The Irish ‘yes’ to the Lisbon Treaty has taken us a big step closer to a united Europe. But is this good news for the insurance industry? We unravel Europe’s legislative maze
It’s often hard to hear the genteel hum of Brussels over the roar of Westminster, but insurers should ignore it at their peril. For this hive of arcane bureaucracy and impenetrable techno-jargon is where the industry’s fate is sealed.
While very few bills going through Westminster will affect insurers, in Brussels there are at least 20 with the potential to disrupt the fundamentals of the industry.
Apart from the sheer volume of legislation pinballing between the various bodies that create EU law, the range of what it covers is eye-watering.
Financial regulation is top of the agenda, as EU law makers mull a doubling of the UK industry’s capital reserves, but equally catastrophic would be anti-discrimination legislation that could make the basis of insurance pricing and selling illegal. Revised competition laws could leave the industry paying thousands of pounds in lawyers fees just to defend their right to do business as usual. There are also market reviews and cross-border consultations that may look benign but have the potential to erupt with devastating consequences at any time.
The two main bodies responsible for lobbying on the industry’s behalf in the EU are the ABI and European umbrella body the CEA, which works on behalf of insurance bodies in the member states. They are tasked with illuminating, persuading and cajoling civil servants, regulators, ministers and elected representatives from 27 countries. They tackle issues such as why insurance policies should be priced differently to suit the flood plains of the Netherlands, avalanche-bound Switzerland and whiplash-prone Britain, and why, despite their apparent similarities, insurers are very different to banks.
Although it may not have felt like it, for the past five years the pace of legislation coming out of the EU has been moderate. But that all ended with the financial crisis, as the pent-up desire for regulation exploded from the European Commission like a cork out of a bottle.
Most of it is directed at the banking sector and presented as measures to prevent another financial crisis. That means the ABI’s role in Europe is similar to the one it plays in Westminster: trying to persuade law makers that insurance is not the same as banking and shouldn’t be subject to the same regulatory knee-jerk reaction.
So what are the major proposed new laws on the horizon for the industry?
Solvency II is by far the most important piece of legislation working its way through the EU. It dwarfs all other issues, dominating lobbyists’ time and energy.
Solvency II was, and still is, seen as a good thing by the UK insurance community. It aims to improve insurers’ risk management, harmonise capital requirements across the 27 member states and shift the focus of regulation from consumer rights to internal corporate governance. In the UK, the FSA had already been moving in this direction.
The framework directive for this was agreed by the European parliament in April, which meant level-two negotiations could start to thrash out the details.
Insurers had been disappointed that the provision for group support, which would have reduced the burden of duplicate compliance on pan-European companies, was not included, but were looking forward to the next stage.
Then in July, the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS), responsible for advising the Commission on implementing new rules, dropped a bombshell. It issued an 1,100-page consultation paper proposing new rules that would mean UK insurers having to increase their capital reserves by, the ABI estimates, between £30bn and £70bn – potentially more than the whole equity base of the sector.
By its mid-September deadline for responses, CEIOPS had received 20,000 comments and the lobbyists were in overdrive.
Why CEIOPS wants to double the industry’s reserves when the FSA appears happy with them is a mystery. The consequences – not least for premiums – are so severe that it seems unlikely the Commission will accept CEIOPS’ proposals or that other bodies in the EU would vote to implement them.
But the lobbying groups can’t afford to slack. There are 18 months to go before the details are finalised and it reaches the European parliament in spring 2011.
Regulating the regulators
A related issue is the ongoing discussion of financial supervision, and a greater role for a pan-European supervisor.
In February, a report by former International Monetary Fund head Jacques de Larosière envisaged stepping up the establishment of a pan-European supervisor, which would co-ordinate regulation across the 27 member states.
In September, the Commission produced a package of proposals to take this forward. The three clubs of national regulators that oversee banking, securities and insurance would become authorities and be given new powers to set binding technical standards, settle disputes between national regulators and ensure EU laws are applied consistently.
UK insurers have given the proposals a cautious welcome. Harmonisation across Europe is a good thing for insurers that do business across the EU, and the risks of fragmented regulation have been all too apparent in recent months.
But CEIOPS’ approach to Solvency II has alarmed them. Is it good to hand power to one organisation without a system of checks and balances in place?
The ABI and CEA are trying to establish how member states or the industry would be able to challenge the decisions of a beefed-up CEIOPS.
