In the regulatory backlash, insurers are losing control to bankers

If there’s one thing that insurers hate, it is being compared to bankers – especially in the current financial climate. Yet, politicians are making exactly this mistake in their quest to create financial supervision so watertight that markets will never again spring a leak.

Take a look at the new European Systemic Risk Council (ESRC), for instance, composed of three powerful pan-European authorities for banking, insurance and securities. The problem with this mega-supervisor – hastily formed by European leaders in June – will be led predominantly by bankers while the European Central Bank president will automatically be chairman.

Suddenly it is as if the naughty children in the classroom are promoted to prefects. This is ironic since it is precisely insurers’ caution in terms of risk taking that has placed them in a better position to weather the current financial storm than the rest of the financial services. And while some have suffered financial shocks, for the most part the insurance industry has been functioning normally.

Insurers are understandably worried about the future; in fact Munich Re boss Nikolaus Von Bomhard says he is nothing less than “frightened” by the potential influence of bankers over insurers in the new European mega-supervisor because banking representives on the Council outnumber the insurance representives.

“Bankers will hold much greater authority even in matters that impact insurers the most. Already they are making proposals and it really frightens me that there is this prospect of bankers having control over insurers,”says Bomhard.

The ESRC will have powers to investigate cross-border firms and mediate in disputes between national regulators. Among the most contentious areas is that the council could force national governments to take action against insurers or recapitalise banks against their will. Insurers are also fearful that the organisation could act to increase minimum capital requirements in a pro-cyclical manner.

The creation of the ESRC is the latest in a series of events in which decision-makers have attempted to form rules for insurance within a banking context. Three weeks before the ESRC was approved, European commissioner for competition Neelie Kroes asked why insurers should not observe the same competition laws as bankers during discussions about insurers’ block exemption rules.

The overwhelming response from delegates at a public hearing in Brussels was that insurance was unique. The insurance industry argues that the unknown future costs of insured risks and the need for companies to share information on risks for the benefit of customers were two unique aspects of insurance that separate it from banking. The International Underwriters’ Association says comparing insurance to banking is “like comparing deep-sea fishing to dairy farming”.

Insurers await a final decision from the European Commission on whether they will continue to receive a block exemption from competition law on the use of standard policy conditions. Observers believe European decision-makers have gradually come round to insurers’ unique competition exemptions – which had been lined up for removal – in light of the financial crisis.

“There is a growing understanding that regulation that reduces risk, and respects the unique aspects of insurance, is a good thing. However, there is still a long way to go,” says one insurer.

Key points

• European Systemic Risk Council (ESRC) was created by European heads of government in June

• The new supervisor for financial services will be dominated by bankers and headed by European Central Bank chairman

• Insurers concerned by the implications of banker dominance on the new supervisor

• ESRC’s decisions on capital requirements could affect insurers

• European Commission compared insurance to banking in its review of insurance block exemption rules in competition legislation

• Insurers argued that their industry is sufficiently unique in certain areas that some block exemptions from competition law are required and must remain