Regulatory capture, a pro-cyclical hike in capital costs and the intrusive micro-management of liabilities – the volley of criticism over European insurance reform (Solvency II) echoes the dissent that has blighted new banking regulation. It's not clear whether even the 2016 deadline will be met.
Given the diversity of opinion and vested interests that vexes financial co-ordination in Europe – even with an apparent single market – forging a consensus on region-wide regulation is like trying to herd cats. Now there is an added imperative for politicians to deliver growth to voters at home and to protect their own national champions. What’s more, a rethink of aspects of bank regulation at the European and Basel-wide level has also contributed to reform inertia.
It’s no surprise, therefore, that efforts to conclude discussions on Solvency II – the fundamental review of the capital adequacy regime for the European insurance industry – are floundering, despite being in the works for a decade. Some market participants doubt the latest deadline of 2016 will be met, with a dispute on how much capital insurers should hold for guaranteed life-insurance products serving as the most recent stumbling block.
The insurance industry constitutes a substantial proportion of the European financial market, and hobbling it could constitute an economic blow. Yet failing to tackle systemic risk issues could allow for a repeat of the 2008 crisis.
There are valid concerns that high capital charges could push weaker insurers into raising capital in a constrained market, putting them and the wider economy under pressure. However, the regulatory uncertainty itself is undermining the recovery. “The continuing failure to deliver Solvency II has resulted in uncertainty, which has constrained insurers from undertaking potentially value-creating actions”, says Philip Jarvis, head of insurance at Allen & Overy.
Resolution is especially difficult to reach because there are no clear distinctions between those that favour pushing through tough regulations and those concerned about killing a recovery.
The difficulty in accurately ascribing risk weightings to assets is illustrated by the experiences of the banking regulators in Basel. The treatment of securitisation – treated as high risk – and sovereign debt, regarded as essentially risk free, have been especially contentious.
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