Regulation of insurance sector to have squeezed focus

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One does not often think of regulators as heroic types.

There are few films or TV dramas in which regulators are portrayed as heroes in the same way that police officers, fire fighters, doctors and nurses or lawyers are.

Even (Taiwan OTC: 6436.TWO - news) the financial crisis, which threw a spotlight on the way in which regulators had (or had not) been doing their jobs, did little to change this.

And, where the book has been thrown at wrongdoers in the financial services sector, it has tended to be the law enforcement types, rather than the regulators, that have garnered most of the publicity and the accolades.

Yet Sam Woods, the chief executive of the Prudential Regulation Authority and deputy governor of the Bank of England for prudential regulation, has today made a decent fist of highlighting how regulators genuinely can improve lives.

All the more striking is that he has done so in the unpromising territory of a speech on regulation of the insurance sector - a chewy subject at the best of times.

The big story in insurance regulation over the last decade or so has been Solvency II - an EU directive that was introduced in 2009 and that came into force at the beginning of 2016.

The idea behind it was to harmonise regulation of the insurance sector on an EU-wide basis.

On the face of it, the directive covered issues such as consumer protection, corporate governance and supervisory issues.

However, so far as most bosses in the insurance industry were concerned, the main element in it involved capital - and the amount that insurance companies must have in order not to become insolvent.

This sounds like dry, arcane stuff, but is vitally important. When insurance companies become insolvent, they cannot keep the promises they make to customers, with huge real-life consequences.

To remind himself of this, Mr Woods told his audience on Monday, he spends some time looking at individual policyholder cases to remind himself what was "going on at the frontline".

He added: "One case in particular made a powerful impression on me.

"A young man got in touch with an insurance company to claim on his critical illness cover. The reason for the claim was that his four-year old son had brain cancer.

"The cancer was in a difficult place and the best-case outcome from a forthcoming operation was grim. The worst-case was the grimmest of all.

"The father was calling to claim on the policy in order to help cover the ancillary costs to the family while the NHS took forward this procedure.

"The company did the right thing and it had enough money to do the right thing. I and others were only exposed to this case in a wholly anonymised way, for data protection reasons.

"Despite this, I have never been in a meeting where so many people wept."

Mr Woods's point is that, partly because regulators had been doing their job properly, the insurance company was in a position to do the right thing.

Monday's speech also signals another important direction in which insurance regulation is heading: the PRA clearly intends to focus its resources on protecting policyholders for whom a failure of an insurer would be most severe.

For Mr Woods, a Kiwi, this is going to be in areas such as life insurance and personal pensions.

As he notes: "Five million (UK) households have life insurance and two million have personal pensions.

"Some of the oldest and most vulnerable people in our society are reliant upon income provided by insurers under very long-term annuity contracts, into which they have invested their life savings… the financial harm caused by the failure of an insurer in this space would be considerable and it is quite right that the PRA devotes significant resources to supervision of this sector, and that we have a very low appetite for any firm being unable to honour its promises."

He accepts this means those offering insurance protecting people against, for example, the loss of a mobile phone may not face quite the same level of regulatory supervision.

Is this the right approach to take? Those who were burned by the failure of Equitable Life to keep past promises it made to its policyholders would undoubtedly say it is.

But some may be alarmed by Mr Wood's implication that more stringent regulation of insurers in sectors such as life insurance automatically means a downgrading in the quality of consumer protection elsewhere.

There is a balance to be struck. If regulation in some of these other areas proves too lax, the consequence could be mis-selling, or worse.