Moving towards Macro-governance? IAIS2010

A report on the 17th Annual Conference of the International Association of Insurance Supervisors held in Dubai, UAE in October 2010 under the auspices of the Dubai Financial Services Authority.

It is interesting that this year’s IAIS Conference held in Dubai more or less coincides with the annual reinsurance convention of Baden-Baden, Germany. Intriguingly, irrespective of the array of topics and the different audiences in these gatherings the key ‘take-home’ message for both events is similar; there is a need for greater discipline and cooperation whether at company, market or industry level. The two distinct audiences, i.e. regulators at IAIS on the one hand and market practitioners at Baden-Baden on the other hand may differ in opinion as to the extent or nature of governance but there is nonetheless a unifying theme between the two, perhaps synthesized in the words governance,  discipline and cooperation in an otherwise competitive market.

One of the by-products of the financial crisis has been a sustained soft market in both retail insurance as well as reinsurance as excess supply created during the years of plenty seeks to fill the demand void for the years that followed. The sustained deflationary market is being viewed by many as a threat in various insurance industry or practice strata. For example, quoting Mr. Ludger Arnoldusson, member of Munich Re’s Board of Management at Baden-Baden this October, the company will continue to walk away from inadequately priced business.  Similarly, Mr. Martin Albers (Swiss Re) at the same convention renewed its call for companies to focus on profits rather than premium. In another convention, on another continent and for a different audience, speakers at the IAIS Conference in Dubai debated measures to counter this adverse state of affairs such as through the implementation of the Comframe Directive, Future Safety Net & Resolution Framework and concerted efforts in the implementation of IAIS Standards internationally.

The Comframe Directive is aimed at supervising internationally active groups. The industry’s view encapsulated in a recent Geneva Association paper is that the insurance industry per se is not systemically relevant. In a nutshell this means that it is largely believed that if an insurance company fails, because of such factors as the nature of the business, the way it would be run off etc. its failure would probably not have widespread negative repercussions on the wider economy. This being stated, there are some companies which, because of for example their size or international reach, may be deemed to be systemically relevant. Among these one would include the larger international active insurance groups. The objective of the Comframe Directive is to provide the necessary framework for the supervision of such groups. Monica Mächler of the Swiss Financial Market Authority, aptly described Comframe as a multilateral, multi-disciplinary and multi-perspective framework for conglomerate supervision.  Whilst in principle, a recommendation for conglomerate supervision in respect of large, international and systemically relevant insurance groups is a step in the right direction various industry figures provided their perspective on what is essentially a pioneering project in marco-governance. Michael Butt representing the Bermuda Association of Insurers stated, “If we are adding a new layer of supervision then we need to add efficiency and not complexity and cost.” Karel Van Hulle, representing the European Commission commented that Solvency II may be a good model for ComFrame to learn from adding however that if it is designed as a ‘principle-based’ framework it would run the risk of becoming irrelevant. There was also consensus by the panelists that the international architecture for insurance supervision is currently weak and this was, perhaps further attested by a better than the Jones’ sentiment fomenting into a friendly but heated debate between the US and EU counterparts on the panel. 

In his key note speech earlier in the conference, Lord Adair Turner, Chairman of the UK Financial Services Authority stated that the keys for financial services regulatory success, which could also be applied to the ComFrame Directive, were that firstly such regulation should be sufficiently consistent to eliminate regulatory arbitrage and secondly it would need to be continuously updated particularly on inter-connected and/or systemic risks. One would also need to take into account that internationally active groups have more to do with complexity than they do with size. A typical case, for example, would be a Lloyds syndicate writing business with as widespread a portfolio of business as that of a much larger international reinsurer active in several countries.

The objectives of the Conframe Directive, once implemented would be twofold, i.e. addressing the complexity of a group and reducing the complexity of an otherwise fragmented regulatory approach. This signals an expansion of the current principle of ‘local’ regulation of entities even if forming part of a larger conglomerate to macro-governance.

Prof. Fernando Coloma, from the Chilean Superintendence of Securities & Insurance, speaking on the topic of Concerted Efforts in the Implementation of IAIS Globally drew examples from Basel II and its relative weakness, exposed by the crisis, in perhaps relying too much on risk models. The lessons that can be elicited from this as the Solvency II implementation deadline approaches are the need for:

  • Leverage preservation in addition to risk-based capital implementation;
  • Preservation of prudential limits of investment;
  • Postponement of the internal model implementation.

