UK regulator will not shoe-horn insurers into banking regime

Financial Services Authority (FSA) regulator John Tiner acknowledged that some in the insurance industry were worried that in developing risk-based rules for insurers, UK supervisors would simply apply the proposed Basel II bank capital adequacy Accord to insurance companies. Tiner is managing director in charge of developing insurance regulation at FSA, the UK’s principal financial watchdog.

He told a conference on reforming the regulatory regime for insurance that the FSA wants a risk-based regime for both insurance companies and banks that recognised the difference between the two industries.

That task also required the aligning of the regulatory system with uniform accounting standards, particularly in the direction of fair-value accounting.

Risk-based regulation of insurance companies would, however, embody the underlying purpose of Basel II, namely to ensure that insurers were cushioned against the risks they actually faced as measured by the firms’ own internal systems. The regime would require stress and scenario testing, and would reward good risk management with a lighter hand from the regulator and lower capital charges. Insurance regulation would rest on a Basel-II type three-pillar structure of reserves, supervision and market discipline achieved through greater disclosure of information.

Tiner is leading a team reviewing insurance regulation in the UK. He expects to issue an interim report in September.

The Basel II Accord is designed by the Basel Committee on Banking Supervision, the body that in effect regulates international banking. It will determine how much of their assets major banks will have to set aside as protection against the risks of banking. It is currently due to come into force in late 2006.

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