The Insurance Industry: Rebuilding Confidence in Europe

The Insurance Industry:
rebuilding Confidence in Europe
February 2009
The ABI is the voice of the insurance and investment industry. Its members constitute
over 90 per cent of the insurance market in the UK and 20 per cent across the EU. They
control assets equivalent to a quarter of the UK’s capital. They are the risk managers of
the UK’s economy and society. Through the ABI their voice is heard in Government and
in public debate on insurance, savings, and investment matters. And through the ABI they
come together to improve customers’ experience of the industry, to raise standards of
corporate governance in British business and to protect the public against crime. The ABI
prides itself on thinking for tomorrow, providing solutions to policy challenges based on
the industry’s analysis and understanding of the risks we all face.
Foreword
A new European Commission and European Parliament will be in place over
the next 18 months or so. We all need to be clear about our priorities for Europe
in 2009-2014.
In this paper we have provided a set of principles to guide the future of regulation.
Insurance is fundamentally different from banking. Solutions for banking must not
automatically be applied to them. Insurers will inevitably face challenges over the
coming years but they entered the financial crisis with stronger capital positions than
banks. This has and will continue to assist them to weather the economic storm.
The overriding goal is the restoration of confidence in European financial markets.

This confidence must be restored quickly. The weakening of trust between national
regulators is, however, a major obstacle to progress. In particular, we must not allow
fragmented supervision to develop along national lines and set the Single Market back
years. To prevent this, revisions to the European supervisory framework are needed.
The challenge over the coming months and years is to ensure that regulation is based
on strong principles, not rules. Principles require excellent judgment and high quality
supervision. Neither is easy to achieve but both provide better safeguards than tick-box
regulatory rule keeping. Nor can we allow protectionist pressures to develop. We must
keep markets open and avoid a “fortress Europe” philosophy. Open and liberal capital
markets have been critical to the success of the European Union and will be critical to
Europe’s emergence from the financial crisis.
With an uncertain economic outlook ahead, the need for close engagement with Europe
has never been greater. We will support the new Commission and Parliament as they
seek to restore confidence and trust in the financial services sector.
Stephen Haddrill
Director General, Association of British Insurers
The Insurance Industry: Rebuilding confidence in Europe 1
Contents
Page
Executive Summary 2

Chapter 1: The Economic Context 3
Chapter 2: Principles for Responding to the Financial Crisis 7
Chapter 3: Revisions to the EU Regulatory Framework 10
Chapter 4: Preserving Working Capital Markets 13
Chapter 5: The Need for Global Solutions 18

2 The Insurance Industry: Rebuilding confidence in Europe
Executive Summary
The economies of all European Union Member States face very challenging times.
The fallout from the financial crisis has spread from the banking sector to the real
economy, increasing unemployment and hitting consumer confidence. However,
insurers have weathered the financial crisis well. We have a key role in protecting
citizens and business from the crisis.
Insurers also have a key role in restoring confidence and getting the economy going
again. The work of the new European Commission and European Parliament needs to
be undertaken with this in mind.
In this paper, we have set out a robust set of principles to guide European policy
makers as they face the challenges ahead. Decisive but considered action is needed
from Brussels. There is a need to restore confidence and trust between supervisors at
European level. We must also avoid rules-based responses. A balanced approach
is needed.
In order to restore confidence and to ensure a consistent regulatory approach across

the Single Market, we propose closer policy co-ordination between the Level Three
committees. Now is also the time to start thinking about a revision of the European
supervisory framework. Careful consideration is required. Radical as well as evolutionary
options need to be looked at. But the goal is clear: a regulatory structure in which all
parties collaborate, which promotes security and competition in a proper balance, and
which earns the confidence of consumers and industry together.
Capital markets are critical to the economic recovery across Europe. They need to be
as deep and liquid as possible and as many categories of investors as possible must
be able to participate. But there is room for improvement in the way such markets
operate; greater transparency for investors is needed in addition to stronger corporate
governance arrangements.
Solutions developed at European level are only part of the answer. The European Union
must work with our international partners and push for a globally agreed approach.
We urge world leaders meeting in London on 2 April to agree concrete proposals to
get the world economy functioning properly again. Leaders should also encourage a
successful conclusion of the Doha Round of trade negotiations as soon as possible.
Given the nature of the financial crisis, there is a need for truly global solutions.
The INsuRaNCe INdusTRy: RebuIldINg CoNfIdeNCe IN euRoPe 3
Chapter 1: The Economic Context

