ASSESSING DAMAGES

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THE LANDSCAPE OF INSURANCE REGULATION A EUROPEAN
VIEW Professor Chris Parsons Cass Business
School, City of London

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TOPICS
A look backwards 1 Origins of insurance
and its evolution in Europe 2 Different
insurance models Alpine and Maritime
3 Harmonisation of regulation in Europe A
look forwards 1 Regulation after the financial
crisis 2 The interplay of social insurance and
private insurance 3 New sources of regulation
and control
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A LOOK BACKWARDS .

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EARLY DEVELOPMENT OF INSURANCE
? Risk sharing by Chinese merchants (2,500
B.C.) ? Early (marine) bottomry contracts
(Babylon, Mesopotamia, 2,500 B.C.) ? Roman
burial societies
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EVOLUTION OF INSURANCE IN EUROPE
Two cradles (birthplaces) of
insurance 1 The Alpine Mountains Early
mutual fire and livestock insurance
schemes 2 The sea Marine insurance in
Italian sea ports then, increasingly, in
London
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EVOLUTION OF INSURANCE IN EUROPE
Two models of insurance 1 The Alpine
model Mutuality, community solidarity, risk
spreading without fine segmentation Spiritual
home Munich, Zurich, Trieste 2 The Maritime
model Entrepreneurial, competitive,
profit-oriented, with maximum segmentation of
risk Spiritual home Lloyds of London
Michel Albert, Capitalism against capitalism
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EVOLUTION OF INSURANCE
? European insurers exported these two
models through colonialism and the influence of
their overseas trading companies ? In the late
19th century a third model emerged with the first
social insurance systems (beginning in Germany,
1880s)
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THE SINGLE EUROPEAN INSURANCE MARKET
? The aim was to allow insurance to be bought
and sold freely in Europe, and not affected by
differences in national laws and regulatory
systems ? But there were two different models
of regulation
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THE ALPINE MODEL (e.g. FRANCE , GERMANY)
Tight regulation. The approach was more
compulsory than discretionary, for
example ? State control of premium levels or
guidelines for the calculation of premiums ?
Compulsory notification of changes in
premiums ? Prior approval needed for the
wording of insurance contracts, and/or
standardisation of clauses ? Some insurance
monopolies ? Some compulsory specialisation of
insurers
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THE 'MARITIME MODEL (e.g. UK, IRELAND,
NETHERLANDS)
Lighter regulation. And preference for self
regulation. ? No price control, provided
insurers have set up the necessary actuarial
reserves against their liabilities ? No
specific restriction on policy wordings ? No
prior approval required - no standardisation of
insurance contracts or clauses ? No
monopolies or compulsory specialisation ?
Supervisory authorities have wide discretionary
powers and self-regulation was often preferred
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THE EUROPEAN COMPROMISE
? Stronger prudential regulation leading
eventually to Solvency II (unified European
regime for capital adequacy and risk management
standards, coming into force in
2013) ? Abandonment of all (state) regulatory
controls over insurance prices and policy
terms ? Market regulation (consumer protection
rules) set at national level
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A LOOK FORWARDS .

