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The Equitable effect.

Debate has been picking up in Brussels over the past few years over how to regulate insurance among the 27 members of the European Union. Judging by recent developments, the effort may boil down to deciding who is best able to balance solvency with sovereignty--the EU apparatus or national regulators.

Among the more notable EU advances was the 2005 passage of the Reinsurance Directive, which every EU member state is required to write into its national laws by the end of this year. The directive aims for a seamless market among the member states, and eliminates collateral requirements for reinsurers doing interstate business.

Some see the Reinsurance Directive as a stepping stone toward Solvency II, the ambitious European effort to adopt a universal regulatory system for insurer solvency. A Solvency in proposal is expected in a month or two, and final adoption is targeted for 2010.

But never mind the directives and proposals that have so far come out of Brussels. The regulation debate may be ratcheted to its highest point of tension by a parliamentary investigation.

Equitable Life Assurance Society, a U.K. mutual with more than a million policyholders, collapsed in 2000 after coming up short on promised payouts on certain policies, and ended up the subject of an exhaustive committee of the European Parliament.

Debate will begin on the final report drawn up by the Equitable Committee of Inquiry on June 19, when the parliament convenes in Strasbourg.

The report itself is out--a hefty 385-page tome that gathers together dozens of witness testimonials and the analysis of thousands of pages of documents. Its overall conclusion? British regulators were largely to blame for Equitable's failure, and they were to blame mainly because they weren't diligent enough in implementing EU hales regarding the solvency and business practices of life insurers.

Maybe there will be a lot of head-scratching down on London's Canary Wharf, as the Financial Services Authority wonders how their praises can be sung so frequently by insurers and regulators around the world, only to be told by their EU brethren that British regulators showed "excessive leniency" toward Equitable's solvency margin, and that the U.K's "light touch regulatory policy" let Equitable self-destruct.

In all fairness, it must be pointed out that the Committee of Inquiry report targets the U.K. Treasury and Department of Trade and Industry along with the FSA. We must also remember that the FSA, as it is now known, essentially came into being in 2000 when other agencies were consolidated. Equitable's problems were already coming to a head at that time.

The intensity of the European Parliament committee's attack on British regulators may actually say more about where the EU wants to go than where the FSA has been. Take this comment from the committee's statement on the report: "The committee argues that the U.K.'s technique of implementing EU insurance legislation in a piecemeal fashion [through a number of different legal acts] lacks clarity, that U.K. regulators and authorities did not adequately respect the ultimate purpose of the Directive and that the implementation process as a whole was flawed."

The committee's recommendations for improved life insurance supervision leave no doubt that Europe's regulatory structure should be governed at the EU level.The committee calls for a more active European Commission monitoring the application of EU laws more effectively, tighter cooperation between national regulators within the EU and legislation that would favor the consumer and investor, particularly when it comes to pension products.

And for good measure, the Equitable Committee of Inquiry suggests more investigative powers for parliamentary committees--such as itself.

This isn't the first time an EU entity targeted British regulators with accusations of fumbling EU rules. The European Commission had investigated U.K. regulators over their supervisory approach to Lloyd's. The EC dropped its investigation in 2003, satisfied that the 2000 creation of the FSA met its regulatory concerns.
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Title Annotation:Briefing
Author:Pilla, David
Publication:Best's Review
Date:Jul 1, 2007
Words:650
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