The importance of the insurance industry
It is critical that consumers retain confidence in insurers, not

least because the insurance industry plays an essential role in
the lives of millions of European citizens and businesses.
The UK insurance sector is the largest in Europe and the ABI’s
over-riding objective is to ensure insurers are able to serve
customers well – they are at the heart of insurance. The industry
provides a diverse range of services – from protection against
financial loss to making provision for long-term financial security.
In 2007, the UK insurance industry paid out:
• £193 million each day to pensioners and long-term savers;

• £18 million each day in death and disability benefits;
• £1.9 million each day in income protection benefits;
• £6.9 million each day in private medical insurance payouts;
• £59 million each day in general insurance claims.
Although our primary role is to manage risks for our customers, insurers are also
important actors in the wider economy. In the UK, insurance companies have net
investments of approximately £1,599 billion, own around 15% of the shares on the
london stock exchange and control assets equivalent to 25% of the uK’s capital.
This means that insurers are well placed to contribute to the debate in the European
Commission and Parliament.
Challenging times
Difficult times lie ahead. In the UK, we are in the first recession since the early 1990s.
As the graph opposite shows, it seems likely that the effects of the financial crisis will
hit the wider UK economy particularly hard. Unemployment in the UK is also likely
to rise sharply, although it is expected to remain below the rate for the Euro area
(see graph opposite).
4 ThE INSUrANCE INDUSTry: rEBUIlDING CONFIDENCE IN EUrOPE
gdP growth (annual % change)

5
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-1
-2
-3
-4 Euro area United Kingdom United States

Euro average UK average US average
source: oeCd economic outlook November 2008, oeCd. The years 2008, 2009 and 2010 projections are
based on IMF World Economic Outlook, January 2009.
unemployment (%)
12
10
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Euro area United Kingdom United States

Euro average UK average US average
source: oeCd economic outlook November 2008, oeCd
The insurance sector is not immune from the effects of the financial crisis. The recent
falls in the value of stock markets have eroded the reserves of many insurers, albeit not
to a critical level. As consumers look to make savings, cutting back on insurance cover
can mistakenly be seen as an easy way to reduce household expenditure. This exposes
consumers to increased financial risks and reduces the premium income of insurers.
Insurance can weather the storm

It is important to recognise that the insurance business model is different from that
of banking. Insurance companies receive premiums from customers and establish reserves
in order to pay out any claims at a later date. In contrast, leverage is at the heart of the
business model in banks. This means that insurance companies are much less exposed
to liquidity problems or to the sudden loss of confidence that has affected other
financial institutions.
While European banks have needed substantial capital injections funded by taxpayers,
rigorous risk assessment and cautious capital management have ensured that the
insurance business model is fundamentally sound. Insurers, particularly UK insurers,
entered the financial crisis with strong capital positions. They are well placed to weather
the economic storm. The graph below shows the Total Capital Ratios (TCR1) of the main
UK and European insurers. As can be seen, UK and European insurers hold adequate
capital buffers to sustain their business and credit strength ratings. Indeed, insurance
economists expect that investment write-downs directly related to sub-prime mortgage
instruments will not exceed around 3.5% of the global insurance and reinsurance
industry’s capital, or a mere 0.5% of invested assets2.
Capital Strength of European insurers – Total Capital Ratio (TCR)
200%
150%
100%
50%
UK Insurers UK and other European Insurers
September 08 January 09
January 09 after stress test
January 09 after stress test, excluding diversification benefits
Source: ABI Research based on Morgan Stanley Research3.
1
The Total Capital Ratio is the relationship between the amount of capital held by a company and the amount of capital needed to support the
insurer’s business and financial strength rating. Therefore, a TCR above 100% indicates that the insurer is adequately capitalised.
2
http://www.genevaassociation.org/Portals/0/Navigating%20the%20storm.pdf
3
The TCRs allow for diversification benefits unless stated otherwise.
6 The INsuRaNCe INdusTRy: RebuIldINg CoNfIdeNCe IN euRoPe
The insurance industry’s resilience to the financial crisis is reflected in the greater degree
of confidence European capital markets have shown in insurers than they have in banks.
As can be seen in the graph below, the share price of the main insurers outperformed the
share price of the main banks during 2008. Therefore, despite the difficult times ahead,
the capital markets can continue to have confidence in British insurers. So too
can consumers.
Insurers vs. Banks share price performance in Europe

20%
15%
10%
5%
0%
Feb 07 Apr 07 Jun 07 Aug 07 Oct 07 Dec 07 Feb 08 Apr 08 Jun 08 Aug 08 Oct 08 Dec 08
-5%
Source: Datastream, Morgan Stanley research4.
4
Insurance index used is the sXIP and the banking index is the dJ sToXX europe 600 banks (sX7P).
Chapter 2: Principles for

