2013 Outlook - Insurers now face a staggered switch to the new regulatory regime

These companies will move to ‘twin peaks’, or dual regulation (by PRA and FCA), next year, but it has now become clear that PRA will have to continue to operate the existing FSA financial rulebook (the ICAS regime) for several years to come. FSA has finally admitted that the planned switch to the new EU rules under the Solvency II directive (SII) for 2014 is “completely unrealistic”. The likely date for the new EU rulebook is now seen as being 3 or 4 years away. The sequence will now be

• The move to Bank of England supervision via PRA. Many insurers have been sceptical about the idea of a central bank (to be run by a Canadian central banker) being responsible for the supervision of the UK insurance sector. Many feel that insurers were simply tagged on to the decision to move bank regulation back to the Bank of England.

• PRA will operate the ICAS financial regime which came into effect in January 2005. This is “super equivalent” (i.e. much more demanding than current EU requirements which are minimal and outdated).

• But many insurers have been developing internal models for SII implementation (originally planned for 2012/2013). Firms may or may not wish to use these models under the ICAS regime. If they do, they will have to provide a ‘reconciliation’ between the calculations to take account of the differences in the two regimes. Firms that satisfy FSA’s threshold will then be permitted to use the SII internal model and balance sheet for ICAS purposes without further reconciliation.

• PRA’s approach to insurance supervision will involve focusing its resources on the most systemically important insurers (i.e. those with greatest potential to damage financial stability), with a particular eye to orderly resolution for failing firms. It proposes to adopt a judgement-based, forward-looking approach to supervision, with its supervisors forming judgements about the current and future risks posed by insurers.

• Some may doubt whether SII can survive the loss of credibility from the never ending delays and the constant arguments about the new requirements. We still believe that a pan-European rulebook will emerge eventually and this will be the final step in the staggered process to the new regime.

The second “guvnor” will be the invigorated FCA, which has two key messages for the insurance market. First, it insists that the FSA’s six “Treating Customers Fairly” outcomes will remain at the heart of its objectives. Second, with its new (in reality repackaged) power of product intervention and its truly new role as a competition policeman it is certain to have a major impact on how insurers design and market their products.

Insurers may rightly suggest a better description of the process is ‘staggering’: who could have dreamt up a more complicated and disruptive way to transform the regulation of insurers. Plus ça change plus c’est la même chose?