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The Actuary The magazine of the Institute & Faculty of Actuaries

Soapbox: All aboard the Euro train

As I write this, the consequences of the election and coalition government continue to be discussed and it is clear the markets are still jittery. While in the run-up, much comment was made that the result had already been discounted, we now need to wait to find out if that is indeed the case in the long run.

Of course, the election result is purely that for the UK whereas, as we all know, much more that affects us in our industry day to day emanates from Europe — where the EU itself is grappling with bigger problems than our election result. How far will the contagion spread from Greece, beyond Portugal and Spain — could it too reach the UK and also hit our markets whether for equities or bonds?

The link from this to our very real practical business concerns is plain: any significant shift in value of equity or bond holdings affects most financial services businesses, whether from the effect on our clients’ portfolios or our own capital adequacy. Here, too, the EU has a major impact with the forthcoming Solvency II top of the list; by late 2012, its detailed requirements will be driving the elements of our holdings and perhaps quite fundamentally changing the make-up of our capital structures. The value, or any change in it, of the equity market or downgrading of bonds could have quite fundamental effects on how we are able to fund our required level of capital. There is a clear link between our own recent election results, EU contagion risk and capital adequacy.

In recent times, particularly the turmoil following the credit crunch, the FSA was able to take a pragmatic view and allow — indeed, encourage — firms not to sell equities simply to meet a level of capital adequacy, while markets seemed to be in free fall. Such pragmatism may no longer be possible once it is detailed EU directives driving the levels required and, of course, the future of the FSA itself is not certain. Would any successor body wish to, or be permitted to, take a similar stance?

More immediately I am sure many readers are gearing up for the fifth Quantitative Impact Study over the autumn, as it is expected that some 50-70% of insurance firms across Europe will take part. I am very torn about the QIS process. On the one hand it is clearly good that the EU recognises the importance of getting it right before the detailed requirements become law. On the other hand, though, can a piece of legislation that requires at least five rounds of ever more detailed testing be fundamentally correct — is it not so intrinsically complex as to be unworkable? How will it cope in a real world where things happen: elections, bond downgrades and even market free fall?

And Solvency II is itself only one example of increasing regulation that often drives our businesses decisions day to day coming from EU not UK. Over the last few years there has been quite a change in that regulation, a change that the credit crisis will only drive harder. Rather than the EU looking at principles and overarching aims — with local regulators given the discretion as to actual implementation — the EU is now involved at the most detailed level, with no local involvement other than in oversight and enforcement. Again, this can be good; it removes opportunities for ‘gold plating’ and helps ensure a level playing field. But it will also continue to force the EU to develop the detail that works across every market, and hence to require QIS equivalents for perhaps many significant pieces of regulation. One factor I didn’t mention about QIS is that, whatever its benefits, it is time-consuming and costly.

So on balance I feel we are at quite a watershed in the regulatory environment. One where it is clear that local regulators will have less power going forward, where the EU will be involved at a much more detailed level but where local events will continue to have, sometimes a large, impact. It remains to be seen how these two factors will interrelate in practice and whether the pragmatism of local regulators can be replicated by those working across the EU.


Joanne Hindle is a consultant to the financial services industry and is currently chair of the Investment and Life Assurance Group