Responding to the Financial Crisis
• Targeted regulation is needed
• The needs of consumers are vital
• Better regulation principles remain important
• Risk-and principles-based regulation is key
• Partnership and trust between the public and private
sectors is necessary
• An international response is needed
In light of the challenges ahead, Europe must be prepared to take action to restore
confidence across the Single Market. The unique feature of the European Union is its
binding legal framework, but not all the levers are at the European level. Action needs to
be taken in conjunction with others at the national and international level. Action needs
to be considered and proportionate.
The crisis calls for targeted refinement of regulatory frameworks. But poorly considered,
knee-jerk and prescriptive regulatory responses are only likely to disrupt the business
environment. Such responses are unlikely to provide benefits to consumers and may
simply prolong the economic downturn.
Below we have set out some suggested principles to underpin Europe’s regulatory
response to the financial crisis.
Targeted regulation is needed

Better regulation is the key to restoring confidence – not simply more regulation.
Regulation must be properly targeted at the identified causes of the financial crisis.
If Europe is to come out of the economic storm, it must avoid rushed legislation, as
seen through Sarbanes-Oxley in 2002. The insurance industry faces the risk of collateral
damage if regulation directed at the banking sector spills over into insurance in the
mistaken belief that insurers pose a similar threat to the stability of the financial system5.
5
http://www.genevaassociation.org/Portals/0/Navigating%20the%20storm.pdf
The needs of consumers are vital

There is a real risk that the needs of consumers will be forgotten in this debate. It is
always easy for policymakers to assume that they know what is best for consumers.
The European Commission must ensure that research is undertaken to identify clearly
the needs of consumers. Problems must exist on the ground, not just in theory. If an
issue is identified, regulation may be required. But any proposed regulatory intervention
must be tested with consumers and enable the insurance industry to deliver even better
outcomes for consumers.
Better regulation principles remain relevant

Regulatory intervention must be justified by robust impact analysis. Frameworks must
be developed in consultation with key stakeholders. They should be fit-for-purpose,
proportionate, of high quality and stringently enforced. Regulation that does not meet
these tests will make recovery even harder.
Markets evolve and so too must regulation. It is important, therefore, that regulatory
regimes are reviewed at appropriate intervals to ensure that they remain fit-for-purpose.
This must involve an understanding of how regulators have incorporated European
legislation into their national laws. The Commission should demand explanations from
national regulators who do not transpose European Directives correctly.
Risk and principles-based regulation is key

The financial crisis has lead to questions over whether principles-based regulation can
be trusted in the future. Let us be very clear; principles-based regulation does not mean
“light touch” regulation. It stands for a focus on principles, flexibility and balance rather
than dogmatic rules, inflexibility and prescription. Writing endless rules is the easy option
for regulators. The challenge before the financial crisis was to develop high quality and
principles-based regulatory frameworks. This remains the challenge today.
Partnership and trust between the public and private

sectors is necessary
In these unprecedented economic times, it is right to ask fundamental questions about
the respective roles of the public and private sectors. There is no reason why the present
boundaries should stay where they are. At the moment, the State is coming to the rescue
of the private sector with bank recapitalisations placing a strain on public sector finances.
In the future, governments will need an orderly exit strategy from the extraordinary
measures they have taken and private sector expertise will be needed.
Novel funding instruments, for example, deferred government bonds, may be needed
to fund increasing fiscal deficits but they will need to be incorporated into the balance
sheets of insurers. At some stage, national governments’ ownership stakes will need
to be returned to the private sector and this must be accomplished without disrupting
the capital markets. It will also be harder for national governments to fund their
welfare states in the future, meaning private sector funding may be needed. Trust and
partnership between the public and private sectors is just as essential in these difficult
times as it will be in the future.
An international response is needed

The challenges posed by the financial crisis are not specific to the UK. Nor are they
specific to Europe. The crisis is a global one, meaning that global solutions are required.
Like many others, the ABI will be looking to the next meeting of the G20 in London in
April to deliver tangible outcomes to revive the world’s economy. Before then, Europe
must maintain its position as a key player on the global stage. In particular, protectionist
forces must not be allowed to use the financial crisis to create a “fortress Europe” by
regulatory means, any more than nationalist sentiment must be allowed to fragment
the Single Market. We examine these issues in more detail in Chapter 5.
Chapter 3: Revisions to the

