On the eve of our Commercial Lines Forum, here’s another chance to read the views of Paul Sharma, one of the speakers.

What significant developments are on the horizon?

From a regulatory perspective, there’s Solvency 2, a fundamental review of the capital adequacy regime, the systems of governance and reporting requirements for the European insurance industry. It is set to come into effect in five years’ time (November 2012). Good progress is being made and it is expected that the directive will be agreed by the end of this year.

It is clear that one effect of Solvency 2 is to focus attention on the risk management of companies and there will be increasing public scrutiny of that going forward.

How will the insurance sector adapt to the changing business landscape?

Insurers will need to react to less benign market conditions by looking at their business models and assessing the opportunities and threats to these models. If firms fail to recognise the capital and financial implications of not appropriately assessing all the risks they are exposed to, this could lead to significant financial losses.

Market volatility may require an insurer to improve its liquidity position by securing funding via the capital markets.

If other insurers are required to do this at the same time, there is a risk that funding may be unavailable or only available at a higher price. More volatile investment markets may lead to an increase in the number of hedging products purchased to mitigate against market fluctuations.

What do you see as the main challenges in the market going forward? How can businesses overcome them?

As mentioned above, one of the most significant regulatory challenges ahead for insurance firms is compliance with the Solvency 2 directive. This revised set of EU-wide requirements, the detail of which is currently being developed, is likely to provide a number of challenges for firms.

To overcome these challenges, firms should be engaging in the process now by reading and digesting the material that has been published on the topic by the Committee of European Insurance and Occupational Pensions Supervisors and the European Commission, as well as engaging with the FSA.

Who do you see as the main visionaries in the insurance market right now?

The insurance companies that seem to be performing best are those that appear more able to adapt themselves to the external economic and underwriting markets while having a robust internal controls and risk management framework. These companies appear to be flexible in the nature of their decision-making, which is supported by well controlled and appropriate management information.

What are the key issues that the insurance leaders need to understand today to drive their businesses?

The FSA considers it vitally important that firms are aware of the risks that they are running within their business. In line with our move to principles-based regulation, we place the onus on firms’ senior management to ensure that their risk management practices are effective. Allowing firms to determine the best means to achieve this recognises that risk management and, indeed, regulation is not a one-size-fits-all approach.

Recent market events have highlighted how important risk management is in the financial services sector.

Paul Sharma is the FSA’s director of wholesale and prudential policy, and is one of the industry leaders speaking at Insurance Times’ Commercial Lines Forum, to be held at the Hilton Tower Hill on October 13. For more details and to book your place, see www.insurancetimes.co.uk/forum