As well as capital Directive Solvency II, for which the European Insurance and Occupational Pensions Authority released its final guidelines on 27 September, insurers must comply with accounting and taxation regulations and, if they are engaged with a US client, the Foreign Account Tax Compliance Act.
PWC global leader of insurance regulatory change Paul Clarke agrees regulation is one of the drivers for increased industry spending generally but questions whether the cost of regulation is as high as it might initially seem. "It is probably the case that some element of this regulation is being used as a catalyst to make changes that companies might necessarily have felt they needed to do anyway", Clarke says, giving risk management and IT systems as examples of areas for change.
European Union regulation can result in two types of cost for the industry: direct compliance costs and also costs in terms of capital allocation, according to Olav Jones, Insurance Europe deputy director general. "Regulation that sets unnecessarily high levels of capital should arguably be of greater focus and concern, since it can have a substantial impact on the product prices for policyholders and the ability of insurers to provide products", Jones says. While costs to policyholders may increase, ultimately it is insurers who will take the biggest hit. The regulators themselves gain little monetary value from regulation costs.
Clarke agrees that most regulation costs are either allocated to people or technology. "Systems and reporting capabilities are big part [of how costs are broken down], as well as development of in-house models for capital modelling and reporting ability. The team and infrastructure that is there to be able to gather data from around the world [is also important] because a lot of these companies operate on a multinational basis", he says.
But multinationals are not the only ones expected to comply with regulation; mid-tier and small firms must fall into line as well. Clarke says: "The mid-tier in particular is forming the view that a lot of these very significant and quite burdensome requirements are designed for the needs of the big multinationals and don't sit well for mid-tier and domestic companies".
Whether the industry will see an increase in companies merging in order to comply with regulation remains to be seen. Francesco Nagari, Deloitte insurance partner, says: "The possibility of a merger, acquisition or disposal is a decision that is becoming more frequently affected by regulatory considerations". "As we get more clarity from the regulators on the features of these regulations you may see acquisitions, disposals and mergers in the European industry. There will also be an indication that the cost of the regulation can be managed better in a large organisation but I wouldn't generalise and say that only large organisations can cope", he says.
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