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Frits Bolkestein

Member of the European Commission in charge of the Internal Market, Taxation and Customs

Regulatory Change: Building a Single EU Market for Insurance

Address at conference organised by theRoyal Institute of International Affairs in association with Reactions Magazine at Chatham House

London, 2nd February 2004

Introduction: current business climate and FSAP

"Hard Times" would perhaps be a fitting title for a speech about the insurance industry at the current time.

The risks are high and investment returns are low, with the insurance industry sandwiched in the middle.

The reasons are well-known: an increasingly litigious society, more people and human activities affected by natural catastrophes and new types of terrorist risks have sent liabilities soaring, while crashing equity markets and falling investment returns have created intense pressure on assets and profitability. And if this were not enough, the bureaucrats in Brussels seem hell-bent on changing the regulatory framework!

Yes I exaggerate. But I should like to congratulate the Conference organisers on their insight. It seems to me that the three conference themes chosen very much identify the three 'Rs' of the day: that is Risk, Return and Regulation.

The themes of risk and return will be explored and tackled by other expert speakers at this distinguished conference. Therefore let me focus my attention on the remaining 'R' of regulation. I would briefly explain the why and the what of the Commission's regulatory action.

So first the why?

Quite simply, if we are to transform Europe into the world's leading marketplace, the creation of an integrated financial market is vital. Without a single, deep and liquid capital market the enormous pool of European savings 10 trillion euro of private savings invested in pension funds, life-insurance and UCITS will not work to the full advantage of European savers and corporate borrowers. We have a unique opportunity to increase the returns for savers, while reducing the cost of capital to business.

Recent estimates suggest that a modest 0.4% improvement in investment returns well within consensus estimates of the benefits from greater integration of Europe's fund industry could increase the size of pension values at retirement by 9%. At the same time, a reduced cost of capital to business will encourage investment, promote growth and stimulate job creation. Comprehensive and competitive insurance cover is essential to the proper functioning of any modern economy.

The Financial Services Action Plan will help to deliver these benefits by removing the regulatory and other public policy barriers which prevent financial market participants from exercising commercial freedoms on a pan-European basis.

So what is the progress with the FSAP?

In terms of legislative delivery, the figures speak for themselves: 36 out of the 42 measures in the Financial Services Action Plan have been agreed. While specific elements of individual proposals have been the subject of fierce controversy, from a macro-perspective, the project has already laid the legislative foundations for a more integrated financial marketplace.

We now need to capitalise on this huge investment. In this respect, the Commission will be seeking to focus energies on the consistent implementation and even-handed enforcement of agreed FSAP rules.

New regulatory architecture and enforcement

The best hope for rigorous implementation and enforcement of FSAP rules lies in the creation of a "network of supervisors". Structured cooperation between national enforcement authorities under the European roof of committees of national supervisors will enable them to orchestrate supervisory practices, develop practical arrangements for real-time mutual assistance and undertake effective peer review.

That is why the Commission has recently come forward with proposals (5 Nov 2003) to extend the so-called "Lamfalussy" approach to the banking and insurance sectors. This approach deserves the support of all those interested in the sound and efficient operation and supervision of European financial markets.

FSAP stock-taking

This is also an opportune time to take stock of the FSAP. The Commission will not rush headlong into announcing new legislative initiatives beyond those already announced in the areas of capital adequacy (Basel II), reinsurance, insurance solvency and corporate governance. We are aware that market participants and regulatory authorities may feel "punch-drunk" after the flurry of recent legislative proposals and consultative processes.

What is required now is a pause for reflection, especially in view of elections to the European Parliament, the renewal of the Commission and Enlargement.

To this end, the Commission services have recently taken the first steps to prepare the ground for a collective assessment of the state of financial integration after the FSAP.

In close consultation with industry bodies and market participants, we have assembled a group of top-calibre market practitioners to assist us in assessing the strengths and weaknesses of the EU legislative framework in the insurance sector. The output of this group expected in April 2004 will serve as the basis for an open, strategic debate on the EU framework for financial regulation and supervision in mid-2004.

But allow me to reassure you. This assessment should not be seen as the precursor to a large new legislative programme in this area. Rather, it should provide a snap-shot of the state of financial integration following 5 years of FSAP activity and serve as a basis for reflection on remaining priorities and equally non-priorities.

So let me turn to the main initiatives that are under way:

Solvency II

Solvency II is a major and ambitious project. It aims at creating a new EU prudential framework. It is the insurance equivalent to Basle II. But do we need this major project? The existing system worked reasonably well and formed the basis for mutual recognition in the single market. However:

Companies are developing better techniques to analyse their risks and to allocate their economic capital.

