Of Special Interest


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14th November 2012

Research indicates rising cost of regulatory cost for UK general insurers

Some UK general insurers have witnessed a 400% increase in regulatory costs. But 68% of insurance businesses say new regulation enables them to develop competitive advantage over rivals.
The UK general insurance sector is now paying well over £730m every year on the direct costs of regulation and compliance, according to research from City law firm RPC (Reynolds Porter Chamberlain).
Insurers said that the direct cost of regulation to them has now hit an average of 1% of gross written premiums.
Data from the Association of British Insurers shows that gross annual written premiums for general insurance were £73bn in 2010, the direct costs of insurance for UK insurers are likely to total well over £730m per year.
Steven Francis, partner and head of Financial Services Regulation at RPC, comments “This figure is quite astonishing considering it only accounts for the direct costs of regulation, such as salaries for compliance workers and the FSA levy.
The UK Government needs to guard against European and UK regulators heaping extra costs on the general insurance sector as part of the overall trend to subject everyone in the financial services sector to collective punishment. After all, these extra costs normally have to be absorbed by the customer.
Unlike banking, the UK insurance sector escaped relatively unscathed from the financial crisis but it still got hit with the same, much stiffer regulatory requirements after the crisis. It’s not like the UK taxpayer had to bail out an insurance business, so it’s no wonder that senior figures within the UK insurance industry are angry that their businesses are spending so much money now on compliance.”
RPC says that the FSA levy charged to general insurers is set to increase by 36% to £40.1m for 2012/13, up from £29.4m in 2011/12.
Francis continues “It is notoriously difficult for insurance businesses to assess the indirect costs of regulation and compliance, but if these were taken into account, the figure would be far higher.”
RPC says that indirect costs of regulation include:
-The lower rate of productivity businesses face as a result of increased regulation and the requirement to check activity with internal compliance staff
-Opportunity cost as a result of restrictions on the use of investment capital as a result of capital adequacy requirements
-Lost opportunities to enter new business lines because of pre-approval requirements
-Management time needed to troubleshoot regulatory problems rather than focus on strategic goals
-The cost of external advisers on compliance issues, such as accountancy firms, compliance consultants and external legal advisers.
Insurers told RPC that, on average, regulatory costs have increased 75% over three years, although some companies reported an increase of over 400%.
In addition, 86% of insurance business leaders said that their business is more complicated now than it was three years ago, with 92% saying this was because of greater regulatory oversight.
Francis adds “The message we’ve heard loud and clear from the UK insurance sector is that tighter regulation since the credit crunch has increased costs and led to greater business complexity.”

“Board level executives are angry that their businesses are being clogged up with more complex compliance requirements, from Solvency II to double regulation by the FSA’s replacements, the PRA and the FCA.”

Despite the increased cost of regulation, 68% of respondents said that regulation can enable businesses to create a competitive advantage, and that regulatory compliance will produce benefits for insurance buyers.

Comments Steven Francis: “It is very interesting that insurers are looking at greater regulation as an opportunity as well as a cost.”

“Some insurance businesses are changing their attitude to regulation. Rather than simply view regulatory requirements as a box-ticking burden, some insurers are deeply integrating regulatory standards within their culture so that meeting the stricter standards doesn’t act as a drag on doing business.”

* The research, which was conducted by RPC and research company Gracechurch Consulting, consisted of 100 interviews with senior decision makers within the London Insurance Market. Respondents were asked to comment on how regulation has affected their business.