EU Regulatory Framework
The financial crisis has inflicted serious damage on the institutional
framework that governs the regulation of financial services at EU
level. As national regulators have reacted to the financial crisis, the
relationships essential to the smooth working of the supervisory
institutions have weakened:
• national authorities have adopted a narrow view of national interest when

cross-border institutions have failed (e.g. Lehman Brothers, Icelandic banks);
• the so-called Group of Twelve supervisors have persuaded their Governments to
remove the group support proposals from the Solvency II Directive. Without group
support the purpose of group supervision is limited, and the benefits for insurers
are restricted. In addition, the incentives for supervisors to co-operate and achieve
genuine harmonisation are reduced;
• the collapse of Fortis led to the fragmentation of the group along national lines;
• different national versions have emerged of the ban on short selling;
• national supervisors are pressing ahead with their own solutions on liquidity
management; and
• national deposit protection arrangements have created difficulties for cross-border
investors and insurance protection schemes may yet do so.
Fragmented national insurance markets must be avoided

Trust between national authorities must be restored in the foreseeable future to levels
that give financial institutions the confidence to invest and operate cross-border in the
European Union.
There is even a risk of further fragmentation of supervision along national lines as

national authorities seek solutions to the difficulties raised by cross-border institutions.
Tighter restrictions on the freedom to provide services are being discussed or increased
capital requirements on companies operating branches in other Member States. Such
proposals would reduce capital efficiency and set the Single Market back several decades.
Reinforcement of the supervisory framework
A return to fragmented national insurance markets is not desirable. Respect for local and
regional markets is paramount, but cross-border financial institutions will spearhead the
recovery of Europe’s real economy. They have business models and structures rooted
in a pan-European vision, which would be costly to unwind. The consumer benefits of
financial integration would also disappear. The supervisory framework underpinning
Europe’s financial services therefore needs to be reinforced, not weakened.
A group chaired by Jacques de Larosière will shortly be making recommendations to the

European Commission. Many of the changes under consideration by M. de Larosière will
take time to achieve, so insurers are looking for the group to set out a clear roadmap and
timetable for reinforcing Europe’s supervisory framework. This will need to be achieved
in steps. Clear political and economic conditions should be met in each case before
proceeding to the next step.
Step One: Solvency II Framework Directive and Supervisory Colleges
On an immediate basis, national regulators should be mandated to make effective the

increased information exchange offered by Colleges of supervisors.
For insurers, the key to increased co-operation is the Solvency II project. Solvency
II introduces an economic basis for the valuation of the liabilities and assets on
insurers’ balance sheets. Capital requirements are to be set on a realistic, market-
based assessment of the risk the insurer carries. Risk is to be calculated using internal
models, thus bringing the information used by management into line with that used by
supervisors. Insurers are to receive credit for diversification of risk.
Most importantly, the Commission’s proposal envisages tailored supervisory

arrangements for pan-European insurance groups. The group supervision proposals will
allow for enhanced information exchange between a group’s local and home supervisors;
and if approved, the use of group support to provide capital to a group’s subsidiaries.
This leads to the assumption of a very limited range of decision-making powers by the
group supervisor.
A large minority of national supervisors have objected to the group support elements
of the Directive. However, it provides an economic and risk-based approach to capital
management within a group. UK insurers believe it must be restored to the Directive in
negotiations between the Council of Ministers and the European Parliament. This needs
to happen before the Parliament is dissolved in time for the Elections in June.
Step Two: Enhanced policy co-operation by CEIOPS
Solvency II also remains the key project in the medium term. The Commission and
the Committee of European Insurance and Occupational Pensions Supervisors
(CEIOPS) will need to flesh out the Framework Directive with market-consistent
implementing legislation.
Over the next two years, steps should also be taken to increase the resources available
to CEIOPS and the other Level Three Committees. This should provide sufficient policy
support and ensure consistent decision-making by supervisors. We welcome the recent
announcement of additional resources from the European Union’s budget. The initial
mechanism should be a better-defined mediation role for CEIOPS. Depending on the
experience with these arrangements, limited and tightly defined decision-making powers
for CEIOPS may also be considered. We are not convinced that EU Agency status is the
right answer.
Step Three: Europe should examine – without prejudice to the outcome

– the case for a single prudential regulator
Over the longer run, the de Larosière Group should set in motion thinking about the
issues associated with a single European prudential supervisor. This is not a decision to be
taken lightly and needs very careful preparation in advance. The transition from a system
based on twenty-seven national regulators to a single regulatory body would need
thorough and detailed planning. The step should be taken only if all the economic and
political conditions have been met. This is not a decision that can be taken now. Indeed,
we may never get there. But the failure of trust between national regulators makes this
the right time to start the exploratory work.
Two final points for the de Larosière Group. First, insurance is not banking, and does
not require the same supervisory arrangements. It is a major source of frustration for
insurers that, despite their robust business models and risk management, the regulatory
framework continues to be set principally with reference to banking. Insurance
supervision needs dedicated expertise and adequate resources, whatever the institutional
arrangements. We see no case at present for combining the separate Lamfalussy
Committees, CEIOPS (insurance), CESR (securities) and CEBS (banking).
Secondly, Europe’s retail markets in financial services are local, and are likely to remain
so for several years. Regulation of retail markets should therefore be done at local level,
close to the consumer. Changes to the prudential supervisory framework should not
alter this.
The INsuRaNCe INdusTRy: RebuIldINg CoNfIdeNCe IN euRoPe 13
Chapter 4: Preserving Working

