Crisis talks

If you are concerned about the possibility of insurance companies collapsing as a result of the financial crisis, have no fear because help is at hand. It was reported this week that the Financial Services Authority is putting together an insurance sector “crisis team” that will come to the rescue of any insurance companies that appears to be failing. By all accounts, the recruitment process for this crack insurance rescue team is pretty stringent – it is understood that the FSA began selecting the members of the team back in January.

So, how exactly will the crisis team prevent insurance companies from going under? The word is that a number of options are being considered – among them are proposals to relax accounting rules as well as regulations relating to capital requirements. Basically, this means that FSA rules stipulating how much capital an insurance company must hold would be bent slightly. In addition, it has been suggested that “mark to market” accounting – which stipulates that insurers must value their assets according to market prices – would be suspended.

This all sounds great in theory. The FSA turns a blind eye when insurers produce balance sheets that may have caused some concern in the past, and looks the other way while companies indulge in some creative accounting. It’s all aimed at cutting insurers a bit of slack while they try and get themselves on a firmer financial footing – that can’t be bad can it?

Well, if the FSA is determined to go down the road of relaxing regulations for insurers, it should tread very carefully. What the public wants is to see financial institutions kept on a tighter leash, not given more freedom. After all, a common complaint is that financial institutions have been given too much freedom in recent years and look at the mess that has landed us in. No one wants to see an insurance company go out of business, but, at the same time, we must ensure that financial institutions are not allowed to repeat the mistakes of recent times. It may be possible that a balance can be struck between giving insurance companies a little more leeway and making sure they avoid past errors. The FSA will have to work hard to find that balance.