But the report also starts to flesh things out with some more concrete - and daring - proposals for the regulation of insurance groups and the creation of a cohesive European supervisory system. Two particular changes stand out. The first would see European bodies given a more decisive role and the second would hand more power to supervisory “colleges” at the expense of single, national supervisors.
Until relatively recently - the end of last year, even - anyone that suggested giving binding powers and a hand in supervision to CEIOPS, CEBS and CESR, the three
committees which exist at European Union level to coordinate the shaping of new rules, would have been given short shrift.
The primacy of national supervisors was unchallenged. But de Larosière's report marks a radical shift away from that status quo, proposing that the committees become European authorities with significantly expanded powers.
Prior to the publication of the report, there had been moves afoot in the context of Solvency II which would have bolstered national supervisors - making a 'group supervisor' the locus of decisive
supervisory power for individual insurance groups. In keeping with calls first made by the G20, the European Parliament watered down those plans, shifting away from group supervisors towards colleges of supervisors - a model based more on coordination and cooperation between groups of national authorities. Strengthening the collective power of the colleges offers hope for the future reintroduction of the 'group support' proposals into the Solvency II text. The de Larosière report endorses both moves and calls for colleges to be in place for all major financial institutions by the end of 2009.
It also presses for Solvency II implementation to be supported and accelerated - which would increase the pressure on insurers’ project teams.
These changes would effectively give more power to authorities regionally, and the big question is whether individual countries will countenance surrendering some of their supervisory sovereignty, given the political sensitivity about giving a European body responsibility for a sector that many countries see as critical in terms of the price and availability of cover to local firms, and which is also a major employer.
If individual countries defend what they see as their turf, the bold changes which de Larosière’s report envisages may be dead in the water. But if the crisis convinces those in power that something needs to change, then insurers will need to get to grips with a new world - one in which
regulation becomes more intrusive and challenging, and the relationship with the home country supervisor is no longer the most decisive. One area where the challenges, and the intrusion, are likely to be severe is in terms of remuneration policies.
Supervisory colleges are not entirely new in Europe. The Insurance Groups Directive, implemented in 2000, created Co-ordination Committees (or CoCos) which can be seen as a halfway house to the more formal, powerful colleges envisaged by the G20, by the European Parliament – and now by de Larosière. As such, this part of the current debate could be seen as evolution instead of revolution. That does not mean the coming changes will be trivial.
A report on the work of the CoCos, issued by CEIOPS on February 16, found that the committees had made some progress in supervising medium-sized and large insurance groups, but had not yet established a coherent approach to the issue of proportionality. Simply focusing on large, complex organisations might mean that smaller – but far more risky - companies were flying under the radar. Other problems also needed to be addressed - the report pointed out that 40%25 of insurance groups are part of a financial conglomerate, and urged the committees to improve co-operation with other financial sector supervisors. Less than one-third of CoCos had established a work plan. In conclusion, the picture was of a noble effort which was somewhat limited in scope and still quite immature.
Colleges of supervisors would be a somewhat fiercer animal, with more teeth and claws. A report issued at the end of January by CEIOPS, CEBS and the Interim Working Group on Financial Conglomerates (now called the Joint Committee for Financial Conglomerates) set out 10 principles for supervisory colleges (see box one).
The colleges would be made up of representatives from supervisors responsible for 'all relevant activities' of all cross-border insurance groups, with the group supervisor relegated from a decisive role to become co-ordinator and facilitator of the work programme. The aim would be for the various supervisors to collaborate closely, sharing and discussing their work including on-site supervision; to regulate the company in a consistent manner; and, hopefully, to nip dangerous situations in the bud.
There are any number of questions about how this would work in practice. Is it possible, for example, for a variety of national supervisors - each with their own degree of independence, their own national supervisory priorities, and varying levels of expertise - to achieve consistency of regulation and supervision, for example? Perhaps not - but there is a growing consensus that supervisors need to do much more in this respect.
The de Larosière recommendations, if acted upon, will bring change not just to group supervision but to all insurance companies. Many details on how the recommendations would be put into practice still need to be clarified, but the report envisages a two-stage overhaul. The first stage, which covers this year and 2010, would revamp and upgrade national supervision with a focus on two items in particular. It would also see the supervisory college model deployed to
cover all major financial institutions by the end of 2009.
