on the EU intermediation side, the industry had understood that, in the wake of the business insurance inquiry of 2007 and pending review of the Insurance Mediation Directive (IMD), the European Commission was expecting some kind of self-regulation to address transparency of remuneration. The adoption of the FERMA/Bipar protocol was a direct, but non-binding, response, since it is left to the goodwill of their respective members.

The Commission has yet to unveil the exact content of proposed amendments to the Insurance Mediation Directive, but these are expected to focus on the objective of transparency. There is still a risk that this new Directive will not extend to large risks the principle of automatic disclosure of remuneration “upon request” on the basis that the corporate risk and the reinsurance markets are sophisticated enough to look after themselves.

At stake is the definition of large risks which should be revisited to include small- and medium-sized enterprises and to focus on the extent of damage which could be caused.

The risk management community needs to watch out that the revision of the IMD does not become a missed opportunity.

Second, the same debate is likely when the Commission soon formalises its plans for insurance guarantee schemes at EU level. The intention at present is to limit the coverage under guarantee schemes to individuals but not to extend it to small- and medium-sized businesses.