Management quality seen as key issue in insurance regulation

The big question facing the UK’s principal financial market watchdog in developing risk-based safety rules for insurance firms is how to regulate for the quality of management in a firm, Sue Kean of the UK Financial Services Authority (FSA) said in London today.

Analysis of the past five years of loss events and near-misses in the insurance industry showed that management quality, good or bad, was the crucial factor in the outcome, Kean told a conference on changing the European insurance solvency system. The conference was organised by professional services firm KPMG and the Association of British Insurers, the UK insurance industry trade body.

Kean, who is manager of the FSA’s prudential standards department, said the question for the FSA was how to “operationalise” the management issue within the framework of risk-based regulation.

The FSA wants to bring harmonised risk-based supervision into effect for banks, insurance companies and securities firms along the lines developed by global banking regulators for the Basel II bank capital adequacy Accord.

In the insurance sector, the FSA will focus on senior management systems and controls, FSA sources said. The agency wants to impose an obligation to apportion responsibilities clearly among directors and senior executives of the firm and ensure the operations of a firm can be adequately monitored and controlled. There should also be an obligation to take reasonable care to ensure that proper systems and controls are established and maintained.

But Kean said the lack of agreement in the European Commission’s Solvency II project for insurers was a major problem for the FSA. The project is aimed at reforming existing solvency rules for insurance firms in the European Union, of which the UK is one of 15 member states.

The UK wants risk-based and transparent rules that rely on internal risk measurement by insurance firms in contrast to the current “regulator-knows-best” prescriptive regime, she said.

But there is a lot of support in Europe for continuing with prescriptive rules, she noted. The worst outcome for the FSA would be for Solvency II simply to tighten up existing rules with scope for individual countries to go their own way, Kean said.