Rules of Engagement: Global Regulatory Reforms and the Insurance Industry

The Geneva Papers, 2011, 36, (325–329) r 2011 The International Association for the Study of Insurance Economics 1018-5895/11 www.genevaassociation.org Editorial Rules of Engagement: Global Regulatory Reforms and the Insurance Industry Patrick M. Liedtke Editor-in-Chief of The Geneva Papers on Risk and Insurance —Issues and Practice The Geneva Association, 53 Route de Malagnou, Geneva CH-1208, Switzerland. E-mail: The Geneva Papers (2011) 36, 325–329. doi:10.1057/gpp.2011.16 As this editorial for the July 2011 issue of The Geneva Papers on Risk and Insurance— Issues and Practice is written, multiple, massively important regulation initiatives are hitting the insurance industry around the world at the same time. They range from changes in the financial services framework following the lessons from the most recent crisis, to new and more consumer protection initiatives, from further changes to international financial reporting standards to the profound solvency reforms, from modifications of the tax systems to transformations of old-age security arrangements. For any observer of the industry, it has become difficult to follow all of these reforms simultaneously and then trying to understand how they will affect the prospects of the insurance business in the longer term. It is a hallmark of The Geneva Papers on Risk and Insurance—Issues and Practice to discuss those issues that influence the insurance and risk management business in a strategic manner—and the massive regulatory changes in the works right now will change the industry profoundly and to long-lasting effect, which is why we decided to dedicate part of this issue to regulation. In an additional and much more comprehensive effort, my colleague Jan Monkiewicz and I just published a book called The Fundamentals of Future Insurance Regulation and Supervision—A Global Perspective. Written by supervisors, leading academics, researchers and insurance industry experts, the book offers a diversified and holistic perspective on how the regulatory and supervisory framework for the insurance sector will develop in the future. In seven parts, the book contains articles on the global regulatory framework, the supervisory and market dimensions of insurance, stakeholder protection and international issues as well as perspectives from the developed and emerging market perspectives. From these contributions, as well as from the papers on regulation in this issue of The Geneva Papers on Risk and Insurance—Issues and Practice, it becomes clear how extremely challenging and busy these times are for all those concerned with financial regulation and supervision in insurance. Suddenly, highly sophisticated and complex issues have become a subject matter of heated political debate in public as well as in private discussions, and the appetite for (above all readily comprehensible) analytics of our industry skyrocketed. Key actions taken in the midst of the financial crisis have gained in relevancy, especially where they are not only purposed for immediate fire-fighting, but meant to make a contribution The Geneva Papers on Risk and Insurance—Issues and Practice 326 to more stable and resilient financial systems. And while it clearly is in the larger public interest that financial markets be stable and sustainable, it is equally desirable that they be efficient and effective in delivering their services. Unfortunately, these aims are not always fully compatible and at times even directly opposed to each other. Good regulation ought to take care of this conflict. It is there to ensure competitive, solvent and fair markets in which all key stakeholders are adequately protected. It should also seek to ensure that quality, reasonably priced products and services are available from reliable sources when needed. The Chairman of The Geneva Association’s Scientific Advisory Committee, Harold Skipper, and his colleague Robert Klein, both at Georgia State University, set out four key principles many years ago for proper insurance regulation: adequacy, impartiality, minimal intrusiveness and transparency.1 While I fully agree with their work and the rationale leading to their principles, it is equally clear to me that the current processes defining the new regulatory framework for the insurance industry are unfortunately often enough not adhering to these standards. Whereas the issue of adequacy is one that can and is discussed heatedly by policy-makers and the industry and open to much subjectivity, the issues of minimal intrusiveness and transparency are easier to objectify. Unfortunately, there seems to be right now a general preference for speed and political expediency over analytical depth and proper research. Given the scope of the recent financial crisis and its consequences—which have of course inspired many of the systemic reforms undertaken and under discussion worldwide—it is not surprising that policy-makers would want to comprehensively deal with the perceived shortcomings of our current financial services systems—especially as regards systemic financial stability, the major concern during the crisis. Furthermore, an explosion of regulatory action always seems to appear after major failures in an existing financial infrastructure—so this is nothing new. And the usually proportional rule of the scope of new regulation mirroring the size of the crisis generally applies. So, the bigger the failure, the more sweeping the reforms will be that are proposed and subsequently implemented. However, what is unsettling is that many reform projects apply a perceived urgency that appears to sacrifice too readily methodical analytics and careful investigation for quick action. In the quest for solving the problems at hand, rapid action is desired and the time for meticulous examination seems too long-winded and politically inopportune. This is a shame. Regulation, especially if it is comprehensive and meant to stand the test of time, needs a proper gestation period and enough time for appropriate consideration and thorough discussion. Equally unsettling is the absence of much-requested transparency from some regulatory initiatives. It is more than just unfortunate that some regulatory bodies seem to regard outside comments of their work as distractions or, sometimes even worse, as inappropriate interference in their work. Since one of the key roles of The Geneva Association is to open up discussions and channel academic and industry intelligence into key debates, we are sensitive to any shortcomings in this respect. This has little to do with the advocacy of special positions and everything with trying to 1 Skipper and Klein (2000). Patrick M. Liedtke Editorial 327 make sure the right intelligence is available to the right groups, especially when they are about to take far-reaching decisions. Hopefully, The Geneva Papers on Risk and Insurance—Issues and Practice and other such journals and publications can help achieve this for insu (...truncated)