The recent annual AIRMIC conference revealed optimism and frustration in equal measure among UK risk managers, reports Mark Baylis
There's a temptation to believe that, if an idea is totally illogical and ludicrous, then it won't happen. And the suggestion that risk managers may soon be regulated is the stuff of our worst nightmares."
So spoke the retiring AIRMIC chairman Nick Chown, opening the association's 2004 annual conference in Manchester. The event was extended on the final day to discuss whether and under what circumstances new regulations, published by the FSA and due to come into force in January 2005, might apply to risk managers. By the end, many of the assembled risk managers still did not know the answer, though it was not for want of effort by AIRMIC, which has been seeking clarity from the authorities for several months.
In his speech, Mr Chown compared their logic to Alice in Wonderland.
A jaundiced view from someone who has lost patience, perhaps. Even with the most charitable of interpretations, however, the confusion around this issue has shown the UK regulators in a less than flattering light.
The problems arise out of the European Commission's Insurance Mediation Directive, which is intended to ensure a level playing field for brokers and other intermediaries throughout the European Union. There is, of course, a world of difference between a broker who buys insurance on behalf of a client in return for a commission and a salaried employee who buys it as part of their job. In the first case, there is a direct financial incentive to acquire insurance; in the latter there is none. AIRMIC had assumed that this distinction would enable the FSA and UK Treasury (which oversees the FSA) to exempt most risk managers from regulation, as has been the case in other EU jurisdictions.
The Treasury and FSA, however, are interpreting the directive differently from their counterparts in other EU countries, in a way that suggests that most risk managers will be regulated. It is important to stress the word 'suggests', because the FSA has declined to give a definitive answer.
When asked, it says repeatedly that it applies to anyone who trades insurance 'by way of business'. It has admitted repeatedly, however, that it does not have a definition for this term, commenting that the question might have to be tested in the courts.
Mr Chown is not alone in his irritation that the regulators do not appear to understand their own rules. Equally frustrating, is that the FSA and Treasury acknowledge that no public interest would be served by regulating risk managers. In their defence, they plead that they are simply implementing an EU directive.
"If most risk managers are to be regulated - and we still don't know for certain - it will be as a result of the Treasury interpreting an EU directive in a legalistic way without considering what was intended," according to AIRMIC Executive Director David Gamble. "So far, no other EU country has interpreted it in this way. The outcome is that, unless there's a last-minute change of heart, the UK will be a less attractive, less efficient place to do business."
Mr Gamble is especially incensed that private sector risk managers are included when those in the public sector have been exempted. There seems to be no logic in this or in some of the other decisions which have been made. It is hard to explain, for example, why shops which sell warranties with their electronic goods are exempt, while vets who sell pet insurance are apparently not.
Hopes that risk managers might avoid regulation receded somewhat during the conference when, coincidentally, a letter arrived from the FSA. It was a long-awaited response to a joint request for clarification, sent nine weeks earlier by AIRMIC and the London Market Brokers' Committee.
At the time of writing lawyers are still studying its implications, but there is little doubt that it makes regulation a more likely option.
"Taking these factors into account," the letter concludes, "we are unable to properly conclude that group risk management companies are not carrying out regulated activities by way of business."
Where does this situation leave UK corporations and their risk managers?
Some, such as property companies which sell household insurance to their tenants, clearly have no choice but to apply for authorisation. This costs up to £25,000 plus an annual fee and requires the risk manager to abide by a set of rules, downloadable from the FSA website.
By contrast, risk managers who work for single companies and do not purchase insurance on behalf of subsidiaries or group operations are most likely safe. The majority of risk managers, however, fall into a grey area.
The anecdotal evidence suggests that, while some have registered, many of them have decided not to become authorised. In taking this course, prosecution becomes a tangible, if distant, possibility. More immediately, they may now have to persuade their insurers and brokers that they can still do business with them. As a representative of Royal & SunAlliance explained at the conference, underwriters can only sell insurance legally to risk managers who pass the necessary regulatory tests.
A number of companies, though, are considering a more radical response.
A survey of AIRMIC members found that in 6% of cases there was a 'strong possibility' that regulation would drive the risk management function to an overseas office. A further 8% said there was a 'small possibility' of this happening.
Others indicated that, although the risk manager might remain in the UK, responsibility for insurance buying would move to another territory.
All of this is bad news for the London insurance market, which receives the lion's share of the £3bn of premiums placed by UK risk managers.
Do not be too surprised if Dublin's burgeoning insurance community gains a few new recruits.