UK parliamentary group, the House of Lords Industry and Regulators Committee, has told the government that following an inquiry into commercial insurance and reinsurance regulation, it believes the “inflexible culture” of the regulators has held back the countries ambitions to develop new forms of business.
The Committee-led inquiry wanted to assess the effects of commercial insurance and reinsurance regulation on the competitiveness of the London market.
Over recent weeks, the Committee heard from industry representatives and trade-bodies who described a situation where regulations have failed to support the re/insurance industry in its ambitions to attract more business to the UK.
In particular, ILS was singled out by the CEO of industry trade-body the London Market Group (LMG), who said the failure of the UK to gain much traction in ILS is an example of regulation failing to support the market’s ambitions.
The regulators were also quizzed by the Committee, with the PRA saying it recognises the insurance-linked securities (ILS) regime in the country has faced challenges since its launch, adding that it intends to evolve the system to make for swifter and easier issuance conditions.
Now, the Committee has delivered its initial thoughts following the series of meetings with industry experts, writing to the Economic Secretary to the UK Treasury, John Glen MP, who also gave evidence.
Lord Hollick, Chair of the Industry and Regulators Committee, commented,“While the Committee welcomes the continued success of the London Market, we are concerned that the UK may lose out on new and fast growing areas of business because of an overly inflexible and bureaucratic regulatory framework. There is a need for regulators to consider whether current rules could be applied more proportionately and regulators should ensure that their rulebooks are achieving their objectives in the most efficient way possible.
“The Committee agrees that there are strong arguments in favour of the Government’s proposal of a secondary competitiveness and growth objective for the financial regulators, enabling them to consider to a greater extent their impact on the industry in addition to their impact on the safety and soundness of firms. However, to ensure that regulators’ behaviour is genuinely responsive to the secondary objective the Government and regulators must formulate clear performance measures that will be reported on annually, ensuring that this Committee and others can hold the regulators to account for their performance.”
Singling out the UK’s efforts to attract insurance-linked securities (ILS) business, the Committee said that at the inquiry it heard that, “an overly inflexible culture within the regulators may have inhibited the development of new forms of business within the UK commercial insurance and reinsurance industry, such as insurance-linked securities and captives.”
The letter to the UK government minister also explained that a, “lack of proportionality can hinder the development of new forms of insurance in the UK, such as insurance-linked securities, due to delays in the UK’s regulatory processes, where other jurisdictions have found greater success with fast-track methods and a more welcoming regulatory environment.”
Tasking the regulators with having a secondary objective of increasing the competitiveness of the UK insurance and reinsurance market and driving growth should help, but whether it will be enough to get the regulators past their reticence to make ILS applications much simpler and swifter, or to allow approvals to be notifiable for more complex, repeatable ILS arrangements remains to be seen.
But this is a sign that the concerns that the UK may have missed an opportunity when implementing new regulations, such as for ILS, run deep and there is broad agreement that things could have been done much better.
The good news is that the regulators also appreciate the need to be more responsive to the needs of the industry, one example being their engagement with Lloyd’s and its desire to expand the regulatory approvals of its insurance-linked securities (ILS) structure London Bridge Risk PCC.
That suggests a regulator that is wanting to do more and to prove itself to be more flexible, which bodes well for the ambitions of the UK and London insurance and reinsurance market to become better connected with ILS capital and opportunities.
It is a little unfair to level the failure of the UK’s ILS offering to gain much traction in its first few years solely at the door of the regulator though.
Entrenched interests of parties involved in setting the direction also tend to hold back the development of any new framework, such as for ILS business.
While these interests want to broaden the UK’s platform offering, that’s not at the expense of disintermediating themselves, or cannibalising their own positions in the market chain. This can also hold back innovation and as a result traction, just as much as a cautious regulator (we would suggest).