Nationally, supervisors, like the UK FSA, are developing more effective ways of determining regulatory capital.

Globally, the International Association of Insurance Supervisors (IAIS) is drawing up more detailed rules on solvency.

At the same time, divergences exist in the application of our current rules by Member States. Companies complain about this.

Finally, financial convergence leads to greater risk transfer between different financial sectors. We must avoid regulatory arbitrage.

We therefore decided to initiate the Solvency II project. This will be much more risk sensitive than the current system. In terms of architecture, we have decided to adopt the 3 pillar approach of Basle(1) but obviously adapted to the specific needs of insurance. We want to create a system that focuses on economic capital in harmony with companies' risk management processes

To establish the detailed rules we have set up a process involving all stakeholders. Member States and the supervisory Committee of European Insurance and Occupational Pensions Supervisors (or "CEIOPS") will clearly play a key role.

But industry will also be involved. My services are pursuing a policy of transparency with industry to obtain its input at all stages. Consultation and openness are the key words for this second detailed stage of Solvency II.

International Accounting Standards (IAS)

The questions of solvency lead naturally to the thorny but vital issue of accounting.

The European Union is committed to the use of international accounting standards. As from 1.1.2005 all quoted EU companies, not just in the financial services sector, must use International Accounting Standards for the preparation of their consolidated accounts.

The future accounting rules will be an important cornerstone of the new Solvency II system. Our aim should be to implement accounting rules which are compatible with the likely outcome of IAS work. However, we recognise that there are areas where the specialist and detailed information required for supervision may not be fulfilled by the future international accounting standards. In these cases, adjustments or additions will be necessary.

Furthermore, the Commission is aware of the heated discussion on insurance accounting between the industry and the IASB. The Commission is closely monitoring the situation. We believe it is important that the insurance industry remains in a close and constructive dialogue with the IASB in all our interests.


Solvency II and accounting are major, but long term projects. But in the very short tem, we plan to propose a prudential Directive for reinsurance. Why do we need this Directive? There are several key objectives:

First, it will enhance the protection of policyholders.

Secondly, it will eliminate barriers to cross-border provision of reinsurance services. In the absence of a secure EU framework, some supervisors ask for trust funds or require reinsurers to re-format their accounts to local GAAP.

Thirdly, a secure EU framework will hopefully help us to negotiate mutual recognition agreements with major trading partners, notably the United States.

Finally, a sound EU reinsurance framework enhances macro-economic stability. The IMF and the Financial Stability Forum are concerned about systemic risk in that sector.

So there are good reasons for EU action and in fact it is the industry that originally proposed that the Commission should take an initiative. Our current work is now nearly completed. We have consulted closely with all stakeholders. Our proposal will involve a delicate balance between companies having sufficient solvency to ensure a robust and secure system, without overburdening them with excessive capital requirements.

International aspects

Before concluding, I must mention our international work. Insurance, particularly re-insurance, is a global business. Poor or inconsistent application of prudential rules creates distortions of competition, undermines global stability and negates market liberalisation achieved through GATS initiatives.

For these reasons the Commission actively supports the IAIS (International Association of Insurance Supervisors). While the IAIS is still relatively young compared to the Basel Committee, it is maturing fast as an international standard setter for insurance.

EU-US Insurance Dialogue

With the US we are not waiting for the IAIS to bear its fruits. We have a bilateral EU-US regulatory dialogue in all the major financial services' sectors. Mutual understanding of each other's prudential regulation is a sine qua non to improving bilateral market access. We are engaged in intensive discussions with our US counterparts, but the hard part is still to come. To put it bluntly can we eliminate or at least significantly reduce collateral requirements?

It is too early to say whether we will achieve this goal. We will need much more hard work if we are to convince all our US colleagues of the soundness of our rules and supervision, to such an extent that they feel comfortable and grant better market access. I know we can count on the active support of our supervisors and industry in this difficult task.


In concluding, I hope I have reassured you that no new tsunami wave of regulation is being hatched in Brussels. Our objective remains an efficient and integrated financial market for Europe. To achieve this objective we need to stay on course and complete the measures planned under the Financial Services Action Plan.

These measures are designed to benefit the consumers as well as give industry greater opportunities. And we need the active involvement of both regulators and industry if they are to succeed.

(1)Pillar 1: quantitative capital requirementsPillar 2: supervisory reviewPillar 3: disclosure

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