Capital Markets
The regeneration of Europe’s real economy will depend on a
renewal of confidence in the capital markets. As major institutional
investors and holders of long-term investment capital, insurers are
well placed to participate.
Europe’s capital markets need to be as deep and liquid as possible. This means
maintaining a plurality of market participants. The basis of a modern capital market is
long-term institutional investors, such as insurance companies, pension funds and asset
managers. however, it would be unwise to exclude other categories of investors – hedge
funds, private equity, Sovereign Wealth Funds and individual investors. regulation limiting
participants in the capital markets – and let us be clear that some of the measures
proposed in the European Parliament would do precisely that – would leave Europe
the poorer.
In difficult times the battle against protectionism has to be fought again. This applies
to the capital markets just as much as elsewhere. We understand the Commission’s
reasons for restricting investors’ freedom to invest overseas in the Credit rating Agencies
regulation. But this is a slippery slope that will rapidly bring up barriers around the world.
If regulators begin to trust only those decisions made by the agencies they supervise,
retaliatory, protectionist regulation will be the result. The recovery of the global economy
depends on capital flowing freely across borders.
All wholesale market participants should be bound by the same market conduct rules.
There should be no special rules for particular classes of market participant, for example
no particular restrictions on sovereign wealth funds. The market rules should be applied
to all. If market abuse is suspected, it should be investigated and rigorously enforced in
all jurisdictions.
regulatory proposals have their part to play in the renewal of confidence. But regulation
is not the only tool, and needs to be approached with care. As we argued in Chapter 2,
the extraordinary circumstances of the financial crisis have not changed the need for
effective regulation: careful analysis of the objective to be achieved, means proportionate
to that end, rigorous cost-benefit analysis, and thorough industry consultation.
however, British insurers do see room for incremental regulatory improvements

at EU level in two areas: greater transparency for investors, and stronger corporate
governance arrangements.
Transparency in capital markets is vital
On transparency, it is important for institutional investors that the international

accounting standards project continues. There are huge efficiency gains to be had from
company accounts that are readily comparable across the globe. We can see arguments
in favour of improvements to the governance of the International Accounting Standards
Board (IASB), perhaps by setting it up on the basis of an international Treaty. The
authority of the IASB must not be called into question. The body’s due process and
independence from political interference should not be undermined.
We are supporters in principle of fair value and of mark to market disciplines. We agree
that greater understanding is needed in marking financial instruments to market in
circumstances where no market exists for them. However, we should avoid far-reaching
changes to accounting rules that undermine confidence in the integrity of the accounts.
The purpose of financial reporting is to show things as they are, not an improved
“stable” version of a business.
The Commission is also consulting on the ownership of auditors. One of the major
difficulties with the audit markets is that only the “Big Four” networks have the
resources to cope with a complex audit. This limits audit capacity and competition in
the audit market, and it drives up prices. At present only qualified auditors are allowed
to own audit companies. This is an old-fashioned restriction that prevents the entry of
capital into the audit market.
The role of Credit Rating Agencies has been heavily criticised in the wake of the
financial crisis. The Commission has brought forward a proposal for a Regulation on the
registration of the agencies. Care is needed here. Agencies’ ratings are just opinions.
They form a part, but only a part, of due diligence when investing. Investors would be
unwise to rely entirely on agencies’ ratings. There is a risk that the Regulation will draw
the agencies further into a quasi-regulatory role.
In any event, the Regulation needs be revised in several areas. First, the protectionist
clause that restricts investors to securitisations domiciled in the EU should be removed.
Secondly, the implications for business of withdrawal of an agency’s registration need
to be properly thought through. Finally, we remain concerned that the supervision
arrangements leave too much room for quasi-political interference in ratings. Freedom
from political interference is paramount if ratings are to be trusted by the market.
The Commission has also launched a consultation on hedge funds. We believe that
the hedge fund industry would benefit from material improvements in terms of
transparency to investors. However, we recommend a self-regulatory response to this
issue. In the UK, this has been led by the Hedge Fund Standards Board. Understandable
desires to impose regulatory solutions should be tempered, and in the first instance,
encouragement should be given to the sector to continue to seek enhancements to
transparency, and improved adherence to best practice.
Good corporate governance is key
British insurers wish to contribute constructively to the debate about the role of
shareholders in the run-up to the financial crisis. Some stakeholders have suggested
that institutional shareholders should have mounted a more robust opposition to
the executive remuneration structures in banks. Or that they could have opposed the
investment policies that allowed financial institutions to take on the level of leverage
and risk that they did. In the light of such a far-reaching crisis we agree that it is right to
conduct a thorough examination of corporate governance arrangements. As guardians
of the Company Law Directives and the accompanying Recommendations, the EU
institutions have an important role to play in this process.
However, it is important that we do not call into question the fundamental principles of
corporate governance that have been developed over decades. These have, on the whole,
served the needs of Europe’s industrial and service companies well.
Perhaps the most important principle is that the system of corporate governance is
largely voluntary. It is enforced not through the courts but through peer pressure on
the principle of “comply or explain”. There will inevitably be calls for further elements
of the corporate governance codes to be enshrined in legislation. The current would
be a retrograde step that would remove flexibility and bog down relations between
shareholders and management in empty formal exchanges. This flexibility is an important
element of competitive advantage that Europe holds over the prescriptive US approach
to corporate governance, best known through the self-defeating requirements of
Sarbanes-Oxley.
Europe needs to re-affirm the principles of comply or explain, and proportionality over
the longer term. Within this overall context, British insurers have identified a number of
issues for consideration in the light of the financial crisis.
First, we need better focus by boards and management on risk management.