Meanwhile, the Commission aims to get the regulations finalised and the bodies created by Christmas, which seems ambitious given that it has to go through the Council of Ministers and the parliament too.
The next issue on the Euro lobbyists’ agenda is very different, but just as challenging to insurers’ operations. The EU Anti-Discrimination Directive, published in July 2008, intends to outlaw discrimination in access to goods and services on the basis of factors including age, gender or disability.
But because discriminating between the different risks people present is central to insurance, this is a significant conflict. It is a similar challenge to that presented by the UK’s Equality Bill, but because EU legislation trumps UK law, the directive is the lobbyists’ priority.
At the end of March, the ABI and CEA succeeded in getting the Conservative Party to table an amendment to the final report in support of insurers’ position, which was voted in by the parliament with a margin of one vote.
This is a positive step, but far from the end of the story. No agreement was reached by the Council of Ministers at its final meeting under the Czech presidency in June, so the issue has passed to the famously egalitarian Swedes.
So far, they have listened politely to insurers’ explanations that discrimination brings positive benefits such as a well-supplied market and lower premiums for many. The strength of insurers’ objections and the complexity of their arguments may work in their favour and persuade law makers to opt for a compromise.
Block exemption from competition law
Euro campaigners are also confronting the threat of removing insurers’ exemption from EU competition law. At present, insurers can work with each other to share statistics and data, use common terms and conditions, participate in insurance pools to cover risks such as terrorism or nuclear accidents, and co-operate on technical standards for security devices such as sprinklers and burglar alarms. This block exemption, one of the few left, expires in March 2010. If it is removed, insurers will have to spend thousands of pounds on lawyers fees to argue for exemption on each case.
A rule like this offends EU regulators’ idea of what the common market is all about. So it’s a significant triumph that they have so far accepted it should be partially retained for data-sharing and pools. They are, however, proposing to scrap exemptions for common terms and conditions and security devices.
The regulators’ arguments can often appear opaque or contrary. On the collection of statistics, for example, they initially argued that the practice was clearly benign, so it could not contravene competition law and the exemption was unnecessary – something that would still have cost a fortune in lawyers fees for insurers to prove.
The Commission also sympathises with security device manufacturers’ position: that insurers’ setting of common standards is anti-competitive when all must meet minimum standards anyway. Insurers say they are the ones taking the risk, so they want higher standards or premiums could go up.
The argument is not over yet.
The Commission is putting out a consultation on the issue in the next few weeks, in which insurers will keep pushing to retain all four exemptions.
Solvency II, discrimination, regulation and exemption rules are the biggest issues on the agenda, but there are a host of other issues the lobbyists must keep an eye on. These include compensation for victims of cross-border road traffic accidents, a study on whether citizens have equal access to motor and home insurance products, and the longer term issues of flooding and climate change.
In fact, at any given moment, there’s only one certainty in EU law making: the lobbyists cannot afford to ignore anything. IT
Quick guide to European law
From a lobbyist’s point of view, Brussels is an entirely different ball game to Westminster – like comparing quidditch to table tennis. There are a lot more people to convince, it’s far slower, with laws often in the making for seven years or more. And at any one time, there are many, many more proposals, reviews and draft legislation that could have potentially seismic impacts on the insurance industry. The lobbyist can never afford to take their eye off the ball.
There are three separate but equally important law-making bodies in the EU. The European Commission is the EU’s civil service, which proposes new laws and sees that they are enforced to represent the EU’s interests as a whole. The Council of Ministers is where ministers from each of the 27 member states discuss new laws, representing national interests. Finally, legislation must be voted in by the European parliament of 736 MEPs, representing the people of Europe. Although this is the final stamp of approval and may take many years, lobbyists must seek to influence MEPs throughout the process. For example, although the parliament won’t be voting on the new Solvency II legislation until spring 2011, it will be unofficially involved in the earlier stages because law makers in the European Commission know it will ultimately have to receive their sign-off.
The MEPs are organised in broad political groupings, with national parties belonging to wider European groups. Lobbyists were concerned earlier this year when the Conservative Party, which has 26 of the UK’s 72 MEPs, left the most powerful centre-right group to set up an anti-Europe body with far-right parties from eastern Europe. How damaging this is to UK interests will depend on whether they continue to play an active part in the EU’s activities or settle for making anti-Europe pronouncements from the back row.