The Pan European Insurance Forum (PEIF) issued a paper on 12 February 2009 giving its regulatory recommendations for the insurance industry in the wake of the economic downturn. The PEIF is a group of CEOs of major European insurance companies such as Aegon, Allianz, Aviva, AXA, Generali, ING, Mapfre, Munich Re, RSA, Swiss Re, Uniqa and Zurich Financial Services. In this paper, the PEIF considers the impact on the European insurance industry and makes policy recommendations to combat the crisis.
Impact on the market
The nature of the insurance industry means that the impact of the crisis is not as significant as for the banks. The PEIF reported that the impact of the crash is mitigated as insurers are funded by advance premium payments which can only rarely be withdrawn without any form of penalty, as such this rarely happens.
Having said that, the insurance industry is not wholly protected from the crisis. Declining assets values have a detrimental effect on insurers’ investment portfolios. Furthermore, specific lines of business such as directors and officers and errors and omissions insurance are likely to see more claims. The sale of insurance products – in particular new unit linked business in life – is expected to fall due to the economic slowdown.
Policy recommendations
- Public policies should provide incentives for sound risk and capital management – the crisis reinforces the case for Solvency II, in particular its principle-based, economic and risk-sensitive approach. The adoption of Solvency II presents a big step in the right direction. The new supervisory system would enable supervisors to detect any threats to an insurer’s ability to fulfil their obligations to policyholders at an early stage.
- Large complex financial institutions have to be supervised in their entirety – Solvency II offers a good chance to introduce genuine group supervision. It would also foster transparency and co-operation between national regulators.
- Regulators must step up their efforts to achieve convergence in accounting standards – the PEIF states that it is important to avoid pro-cyclicality in the accounting and prudential rules to dampen the negative spiral of the crisis. Market consistent valuation of both assets and liabilities should become the principle that underpins financial information and prudential oversight in the insurance field.
- Transparency regarding financial products has to be improved – regulation of credit rating agencies should enhance disclosure requirements and avoid conflicts of interest. The lack of information in “over the counter” trading of financial derivatives such as credit default swaps has not only facilitated the undetected accumulation of high levels of financial risk but has complicated regulatory intervention aimed at containing the crisis. Initial regulatory steps towards transparency would include the standardisation of contracts and the creation of centralised clearing platforms.
- Government intervention must not distort markets – banks with state guarantees could become a more favourable investment prospect which could artificially distort the market. This could benefit their insurance activities, if any. But also those insurers that receive government support can have considerable advantages over those that have not. Therefore, government interventions must comply with European competition laws and should be limited in time and contain clear exit clauses.