Recent events suggest that more could be done to improve dialogue with company
management. As a major representative of institutional shareholders, the ABI is keen
to work on this. We want to focus on improving mutual understanding between
independent directors and shareholders, how they interact at times of corporate stress,
and on ensuring that dialogue addresses key issues such as risk management. We also
wish to work with companies and others to promote a greater focus on long-term
investment issues. Analysts have tended to place great stress on the impact of short-
term developments, including quarterly financial statements. It is now clear that the
desire for short-term profit encouraged some financial institutions to take excessive risks,
which subsequently led to serious losses. We need to shift the culture away from this.
This objective will not be achieved through regulation, but introducing a longer-term
perspective should be an important priority for dialogue between shareholders
and companies.
Secondly, we need more transparency about the ownership of companies. The widespread
practice of stock lending and the increasing use of derivatives and contracts for difference
has complicated the issue. There have been occasions recently when, in the run-up to
a controversial vote, company management has found that its share register bore very
little relation to those actually empowered to vote. There is nothing wrong in principle
with stock lending or with the use of derivatives, but there should be clearer and quicker
obligations on those holding voting rights through these routes to declare their interest.
Thirdly, we urgently need improved voting systems to raise participation at general

meetings and to allow cross-border voting. Voting at general meetings is the key method
by which shareholders can hold management to account. A Single Market for investment
would make a major contribution to the depth of Europe’s capital markets. This will only
become a reality if, for example, it becomes as easy for a Milan-based institution to vote
at a General Meeting in Stockholm as it is in Milan. The Shareholder Rights Directive took
important steps in the right direction, but there are further improvements to be made,
particularly in the operation of the chain between the legal holder of the voting rights
and the ultimate beneficiary.
We remain concerned by the continued existence of barriers to shareholders exercising

their rights in Europe. These devices serve only to entrench the power of management,
and make these companies less attractive as investment opportunities. The ABI has said
this many times, but the issue acquires particular significance when many of Europe’s
major companies will need to be recapitalised. We urge the Commission to revisit their
approach, especially in the context of the forthcoming review of the Takeovers Directive.
The issue of remuneration is already on the European agenda. Legitimate questions

have been raised about the separate issues of the remuneration of banking executives
and of Directors. On banking remuneration, we see merit in a more sophisticated
linkage between remuneration and prudential supervision. Prudential supervisors should
examine the remuneration structure – particularly of banking executives – with a
view to determining its impact on the risk carried by that institution. We understand
that the issue may in due course feed into the revision of the Capital Requirements
Directive. On the remuneration of Directors, further consideration is needed of the role
played by Remuneration Committees and Remuneration Consultants. We understand
that some thought is being given within the Commission to revision of the existing
Recommendation.
There are, and always have been, limits to the effectiveness of corporate governance
and it should not be seen as a substitute for regulation where regulation is necessary.
Ownership of equities has become more fragmented in recent years. For example,
British insurers now own only around 15 per cent of the London market. Pension funds
own somewhat less. With other owners sometimes less concerned about governance,
this makes it easier for companies to override efforts by concerned shareholders to
achieve change. It is important, therefore, that the European institutions work to build
consensus in the shareholder community in all Member States about the need to hold
boards to account. The future of corporate governance will require continuing dialogue
and partnership between national and European authorities, and representatives of
shareholders. It would be easy for stakeholders to point to shortcomings on all sides but
trust and a constructive attitude are more likely to deliver a lasting constructive solution.
18 The INsuRaNCe INdusTRy: RebuIldINg CoNfIdeNCe IN euRoPe
Chapter 5: The Need for