The internal model issue is the subject of often heated debates between various regulators in view of the relative subjectivity surrounding it and hence the inherent possibility of regulatory arbitrage.

On the topic of global implementation of IAIS standards Mr. Jonathan Dixon, from the Financial Services Board of South Africa added that regulation cannot be achieved only through the widespread enactment of rules and/or core principles but through their strong implementation. From a Middle East perspective this is particularly relevant as regulation can only be at most as strong as the supervisory regime that underpins it.

The IAIS Conference topics were inevitably discussed within the context of the current financial crisis. Various topics focused specifically on this. For example, Mr. Adel Mounir of the Egyptian Financial Services Authority led a discussion panel on the Impact of the Global Financial Crisis on Policy-holders & on Market Conduct Issues. An earlier panel in the conference debated the similarities and differences between supervisors’ responses to the 2009 crisis.  Mr. Ian Johnston, Deputy Chief Executive, DFSA, in the second day’s keynote speech set the tone for one of these debate panels. The underlying theme of his speech was that financial boundaries have shifted geographically as a shift in financial strength was witnessed during the past decade from West to East. Suffice to mention that the Middle East share of global trade doubled between 2000 and 2008. Although an increase in the share of wealth does not mean that the wealthier can supplant influence, it does mean that more equitable decision sharing is warranted.

Also related to this topic Mr. Jose Ribiero, (Lloyds of London, UK) holding the fort for industry practitioners on a panel with higher regulatory representation argued the case for micro (rather than macro) governance quoting IMF findings when stating that the most vulnerable consumers are retail clients. He urged regulators present not to adopt a “one size fits all approach” in spite of buyers and tax-payers currently demanding higher consumer protection.

The ultimate panel in the IAIS Conference delivered presentations on Takaful and regional issues. More specifically, this panel discussed the ability of Takaful operators to restore market confidence post-crisis.

Allusions and allegories of doors, walls, windows, fairy-tale figures and a Basel Museum abounded to dress up what is otherwise an ostensibly pedantic subject-matter of laws, rules, codes, core principles, regulation and governance within a framework of arguably the worst financial crisis since the Great Depression. In addition to stressing the importance of greater market discipline and cooperation, IAIS2010 also underlined that “Safe is good,” and, in the words of Ms. Danielle Boulet, from the Autorité des Marchés Financiers, Canada, “If safe is boring then boring is good.”

James Portelli, the author, is a Chartered Insurance Practitioner a Fellow of the Institute of Risk Management and of the Chartered Insurance Institute as well as a CII Morgan Owen Prize Winner. He has been active in insurance in Europe and the Middle East for over 20 years, first moving to the GCC in 1998.

About insuranceguild

Sharing Knowledge for the Common Good: Many associate guilds with British pre-industrial era. However, predecessors of guilds are found as far back as the 3rd century BC in the Roman Empire. They were also present in various civilizations including Ptolemaic Egypt, India, Iran, China, African dynasties as well as various European countries such as medieval Germany and Italy. A guild is typically an association of practitioners from the same trade. In addition to protecting and developing crafts, trades and business, guilds also helped foster a learning environment among members. Through this platform I wish to share articles of an insurance / risk management nature and hopefully generate comments from readers that would help to enrich my knowledge as well as the knowledge of other insurance and/or risk management practitioners. About the Author: A Chartered Insurance Practitioner by profession, James Portelli is also a Fellow of the UK Chartered Insurance Institute and of the UK Institute of Risk Management and holds an MSc in Risk Management from Glasgow Caledonian University, U.K. James has been active in insurance and risk management since 1990 and in training since 1987. He started his insurance career in general insurance underwriting and agency/broker management with Middlesea Insurance plc (also forming part of the company's Risk Management Implementation Committee and assisting in captive insurance development). He first moved to the Middle East in 1998 occupying senior training, technical, consulting, business development, risk management and strategic development roles. James is also a 2008 CII (UK) Morgan Owen Prize Winner and the 2011 IRM (UK) Steve Butterworth Award Holder.
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