The British penchant for regulation could be holding UK insurers back behind foreign competition, says Grant Ellis
Insurance is the same as many of our favourite sports (and I know you're thinking "how's he going to make that link?" but bear with me).
We introduced cricket, football, rugby and indeed tennis to the rest of the world, but we then expect to have some sort of divine right to always be at the forefront in each of these activities and are somewhat surprised, and indeed affronted when we are not. So it is with insurance; but while we may not currently be in pole position, we certainly are up there in the top tier - but for how much longer?
In the UK we always play by the rules, but not all our neighbours take the same approach. Take the Intermediation Directive, for example. This will be fully implemented in the UK by January 2005 and, we are told, we'll only just get there by the skin of our teeth. In France, however, little if any progress has been made towards implementation, and there are noises suggesting that the French are somewhat reluctant to comply at all - certainly they appear to be dragging their feet, so what chance of them complying in time? When (or if) they do comply, it will not be with anything other than the minimum requirements of the Directive.
That doesn't seem to be the case here in the UK. We have a habit of gold plating all legislation and regulation, occasionally going much further than the strict letter of the law. In this instance I think our over-zealous approach may just actually do us significant harm unless we are careful.
Within the EU, any insurer authorised within its territory has an automatic right (known as a "passport") to operate within any other EU country. This passport is intended to provide an equal opportunity for each member state to trade freely in other member states - indeed the EU has introduced a set of regulations across the community in an attempt to create such a level playing field.
Unfortunately, as George Orwell wrote, "all states are equal, but some are more equal than others."
The FSA is expecting UK authorised insurers to have increasingly onerous levels of solvency to write certain classes of business. Its motives are admirable, and are within its remit of protecting the consumer from the failure of an insurer. But its action may in fact have exactly the opposite effect because, unless similar levels of solvency are imposed by all other EU member states, we will almost certainly end up with insurers turning their backs on the UK in favour of more "relaxed" regimes within the EU.
This will of course be perfectly legal and above board - after all, these states will be complying with the strict letter of the law, but no more, and that's the key. It's the imposition of "super" solvency requirements in the UK that is the danger.
There is already some evidence of a move abroad - the growth of both Gibraltar and Dublin as centres for 'newco insurance' are surely only the start, as the regulators start their squeeze. As three out of five of the largest UK general insurers are not British, how long will it be before they decide that over-regulated UK is no longer for them? After all, what are the downsides? They can still operate here as they do now, but can potentially write more business from the same capital base. They will not have to support the Financial Services Compensation Scheme if any UK insurer happens to fail (and of course as more insurers move out and trade in the UK from abroad, so the remaining insurers will have a larger and larger percentage of that bill to pick up).
Even those insurers who are UK businesses have to be considering a move. Not one has been able to resist the real attractions of outsourcing work to other parts of the world where the workforce is better trained, less expensive and indeed more enthusiastic about working than here in the UK, and why should they? In a global economy we have to compete. And it is these competitive pressures that will ultimately force UK insurers to make their choices.
Anyone fancy joining me in French lessons?