Global Solutions
In Chapter 1 we set out the gloomy prospects ahead for the UK
and Europe’s economy. The global financial system is undergoing
a period of exceptional instability. A number of governments have
provided injections of capital to financial institutions, and central
banks have provided increased liquidity. Despite these efforts,
prospects for global growth have deteriorated markedly. As the
graph below shows, the International Monetary Fund predicts
world output to expand by a mere 0.5% in 2009 – a drop of
almost 3% on 2008. Output in all economies is likely to shrink
on a year-on-year basis in 2009.
The graph opposite shows that Europe is suffering from the world’s economic downturn.
In Chapter 3 we set out a three-step approach for reinforcing the european supervisory
framework. The economic downturn forecast in the Euro area makes this even more
important. But in an inter-dependent world, Europe must work with our international
partners to address the financial crisis. A global problem requires global solutions.
Global outlook for GDP growth (annual % change)
Advanced economies
BRIC economies**
Euro area
UK
World output
-4 0 4 8 12
2007 2008* 2009*
Source: World Economic Outlook January 2009, International Monetary Fund.
Notes: (*) Projections. (**) The term ‘BRIC’ refers to the fast-growing developing economies of
Brazil, Russia, India and China. In the chart, this category shows the simple average of the four annual
percent changes.
Tangible outcomes needed from the London Summit

In light of the financial crisis, last year the insurance industry was encouraged to see the
G20 nations coming together in an effort to develop measures to improve the world’s
economic outlook. We hope that the intervening months will have demonstrated the
critical nature of the situation so that a plan of action is delivered when leaders meet in
London in April.
Liberalised international trade

G20 leaders called for a successful conclusion of the Doha Round of trade negotiations
at their meeting in November 2008. The Great Depression showed the dangers of
protectionism and isolationism. If a conclusion to the Doha Round was important before
the financial crisis, it is even more critical now. The financial crisis must not be allowed
to become an excuse for leaders to continue to engage in protectionist policies that only
harm consumers in their own countries. We call on world leaders to provide the necessary
mandate to their negotiators in Geneva to enable an agreement to be reached as soon
as possible.
Even so, any happy conclusion to the Doha Round is unlikely to deliver much by way of
liberalisation in financial services. It may well be that trade talks are not the right place
to develop the necessary confidence between financial services regulators. Insurers lay
great store by the regulatory dialogues between the EU, US, China and other major
jurisdictions. For financial services, these dialogues are likely to prove more fruitful forums
for liberalisation in future than trade talks. However, the participants need to recognise
the importance of these talks to raise their game on transparency and to ensure that
there is a broadly consistent outcome.
Open European capital markets

Access to foreign investment has been a critical component in Europe’s economic
success and must be encouraged. Emerging markets, especially China, India and the
Middle East pose new opportunities and challenges for European capital markets.
Recently, Sovereign Wealth Funds (SWFs) have come to greater prominence by providing
much needed capital for organisations affected by the current turmoil in the world’s
financial markets. Whilst it is not surprising that this has attracted the attention of
decision makers across the European Union, it is vital that we do not over-react to
concerns that are largely unfounded. To do so would result in Europe unilaterally cutting
itself off from a source of funds that can help build industries and recapitalise financial
institutions. Concerns associated with the transparency of SWFs are more appropriately
dealt with through robust policy measures in areas including competition law, utility
regulation or market abuse. European protectionism in relation to foreign investment
would be a serious mistake.
International financial reporting standards

The ABI supports the International Accounting Standards Board (IASB) in its continuing
efforts to make International Financial Reporting Standards (IFRS) a single set of high
quality, understandable and enforceable global accounting standards. The IASB’s aim is to
encourage convergence on these global standards. This should reduce the cost of capital
by helping investors to more accurately match this cost to the risks incurred. It should
also reduce costs for companies with stock exchange listings in more than one country
by eliminating the need to produce differing sets of financial statements to address
variations in national accounting requirements.
Work in the IMF, Basel Committees and IAIS

