Basel II principles can fit insurers, UK regulator says

The principles of risk-based regulation embodied in the Basel II bank pact can be applied successfully to insurance companies, the UK’s chief financial regulator said today.

Insurance companies are different from banks, but the “conceptual framework” of the risk-based Basel II bank capital adequacy Accord can fit insurers, said UK Financial Services Authority (FSA) chairman Howard Davies. He was replying to reporters’ questions after the FSA’s annual meeting in London today.

The three-pillar structure of the Basel II Accord involving capital charges, close supervision by regulators and greater disclosure of a firm’s risk management policies, will be reflected in forthcoming changes to the way insurance companies are regulated in the UK, Davies said.

The FSA intends to bring in new risk-sensitive rules governing the capital adequacy of some 900 insurance firms from 2004. It is part of the agency’s overall plan to bring the whole of the UK’s financial services industry under risk-based rules, as distinct from general, one-size-fits-all regulation.

FSA officials regard reform of insurance regulation as particularly urgent in the light of recent disasters, including the continuing saga of the troubled Equitable Life and the failure last year of Independent Insurance as a result of apparent fraud. Both events are evidence of the under-capitalised structure of the industry and its antiquated supervision, the officials believe.

Davies told today’s annual meeting the Equitable case remains particularly difficult due to the firm’s “finely balanced financial position” since it lost a key legal case two years ago. The judgement left Equitable, the UK’s oldest mutual life assurer, with uncovered liabilities of around £1.5 billion ($2.4 billion). As a result, the retirement incomes of up to one million people are likely to be less than they planned.