Lords Committee welcome reform measures for insurance sector

The House of Lords European Union Committee have published a report supporting many of the proposals for supervision of the European insurance industry set our by the European Commission in their draft directive Solvency II.

The committee support the commission’s attempts to strengthen the European insurance industry by adopting some mechanisms already in place in the UK. The insurance industry is much more competitive in the UK than in much of Europe with British insurers enjoying flexibilities not present on the continent.

The committee support the proposals to change the way the EU calculates the solvency margin. This is the amount of capital that an insurance company must have readily available in order to meet unforeseen claims. The commission is proposing that EU practice moves towards the UK model and permits insurers to use sophisticated risk management techniques when making these calculations. This would mean that an insurer covering different types of risk, unlikely to occur simultaneously, could hold a lower amount of capital in reserve relative to an insurer covering a narrower range of risks.

The report also welcomes moves in the European Commission’s directive to introduce the concept of a ‘group supervisor’. This would mean that regulation of a cross border group of co-owned insurance companies would be led by the regulator in the member state where the group’s parent company is based, working on a collegiate basis with the supervisors in countries where the group has subsidiaries. The committee state that this would be an improvement on current arrangements where each part of the multi-national group is regulated separately, in the member state in which it is operating.

Group supervision would benefit the European insurance industry as it would allow groups with diverse risks, spread across many countries, to pool their capital and invest it where it would generate the greatest return: this should result in lower insurance prices for the consumer. The committee recognise the concerns in some smaller member states that group supervision would lead to a loss of influence for their national regulators but argue that the benefits for the industry as a whole outweigh this and call for the Government to resist attempts to dilute the proposals.

Commenting Baroness Cohen of Pimlico, chairman of the Lords EU Sub-Committee on Economic and Financial Affairs, said:

“We broadly welcome the proposals being put forward by the European Commission which we feel will give fresh impetus to the European insurance industry.

“The proposals on the two solvency margins insurance companies must keep and the introduction of group supervision will allow cross border insurance companies much more flexibility in how they operate and invest their capital. This should result in a more productive industry and the opportunity for savings for consumers as the industry becomes more competitive. Consumers should also be better protected against the possibility of an insurance firm failing.

“It is always unusual to find an industry, its supervisors and politicians in agreement over new regulation, but it appears to be the case here.”