10 September 2013

A growing burden of regulation will stifle growth

The industry is likely to face increased scrutiny from the Financial Conduct Authority (FCA), the new UK financial services regulator formed in 2012, as regulation tightens across the board, according to Phil Smart, head of UK insurance at KPMG.

“The biggest challenges facing the industry are Solvency II and where it is going to end up, conduct and prudential. In recent times, the FCA has focused its efforts on the banks but I believe that focus is turning towards the general insurance sector, especially on the conduct side. I see it becoming increasingly focused on retail and wholesale,” he said.

“Another area of contention for insurers is recovery and resolution planning; reinsurers have been spared some of the heat for now, however, it will be the next hurdle for them.”

A big talking point at this year's Monte Carlo Rendez-Vous, regulation is an increasing concern for the industry.

“Regulation is driving the agenda at the moment, which is not good for business as it is stifling growth,” said Smart. “The industry needs to find the correct balance and manage this effectively.

“If you asked a CEO five years ago what his or her main concerns were, regulation wouldn't even have been mentioned, however, now it's one of the first things on the list.”

Insurers are also facing the challenge of poor returns, as Smart explains. “We are now looking at five years of depressed investment returns, so effectively companies have lost five percentage points from their returns capital over the last five years. They now have to try and restore that through better underwriting discipline or improved asset yields, which might mean taking some risks on that side of the balance sheet.”

Gary Reader, who will assume his position as global insurance sector leader of KPMG on October 1, agrees that the global markets are facing many, if not all, of the same pressures.

“Regulation is a huge challenge,” he said. “Globally they're not grappling with the FCA, however, all national regulators are looking at upping the anti.

“The biggest issue, however, is growth. You have very mature Western markets, so the focus on emerging markets is strong. The challenge is that the returns over the last five years have been so low it's hard to support growth initiatives. However, the need to respond to the post financial crisis was a business imperative and there is now a real emphasis on a new, efficient, market."

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