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INSURANCE AFTER THE FINANCIAL CRISIS
The 2007-9 financial crisis in Europe and the
US has intensified the debate on a number of
issues, e.g. 1 The benefits, or otherwise, of
convergence in financial services 2 The
adequacy, or otherwise, of systems of prudential
regulation for insurance 3 Indirectly, the
wider social role of insurers
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CONVERGENCE IN FINANCIAL SERVICES
INSURANCE INDUSTRY
BANKING INDUSTRY
SECURITIES INDUSTRY
Regulators once kept these circles apart .....
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THE CIRCLES HAVE CONVERGED .....
Bancassurer
INSURANCE
BANKING
Asset Manager Risk Manager (ART structures)
SECURITIES
Investment bank
Gerry Dickinson Cass Business School
Financial conglomerate
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CONVERGENCE IN FINANCIAL SERVICES
The literature on convergence presents a
mixed picture, claiming ? Benefits e.g.
economies of scale and scope, diversification
benefits, enhanced innovation, better consumer
choice and convenience But also ? Drawbacks
e.g. increase in risk (especially systemic
risk), consumer harm through monopoly power,
management problems, lack of transparency,
additional complexity of regulation
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WHICH INSURERS SUFFERED MOST IN THE FINANCIAL
CRISIS?
1 Companies which dabbled in risky areas of
structured finance (e.g. AIG, Swiss
Re) 2 Bancassurers integrated financial
services providers and insurers having close
affiliations with banks 3 Specialist financial
guarantee insurers (e.g. US monolines) 4 Firms
writing various forms of credit
insurance 5 Insurance firms holding a high
proportion of risky assets (some US life
insurers especially)
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REGULATORY AND MARKET ISSUES
? Will the circles move apart again and will
regulators push them apart? - restrict
convergence within financial services? ? To
what extent is insurance activity compatible with
banking what models of bancassurance are most
viable? ? Is there a case for stronger
regulation of quasi- insurance products such as
credit default swaps (CDS)? ? How should
financial conglomerates be regulated what
form should the regulator take?
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SOLVENCY II
? New, unified European system for capital
adequacy and risk management standards, coming
into force in 2013) ? Three pillars (Capital
adequacy, Risk management and corporate
governance, Transparency and reporting
standards) ? Solvency II is principle-based
rather than rules-based ? Solvency II is dynamic
and model-based, not static and volume/factor
based ? Emphasis on risk management and
corporate governance not found in many other
systems (e.g. US RBC regime)
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IMPACT OF SOLVENCY II IN EUROPE
? Heavy short-term compliance and development
costs, especially for small insurers ? Longer-te
rm benefits include better policyholder
protection, lower cost of compliance (especially
for pan-European firms), more competition? ? Sol
vency II may bring about some changes in market
structure and also in the relative cost of some
lines of insurance ? Possible knock-on effects
on other financial markets (e.g. further shift
of insurers investments away from equities,
less liquid assets and banks generally)
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IMPACT OF SOLVENCY II BEYOND EUROPE
? Size of European insurance market (about 40
of world market) will make Solvency II
influential ? Solvency II may export its
principles because insurers wishing to enter the
EU will undergo mutual recognition
assessment ? A number of major markets (e.g.
US, China) are re- evaluating their own systems
and observing Europe ? Academic approval for
Solvency II (generally)
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SOCIAL INSURANCE AND PRIVATE INSURANCE
? Europe has developed extensive (and
expensive) social insurance systems over the
last 130 years ? Historically, many risks have
been shared with private insurers ? For some
risks there has been the option to insure
privately or through a state system ? For
other risks has been provided through a
combination of private and public insurance
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SOCIAL INSURANCE AND OTHER PUBLIC PROGRAMMES
PRIVATE INSURANCE
Shared risks e.g. accidents, sickness,
disability, unemployment, pension provision
Risks wholly or mainly insured under social
insurance or other State programmes
Risks wholly or mainly insured under private
insurance programmes
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SOCIAL INSURANCE AND PRIVATE INSURANCE
? Social insurance systems in Europe are
under extreme pressure ? Main source of
pressure is demographic e.g. ageing
populations, increased longevity ? The
financial crisis has increased this pressure
(need to cut public spending and reduce budget
deficits) ? Result is a shift away from social
insurance towards private insurance
(especially pensions, health insurance, work
accident insurance)
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SOCIAL INSURANCE AND OTHER PUBLIC PROGRAMMES
PRIVATE INSURANCE
Shared risks
Risks wholly or mainly insured under social
insurance or other State programmes
Risks wholly or mainly insured under private
insurance programmes
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SOCIAL INSURANCE AND PRIVATE INSURANCE
? The shift to private insurance presents
opportunities for insurers and potential
benefits to consumers (more competition, greater
efficiency?) ? It also presents challenges
. ? Because social insurance schemes are
normally open access (no right to decline
applicants) . ? And social insurance schemes
are normally not underwritten (no right to
vary premiums according to risk)
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SOCIAL INSURANCE AND PRIVATE INSURANCE
? Private insurers that assume previously
socialised risks will have to accept stricter
control of pricing, policy terms and risk
selection ? Regulators will have to find the
right balance . ? Consumers must be
protected, but insurers must be allowed to use
their skills and given incentives to participate

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THE EFFECT OF EQUALITY LAWS
? Europe is extending the scope of its
equality laws ? Basic proposition people
should not be treated differently because of
things which they did not choose and cannot
change ? This includes factors such as race,
gender, age and health condition ? Originally
equality laws applied mainly to areas such as
employment they are now being extended to
financial services, including insurance
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CASE STUDY THE EU GENDER DIRECTIVE
? Gender may be a relevant risk factor in
many forms of insurance e.g. life insurance,
pensions and annuities, health insurance, motor
insurance ? The EU Gender Directive (law)
forbids sex discrimination in financial
services, but originally had a limited exception
which Member States could apply ? Member
States may permit proportionate differences
in individuals' premiums and benefits where the
use of sex is a determining factor in the
assessment of risk based on relevant and
accurate actuarial and statistical data
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CASE STUDY THE EU GENDER DIRECTIVE
? The limited exception allowing
proportional differences in premium based on
accurate statistical data was difficult to
apply ? Some European states did not adopt the
exclusion (so had unisex premiums, for at
least some lines), some European states adopted
it, allowing insurers to charge different rates
for men and women ? The European Court has now
declared the exception illegal . ? So Europe
will have unisex premiums for all lines of
insurance including, life, pensions/annuities,
health insurance, motor insurance etc.
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THE EFFECT OF EQUALITY LAWS
? The next battle-ground in Europe may be
other forms of discrimination (e.g. age or
disability)
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