With the cost of red tape leaping a dramatic £10bn to £66bn a year in the UK alone, a new Norton Rose survey reveals how insurers and reinsurers really feel about regulation. James Bateson reports.
The past few years have seen the cost of compliance rise significantly for all businesses, despite government pledges to the contrary. The last figures from the British Chamber of Commerce shows that the burden of bureaucracy now costs UK businesses £66bn a year, compared with just £10bn back in 2001 – and the increase in costs in the past year matches that original figure of £10bn with little sign that things are going to get any better soon.
So it should come as no surprise that industry is looking for change. What is slightly unexpected is that industry is far from afraid of regulation; instead it would prefer greater harmonisation to help bring those costs under control. In surveying more than 150 senior insurance and reinsurance figures across the UK, US, Bermuda and continental Europe, it became crystal clear that compliance is a major issue and that there are express desires for greater levels of harmonisation. Insurance, and particularly reinsurance, is such a global business that this is not a surprise.
There is an overwhelming ground swell of opinion that says having different rules and different laws is crazy. It does not help transparency, it does not help the regulators and it does not help consumers. Staggeringly, more than 90% of the survey respondents from all regions believe greater harmonisation would be a good thing for their companies. This opinion is strongest in the UK where there is 94% support; followed by 88% in Bermuda; 82% in Continental Europe; and 80% in the US.
A third of respondents believe regulators could be doing more to create a level playing field. The major barrier to this, according to the survey, is a lack of co-operation and co-ordination between regulators.
The global option
It would be wrong to suggest that industry is pushing for some kind of intergalactic regulator because that is not realistic. But if you take the European Union (EU) it is moving towards a more level playing field which is a model that is looked on with some envy by those elsewhere.
“It would be wrong to suggest that industry is pushing for some kind of intergalactic regulator because that is not realistic
Looking to the US, political considerations and barriers for foreign players inhibit harmonisation. By contrast there are greater levels of co-operation among EU regulators – something that the survey respondents liked because it allows them to operate and make things happen fast.
For emerging markets, there is a real opportunity to capitalise on the perceived advantages in Europe and to adopt some of the same principles. In the Middle East, for example, they would undoubtedly create a competitive advantage for their region by using the best of Europe’s system.
But there is still a way to go. Again taking the EU as an example with the most sophisticated levels of harmonisation, there is no reason to have different reporting formats. It would provide huge savings for businesses if there were one reporting system for all EU states. Often the problem is not with the individual regulators but rather with the national governments. There is work for the insurance lobby too. As an industry group, insurance needs to get its act together and become engaged in the regulatory agenda to win the right outcome.
Industry has tended to sit back and wait until the lawmakers have done their job before complaining. Instead, industry needs to get onto the front foot and become more proactive. It is critical for every business to develop a global strategy on regulation. Each business needs to consider its approach to regulators in every territory in which it operates and to become more proactive. Some firms do this but it should be every firm.
Axis of cooperation?
For reinsurers, the big issue surrounds the Bermuda/European/US axis. The Bermudan regulators have a more hands-off approach and at times when capital has been needed, large sums have been raised in Bermuda, resulting in the emergence of an increasingly significant market.
“There is an overwhelming ground swell of opinion that says having different rules and different laws is crazy
The issue in Europe has been that many of the original players have become so large that they have moved a long way from their reinsurance roots. They have stretched the envelope of what they do, but such has been their dominance locally that it has been difficult for other specialist reinsurance groups to emerge in the EU. The regulatory burden in the EU has further fuelled the flight to Bermuda.
In the US, while collateral obligations are being removed in Europe, the approach to “alien” reinsurers in the US remains a big problem. Generally speaking, respondents were looking to protect their own markets but there were some surprising results from Europe, breaking down the stereotypes about the protectionist approach from the French and Italians, for example.
But overall the biggest surprise of the survey was the degree of support for harmonisation. The expectation had been that around 50% may support the concept but in reality the figure was 90% - a huge proportion. This destroyed the thought that people would be sceptical and reluctant to engage still further with regulators.
There was strong support for principles-based regulation rather than rules-based, although it should be no surprise that respondents from the US were less in favour of a change to principles, used as they are to rules. But generally people were in favour of moving away from tick box exercises.
The UK leads the field with 82% in favour, followed by Bermuda and then Europe at 71% and 70% respectively. In the US, although two-thirds of respondents prefer a principles-based approach, there is a significant minority of 30% calling for a rules-based system. This result has been influenced by brokers and the reasons for this are likely to include brokers believing a rules-based approach would help reduce the regulatory differences between states.
“The regulatory burden in the EU has further fuelled the flight to Bermuda
There is a question of what the cost of moving from rules to principles might be. One worrying aspect of the survey was that more than one in four insurance companies in the US and almost one in five in the UK and Europe reveal that compliance costs account for more than 10% of their budget.
Of even greater concern, more than half of the Europeans believe their compliance costs will increase significantly in the next 12 months. As one respondent noted, “Compliance costs are increasing all the time. Although we, in reinsurance, are wholesale, that doesn’t seem to make any difference. We did a recent survey internally and around 70% of our finance team is concerned with compliance.”
The question is whether consumers ultimately are protected better by these levels of regulation or whether it has gone a stage too far. If you only had to complete one set of rules in 12 languages across Europe, rather than 12 sets of rules in 12 languages or reporting in 12 formats, it would be far less costly.
On the move
Looking at the way in which businesses will relocate to avoid costly taxes and administrative burdens, the survey did raise some questions. For example in the UK, the Financial Services Markets Act was designed to make the UK a competitive domicile for financial service companies but from the responses there is a case to say that the Financial Services Authority and the government are failing in that objective.
One of the reasons why businesses are moving away is tax but the burden of compliance and issues around raising finance are listed as well. If you look at where they are moving to, tax and regulation is less of an issue. Bermuda is still very much a reinsurance jurisdiction and it takes a matter of weeks to launch a reinsurance entity in Bermuda. In the UK it can take six months, sometimes longer.
“Respondents from the US were less in favour of a change to principles, used as they are to rules
Doom-mongers suggest that some sort of catastrophic event that will lead to a major collapse of the Bermuda market. Then we will all say “well maybe tougher regulation would have been a good thing” but that market has already endured 9/11, the hurricanes of 2005, the Japanese windstorms and now the credit crunch. It is still standing and its regulatory approach is holding up well.
As the survey concludes, “Nobody would ever suggest that moving towards greater harmonisation of regulation of the insurance industry on a global scale will be an easy thing to achieve. Yet there is no reason why significant improvement should be impossible; it relies heavily on the appetite within the industry to bring about change.”
It is evident that the market is ready for change and a move towards principles-based regulation across jurisdictions could bring dramatic cost savings and efficiencies to the industry. Now is the time for the industry to engage in the debate to initiate changes that could bring significant long-term cost savings.
James Bateson is a partner at law firm Norton Rose.