MEP Peter Skinner talks about the progress of key insurance legislation through the EU bureaucracy.

Peter Skinner is the insurance industry’s man in Brussels. The former college lecturer, who joined the European Parliament as a Labour member in 1994, is in charge of pushing through legislation that will revolutionise the way the insurance industry is regulated.

His knowledge of the Solvency II legislation is encyclopaedic, and his passion for getting it right infectious. The representative for the South East met Insurance Times in the parliament’s Brussels headquarters just days before a crucial vote on the legislation was due to take place – the latest step in its journey through the tortuous bureaucracy of the European Union.

Solvency II is a fundamental review of the capital adequacy regime for insurers operating in Europe. It aims to establish a revised set of EU-wide capital requirements and risk management standards that will replace the current Solvency I requirements.

These standardised requirements will make it easier for firms to do business across the EU, with regulatory supervision focused in the member state where they are headquartered. It is designed to protect policyholders’ interests by making financial failures less likely. The final text of Solvency II should be agreed in Europe by the end of this year. The deadline for implementation is 2010.

What are the key aims of Solvency II?

“Solvency II is risk based, economics based, and principles based. It will make it easier for insurance companies to operate, while cutting costs for policyholders,” says Skinner, who is particularly keen to emphasise the benefits for the end consumer, as he believes that historic collapses, such as Chester Street in 2001, would not have happened had Solvency II been in place.

Solvency II has been agreed in principle, but the exact form of the legislation still needs to be hammered out by the European Commission and the European Parliament. What are the most important points still open to debate?

Skinner passionately believes that the regulators in member states should agree to the group supervision structure, whereby a group will be regulated first and foremost by the supervisor in the country in which it is headquartered – for example, the FSA for insurers based in the UK. This is controversial in some of the smaller states, which are worried that their supervisors will lose power, and could be left to clear up someone else’s mess if things go wrong. “They want additional powers over insurers operating in their jurisdiction, which is something to be resisted strongly,” insists Skinner. “We have been proposing that regulators embrace those countries that have regulators that want to enhance their own competencies by offering them the support of their own services. All the regulators could form a group – they could have access to the same information.”

What are the challenges involved in reaching an agreement?

As with all debates in Europe, each of the 27 member states has its own goals. For example the French, when they take over the presidency in a couple of months, will support group supervision, while other states will oppose it, Skinner believes. “There is also a discussion to be had around surplus funds. It is my view that through holding surplus funds, companies are using policyholders to guarantee solvency for their shareholders. We are working with Germany, Sweden and Denmark on a European definition of surplus funds, as a first step to resolving this,” Skinner adds.

Finally, he says that the legislation must set a gold standard that can be exported around the world. “For the sake of competitiveness, we want standards to be the same,” he says.

What unforeseen consequences might Solvency II have?

Skinner believes that the legislation will have a profound effect on the way insurers operate, and expects it to lead to consolidation among insurers. He adds: “For some companies, the implementation of Solvency II might call into question some of the lines of business they are in and the way they operate. There will be opportunities that will not just be a result of this legislation, but a recognition of the modern insurance industry.”

What about those companies that can’t afford to meet the requirements of Solvency II?

Not every insurer will be able or willing to meet the standards of Solvency II, so they will have to be regulated in a different way. But Skinner believes that a solution can be found for them too. “If some companies can’t afford to get into Solvency II, we have to find another way, for example, we may introduce partial assessments,” he says. Moreover, he points out that it is in companies’ interests to meet Solvency II because it will probably mean lighter touch regulation.

Solvency II will be a big step towards creating a single insurance market in Europe – but what about the rest of the world, particularly America?

Skinner, who has recently returned from New York, believes it is vital that the US develops a form of federal regulator that can impose similar standards to those in Solvency II, allowing American and European insurers to trade safely across national boundaries.