Key parts of the Solvency II legislation are being put out for public consultation in the coming months. In this article, Kuni Kawasaki, London liaison for industry and government affairs at Mitsui Sumitomo Insurance, argues that the battle for shaping a regulation is won a long time before it is put out to public consultation.
When insurance supervisors and regulators put a piece of legislation or a draft regulation out for public consultation, it is important to recognise they are in fact not consulting the public at all.
Metaphorically speaking, they are basically asking whether you would like white or green window frames for the new house they built. At that point, regardless of the input you give them, they are not going to change the foundation or the overall design and structure of the house. Public consultation is merely a part of due process that policy-makers have to follow. They also use the process to check if they got something significantly wrong or if they missed something crucially important. Key decisions have been made – and supervisors have made up their minds – way before any drafts are made public.
So how then should the industry influence policy? The answer is, ‘behind closed doors’.
Effectively, dealing with regulatory matters means you must know how the game is played. In terms of lobbying and negotiating the specifics of any piece of regulation, this means being in the inner circle of people that supervisors consult privately.
To be clear, I am not implying any wrong doing or any malicious intent on anyone’s part. I am simply illustrating the reality of how regulation is ‘manufactured’, which is through rounds of private discussions and debates between supervisors and key industry representatives.
Such ‘informal’ joint thinking or development processes are what shapes any piece of regulation. For EIOPA related issues, this means discussions with the CEA and the CRO Forum etc. For the FSA, this means dialogue with the likes of the ABI and Lloyd’s.
It is key for astute insurance firms that wish to stay ahead of the curve to be active members of such associations and forums (if not so already), and through them, be seated at the table for these behind the scenes discussions. What you can’t get at that stage, you will never get at a public consultation.
By way of extrapolation, this same principle can be applied on a cross-sector basis as well. One should not wait until insurance supervisors start to publicly communicate what sort of rules and requirements they plan to introduce going forward; one needs to get engaged at a much earlier stage where the actual decisions are being made. For followers of insurance supervision, this means knowing what is happening on the banking regulatory side. To a certain extent, banking and insurance regulation have an upstream/downstream relationship – it is a matter of time for what happens to the former sector to occur on the latter.
For example, banking supervisors are considering how, and to what extent, convertible contingent bonds (COCOs) could count as core capital, and now insurance supervisors are doing the same. Similarly, banking supervisors have set out basic ideas on capital surcharges for systemically important banks (and requiring them to have recovery and resolution plans in place), and insurance supervisors are following suit.
This close relationship builds on the premise that supervisors, by nature, want to keep banking regulation and insurance regulation well aligned and consistent, but not necessarily identical. Again, that is why a keen insurance firm would closely watch what supervisors (at national or regional level) are doing on the banking side.
As the old saying goes, battles are won or lost before they are fought. Firms that take this to heart will be the ones that stay ahead in the game.
The author is the London liaison for industry and government affairs at Mitsui Sumitomo Insurance. The views expressed are the author’s own.