On 9 February 2011, the Chief Executive of the FSA, Hector Sants, delivered a speech as part of the Insurance Institute of London’s lecture program at Lloyd’s of London on the future of insurance regulation. Specifically, the speech aimed to address the following three key regulatory issues:


Hector Sants highlighted the specific benefits of Solvency II and acknowledged that concerns have been raised as to whether such benefits would be “worth it” in relation to both the associated implementation costs and whether the risk calibration is correct. He stated that the FSA will be laying out a UK cost-benefit analysis in the next year and that it was not the FSA’s ambition to increase or decrease the amount of capital supporting the UK insurance industry, instead it is only seeking to ensure such capital is appropriately aligned with risks. Hector Sants further noted that the FSA is in the process of refining its proposed implementation methodology (to, amongst other points, focus on the key judgements during approval processes, ensure that a plan can be successfully delivered and executed and that the FSA’s oversight is done at a reasonable cost to the industry) and is seeking to communicate the implications to individual firms shortly;


With regard to the new supervisory structure in the UK (comprising the Prudential Regulatory Authority (“PRA”), the Financial Policy Committee, and the Consumer Protection and Markets Authority (“CPMA”)), Hector Sants discussed the progress made to date on how the PRA and CPMA will regulate insurers in future. He explained that the PRA will supervise around 1,000 insurance companies with the high-level objective of “promoting the soundness of firms and minimise the adverse impact that firm failures can have on the UK financial system. In particular it will be seeking to minimise and ideally eliminate the likelihood of cost falling on individual taxpayers and customers. In other words, an orderly firm failure without adverse consequences on the economy would not be seen as a regulatory failure”. Although Hector Sants noted the key differences between banks and insurers, specifically that insurers pose less systemic danger and, therefore, for the purposes of prudential regulation should be viewed differently from banks, he noted that the PRA will base its supervisory interventions for insurers and banks on the basis of a similar judgement-based risk assessment framework. The CPMA will “have a primary objective of ensuring confidence in financial services and markets, with specific focus on protecting consumers and ensuring market integrity....and the CPMA’s regulatory approach towards supervising all firms, including insurers, will be delivered using a risk model which puts a premium on early risk identification and prioritisation”; and


Hector Sants noted that, effective from 1 January, a new European Supervisory Authority responsible for European insurance and occupational pensions (“EIOPA”) has been established with the principal feature of being the rule making body in Europe. The effect of this wide ranging mandate is that the FSA (and successor authorities) will essentially be supervisory arms of an EU policy setting body. The UK, therefore, needs to organise itself to effectively contribute to decision making in both the EIOPA and wider EU forums. He confirmed that the FSA, and himself, would invest considerable effort with engaging in the issues facing the insurance market at a European level.

Closing, Hector Sants commented that he hoped to have demonstrated “the FSA’s determination and commitment to ensuring that the substantial regulatory agenda that faces us all is executed in a manner which improves the regulatory framework for UK insurers, and in consequence brings benefit to their customers and capital providers....I hope I have demonstrated that the FSA and its successor bodies have a clear approach to address the key questions and that I have given a flavour of the likely answers. I also hope that there is certainly no doubt about the importance we attach to the insurance industry and that this commitment will continue into the new regulatory structure in the UK”.