Despite recent high-profile cases, single financial regulator Sir Howard Davies says ending risk of failure for life insurers would be counterproductive, writes Clare O'Dea.
The chairman of the UK's single financial regulator, Sir Howard Davies, has said it would not be in the interests of the British insurance industry to eliminate the risk of failure. He was referring to the Independent Insurance and Equitable Life cases.
"It would be possible to reduce the risk of failure in the life insurance industry to approaching zero by requiring all life companies to keep their assets in the form of cash and short-dated government obligations," he said. But the chairman of the Financial Services Authority argued that this would be counterproductive.
"In those circumstances there would be next to no liquidity risk and almost total certainty about future returns. Those returns, however, would be unexciting, limited to the risk-free lending rate."
Sir Howard said that in real terms, it was unlikely that life insurance companies would be able to show a positive return to investors. "This would in time put the companies' long-term survival in doubt, thereby bringing about exactly the opposite of what a "zero failure" regime is ostensibly designed to achieve."
In the case of general insurance, too, an attempt to eliminate failure could have damaging consequences, Sir Davies stated. "There would possibly be greater industry concentration, reduced product choice, less innovation and higher costs. A dynamic industry cannot be one in which all win prizes." Sir Davies was quoted in the latest Irish Insurance Federation newsletter.
The core function of the fledgling Irish single financial regulator will be to regulate the industry and to maintain public confidence in the sector. It will be the Irish Financial Services Regulatory Authority's (IFSRA) job to ensure companies can remain solvent and that customers' funds are protected.
With much of the relevant legislation on hold between governments, the new chairman Mr Brian Patterson and the six other IFSRA board members are proceeding with regulating the Irish financial services sector on an interim basis.
IFSRA will have limited independence from the restructured Central Bank, which will be re-named the Central Bank of Ireland and Financial Services Authority (CBIFSA). The proposed legislation also provides for the appointment of a Consumer Director to monitor the financial services provided to customers and exercise consumer protection powers.