First, each national body would be put on the same footing in terms of powers and decision-making authority. Recent stock-takes by CEIOPS showed significant divergence from one jurisdiction to the next, mirroring similar work done by CEBS and CESR. To take just one example, enforcement and associated sanctioning powers can vary widely. One supervisor might be empowered to deliver a light slap on the wrist in the form of, say, a €10,000 company fine. Another might have the ability to put key officers of the company in jail and to send the company a demand for €10 million. Of course, it is one thing to call for a uniform set of powers, responsibilities, priorities and outcomes and quite another to achieve consensus on exactly what those powers and outcomes should be.
The second item on the near-term agenda for national bodies would be an improvement in resources: in other words, more and better-qualified supervisors with access to improved systems. That is likely to take the form of external recruitment, training programmes and staff exchanges between supervisors. As an example of the former, the UK FSA has begun hiring 280 new supervisors, which will increase its headcount by more than 10%25 by the time the recruitment drive finishes around September this year. This initiative is about more than just numbers, it is about hiring individuals with developed technical skills in insurance, actuarial risk, finance and risk management.
The second stage, slated for 2011 and 2012, is more ambitious. It proposes the creation of a European System of Financial Supervision. As noted above, that would involve replacing the three existing committees for banking, insurance and securities regulation with three far more powerful authorities and dramatically strengthening their mandates (see Box 2).
The European Commission's communication of 4 March, while endorsing the thrust of the de Larosière report in this regard, accelerates the timetable by squashing both phases into one with the aim of getting the European System of Financial Supervision up and running by the end of 2010. Its detailed proposals on how to do this will be set out in a financial supervisory package due in May this year, for approval by the European Council in June.
So what do these proposals mean for CEIOPS? Today’s committees exist largely as advisors – helping to shape future regulation and smooth its passage by bringing together viewpoints from different European regulators. As such, they are important and influential bodies but, from a supervisory perspective, they are essentially toothless consensus builders: national supervisors are left to police national rules which may or may not permit supervisory convergence. That should now change. CEIOPS would be able to set binding supervisory standards and interpretations of EU regulations, essentially in relation to cross-border insurers but common sense dictates that such determinations would also influence supervisory approaches for domestic players.
One recommendation would see the new authorities settling supervisory disagreements. Today, in the event of a disagreement between home and host supervisors, CEIOPS can attempt to facilitate a mediated settlement. If the impasse cannot be resolved, however, CEIOPS has no power to take the dispute out of the supervisors’ hands by issuing a final, binding judgement. The de Larosière report would give the new authorities that power.
The authorities could also participate in on-site inspections - a direct role in the supervision of insurance groups to facilitate an assessment of consistency between colleges. As such, insurers would find themselves scrutinised more closely not just by the various national supervisors in their college, but possibly also by the new insurance authority. Initially, the complexity of supervisory relationships may not decrease – but the current system
in which national supervisors are divergent and the relationships between national supervisors are disjointed should disappear. Or, at least, that’s what the report envisages.
Opinions on the various proposals now on the table will depend to a large extent on individual attitudes to Europe and beliefs about how governments will react to the crisis. There has been a consistent call for more international supervision, more regional oversight, cooperation and coordination.
Sceptics will conclude that this irresistible force will run into the immovable obstacle of national interest: when push comes to shove, individual governments and regulators will refuse to surrender any power. Believers might argue that the crisis has been so severe, and the calls for action so strident, that a new regulatory order will inevitably emerge.
The near-collapse of AIG, although a US institution, will strengthen the hand of European reformers. Pragmatists would probably mix a little of both: national regulators will lose some of their primacy, regional bodies will become somewhat more powerful, and a greater emphasis will be placed on consistency of regulation and supervision, and on co-operation between national bodies.
Insurers should start preparing for a future in which supervision becomes more challenging – whoever is doing the regulating. It is fair to say that insurance regulation was already set for a dramatic shake-up even before the crisis. Insurers had shown remarkable and unprecedented levels of engagement throughout the drafting of Solvency II - and, as a result, the rules have improved, becoming more rounded, more relevant, and more appropriate. As the supervisory framework is revisited and reshaped in the coming years, there will be a strong need for insurers to remain engaged with the process.