Posted on 28 Jan 2010
As bankers at the World Economic Forum in Davos struggle to fend off deep reforms of the financial industry, they are finding support from insurers who are concerned that new rules could also hit their businesses.
Insurance executives fear that new regulation directed against risk-taking by banks may prove to be useless and could eventually hurt the insurance industry's slim profit margins and consumers.
Lord Peter Levene, Chairman of the London insurance market Lloyd's, doubted that stiff regulation such as Sarbanes-Oxley, which was introduced after the collapse of U.S. energy firm Enron in 2002, could curb excessive risk taking.
"Because of Sarbanes-Oxley, a lot of business moved from New York to London," Levene said, adding that Londoners at one time joked that they should erect a statute to the two U.S. politicians who devised the rules named after them.
Stiffer regulation, Lord Levene said, will move business from one place to another. He said ideas about creating international rules were "naive" because of the many bureaucratic hurdles and political resistance such a bold move would require.
"Already today, Swiss cantons are doing roadshows in London to attract business away from London to Switzerland," Leven said. He expects business to move to Asia and Latin America should new U.S. and U.K. rules prove troublesome.
Zurich Financial Services AG's Chief Financial Officer Dieter Wemmer, meanwhile, stressed that insurers risk being tarred with the same brush as banks because of the crisis. He said that insurers were hardly touched during the financial collapse because of a generally prudent investment strategy that many firms adopted after the bursting of the Internet bubble. With the exception of American International Group Inc. (AIG), no insurer needed to tap government help during the recent financial crisis.
Wemmer said that while he was comfortable with rules set in Switzerland, which require insurers to regularly stress-test their assets and liabilities, he was more concerned about planned procedures across Europe.
"We support the European Solvency II rules, set to be introduced in 2012. However, due to the reigning political discussion surrounding the banking sector, too much emphasis is put on capital needs."
Other insurers share Wemmer's view. "The regulatory response to the financial crisis should clearly differentiate between insurance and banking," said Swiss Reinsurance Co's (RUKN.VX) head of life and health business, Christian Mummenthaler.
"While it is agreed that banking needs higher capital requirements, it may prove to be counterproductive for insurance," he said.
Higher capital needs for insurers could in the end lead to higher premium rates and a reduction of private pensions as insurers cut payouts because they are prevented from investing in risky asset classes such as stocks and derivatives. This, in the end, will increase costs to consumers and the economy in general.
Meanwhile, Munich Re AG Chief Executive Officer Nikolaus von Bomhard said that "a one-size-fits-all approach won't do justice to our industry," noting that insurers, in contrast to banks, are less heavily leveraged and have no liquidity risk due to their constant stream of premium income.