The EU will devise solutions to the financial crisis. So will the new administration in
the US. Different perspectives and solutions can be expected from major developing
markets such as China and India. The financial services industry expects political leaders
to avoid power politics, and to work towards a common solution. There is a risk that the
globalisation clock is turned backwards.
At a more detailed level, the thought leadership of international financial institutions

such as the Financial Stability Forum, the International Monetary Fund and the Basel
Committees will have a key contribution to make. In insurance, the EU’s Solvency II
project is grounded in work by the International Association of Insurance Supervisors
(IAIS). The IAIS is under-funded, and lacks authority by comparison with IOSCO in the
securities field and the Basel Committee for banks. This situation needs to be remedied.
Not only does the IAIS have an important continuing role in the field of accounting
standards and fighting fraud, but it needs to maintain authority over solvency issues.
There is a risk that disputes internal to the US about the respective merits of state and
federal supervision, fuelled by the collapse of AIG, will call into question the existing
consensus on the economic basis to solvency regulation.
Summary
Like many other sectors, the insurance industry has not been immune from the effects
of the financial crisis. But the business model for insurance is fundamentally different
from that of banking. Undoubtedly there will be difficult times ahead but insurers are
well placed to withstand future economic shocks.
The current turmoil has inflicted serious damage on the institutional framework
governing financial services regulation in Europe. Confidence in financial markets has
been lost. Trust between national regulators has been seriously eroded. There is a risk of
further fragmentation of supervision along national lines. All of these have the potential
to set the Single Market back decades.
Reinforcement of Europe’s supervisory framework is needed and we have proposed a

three-step approach to how this might be achieved. Firstly, Solvency II and the associated
supervisory Colleges must be delivered. Secondly, enhanced policy co-operation by
CEIOPS is needed. Thirdly, Europe should examine the case for a single prudential
regulator – without prejudice to the outcome.
Given the right framework, insurers as investors have an important role to play in
the renewal of confidence in European capital markets. Effective corporate engagement
is an important part of the framework. So too is regulation. But we face a real risk of
regulatory overkill in an effort to prevent another financial crisis. Action is needed at
the European level, recognising that a knee-jerk regulatory response will only prolong
the downturn.
As the voice of the UK insurance industry and with tough economic times ahead,
the ABI stands ready to work with the new European Commission and Parliament to face
the challenges ahead and turn today’s crisis into tomorrow’s success.
For more information, contact:
Association of British Insurers

51 gresham street
london eC2V 7hQ
020 7600 3333
www.abi.org.uk

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The Insurance Industry:

rebuilding Confidence in Europe

The overriding goal is the restoration of confidence in European financial markets.

Chapter 2: Principles for Responding to the Financial Crisis 7

Chapter 3: Revisions to the EU Regulatory Framework 10

Chapter 4: Preserving Working Capital Markets 13

Chapter 5: The Need for Global Solutions 18

In order to restore confidence and to ensure a consistent regulatory approach across

Chapter 1: The Economic Context

It is critical that consumers retain confidence in insurers, not

• £193 million each day to pensioners and long-term savers;

gdP growth (annual % change)

-4 Euro area United Kingdom United States

Euro area United Kingdom United States

source: oeCd economic outlook November 2008, oeCd

Insurance can weather the storm

Capital Strength of European insurers – Total Capital Ratio (TCR)

January 09 after stress test

January 09 after stress test, excluding diversification benefits

Source: ABI Research based on Morgan Stanley Research3.

Insurers vs. Banks share price performance in Europe

Source: Datastream, Morgan Stanley research4.

Chapter 2: Principles for

Targeted regulation is needed

The needs of consumers are vital

Better regulation principles remain relevant

Risk and principles-based regulation is key

Partnership and trust between the public and private

An international response is needed

Chapter 3: Revisions to the

• national authorities have adopted a narrow view of national interest when

Fragmented national insurance markets must be avoided

There is even a risk of further fragmentation of supervision along national lines as

Reinforcement of the supervisory framework

A group chaired by Jacques de Larosière will shortly be making recommendations to the

Step One: Solvency II Framework Directive and Supervisory Colleges

On an immediate basis, national regulators should be mandated to make effective the

Most importantly, the Commission’s proposal envisages tailored supervisory

Step Two: Enhanced policy co-operation by CEIOPS

Step Three: Europe should examine – without prejudice to the outcome

Chapter 4: Preserving Working

however, British insurers do see room for incremental regulatory improvements

Transparency in capital markets is vital

On transparency, it is important for institutional investors that the international

Good corporate governance is key

First, we need better focus by boards and management on risk management.

Thirdly, we urgently need improved voting systems to raise participation at general

We remain concerned by the continued existence of barriers to shareholders exercising

The issue of remuneration is already on the European agenda. Legitimate questions

Chapter 5: The Need for

Global outlook for GDP growth (annual % change)

Source: World Economic Outlook January 2009, International Monetary Fund.

Tangible outcomes needed from the London Summit

Liberalised international trade

Open European capital markets

International financial reporting standards

Work in the IMF, Basel Committees and IAIS

At a more detailed level, the thought leadership of international financial institutions

Reinforcement of Europe’s supervisory framework is needed and we have proposed a

Association of British Insurers

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