What will be the cost of complying with N2? Jason Woolfe investigates....
Complying with N2 looks set to increase insurers' annual costs.
Regulation after N2 will add costs both directly, in fees charged by the Financial Services Authority (FSA), and indirectly, for things such as training staff to be aware of the new requirements.
Groupama UK compliance officer Bryan Stewart predicts the cost of complying with all regulation will total at least 5% of industry costs. This includes an estimated 2%-3% attributed to the cost of complying with the General Insurance Standards Council (GISC).
The FSA levies fees on the insurance industry to help pay for its regulatory work. It needs to raise enough to pay for its current budget of £167m.
This budget figure was increased by £3.9m to take account of the extra work it will be doing after its powers are extended on 1 December.
Different firms pay different charges, depending on their size.
These fees are expected to go up by an average of about 10%. Bigger firms face larger increases in these direct costs than smaller firms. But the indirect costs associated with complying will be harder for insurers to quantify. There will also be below the line costs, as staff are taken out of their normal jobs to be trained and costs of reprinting letterheads and other stationery.
It is estimated indirect costs will come to about four times the total for direct costs.
FSA spokesman Robin Gordon-Walker says: "The average cost increase, including the effect of the transition period, is around 10% of whatever the company paid before.
"The smaller insurance companies will pay fees at the same level as before because there has been a deliberate attempt to help smaller companies.
"We are putting considerably more resources into our regulation of insurance companies - there are about 30 or 40 more people working in insurance supervision than there were before - and somebody has to pay for this.
"They will have to pay an extra 10% or so, but the exact amount will not become apparent until next year. The rule of thumb is that indirect charges are four times what you charge directly in fees."
Stewart says: "Regulation in the future will cost upwards of 5% of our baseline expenses, but this will also bring more efficiency."
With increased regulation, there should be an improvement in staff skills, because the regulation includes many requirements for training and competence.
"Managers are in the firing line, so they won't want the FSA breathing down their neck for things that have gone wrong. There should be a general improvement in what they do and there should be greater customer satisfaction. There should be fewer mistakes and fewer documents that are wrong."
Stewart says the main cost to Groupama in the run-up to N2 had been in management time. Managers had to plan the systems and controls required for compliance, changes to documentation and staff training.
One of the largest costs is likely to be with the approved persons regime - the part of the N2 rules that require insurers to designate staff members who can be held personally responsible in case anything goes wrong.
The expenses associated with this section of the rules will include training and record-keeping.
The FSA has estimated 2,100 firms will come under this section of the rules.
Groupama needs 32 approved persons and managers to check the company's personnel procedures will reach the standards required after N2.
Stewart says: "A lot of the requirements are good business practice. It's not necessarily wasted time and it's difficult to argue against having someone responsible in the way that's required."
Approved persons regime
The head of general insurance practice at Watson Wyatt, Nigel Gillott, agrees the area generating the most costs and requiring the most work is the approved persons regime.
"Effectively, there are 27 job types to which insurers have to allocate people as approved persons. Not all will be relevant to general insurance, but one of them is a catch-all category for anybody leading a big business unit.
"Big insurers like CGNU and AXA will have a lot more than 27 people who fall under this rule. It takes quite a long time to just work out who these people are and what their responsibilities are."
Stewart adds: "These are the people who can do most damage to the company if something goes wrong.
"We take the view that we want to empower the people with the decision making by making them approved persons and money spent on education will be money well spent."
Another area likely to generate extra cost is record-keeping.
Companies will need to be able to produce evidence that their systems and controls come up to scratch.
Although the rules place new requirements on insurers, brokers are also likely to face additional costs.
The marketing director of broker Layton Blackham, Charles Whitfield, identifies three areas of potential costs.
The main cost will come in training and making sure staff know all about the requirements.
"A lot of back-office work has to go on and that's time, so that's money," he says.
Stationery would have to be reprinted, creating a second area of cost. "That's mitigated by the fact that we knew about it in advance, but it still has to be done," he says.
A third cost is the simple cost of having staff away from their normal jobs while undergoing training.
Groupama Insurances chief executive Tony Lancaster has warned insurers to be prepared for N2. Speaking at a London conference earlier this month, he said: "I firmly believe the government has our industry in its sights and, frankly, we are going to have to sharpen up our act."
Stewart says: "This should be good for us as a company and for the industry.
"Above all, it should be good for all our customers and without them, we wouldn't exist.
"Regulators are going to ask us to do more and more. It's going to engage more time and more money. N2 is the end of the beginning for regulation."