Insurers caught in regulatory backlash

Insurers in the UK were subjected to a record number of high-level inspections by the Financial Services Authority (FSA) last year despite the regulatory body saying it would be scrapping what is an intensive and time consuming process for companies. Some claim the increase in onsite inspections represented a regulatory backlash following the UK banks’ well documented failures.

The number of documented intensive on-site Arrow inspections to insurance businesses jumped by 38 per cent to 47 visits in 2012 (to September 30) compared with just 34 for the whole of 2011, according to law firm Reynolds Porter Chamberlain.

Arrow visits are in depth regulatory probes of individual businesses where the FSA demands a significant amount of documentation to assess risk handling and then conducts on-site interviews with senior management and other staff. The insurance sector finds these visits very expensive because of paperwork and management time spent in dealing with them.

The rise comes despite the FSA’s decision to revise the Arrow regime because of previous failures like Northern Rock, which received an ‘all clear’ Arrow visit shortly before the bank’s collapse.

Richard Burger, Partner at Reynolds Porter Chamberlain, believes insurers are being caught in a regulatory backlash that many would regard as unfair.

“Insurers will be disappointed that the winding down of the current Arrow regime has had such a sting in the tail for them,” he said.

“The FSA has really put the insurance sector in the spotlight over the last year. The FSA may have decided that it’s the insurance sector’s ‘turn’, but that will be very unwelcome news to insurers who have seen significant increases to the cost of regulation since the financial crisis.

“Insurers are very angry that they’ve been hit by the same regulatory backlash from the credit crunch as banks, even though the insurance sector has fared relatively well throughout the financial crisis and downturn.”

RPC says that many insurers are concerned that the replacement of the Arrow regime is going to lead to excessive regulatory burdens because there will now be two regulators rather than one.

Burger added: “The small silver lining in the spate of Arrow visits is that the FSA will have picked up a much better understanding of the insurance sector. Given how poor its previous understanding of insurance business has been, this can only be a good thing even if it comes at a heavy price for insurers.”