Mr.
Hands: I am slightly surprised there has not been a
numeric value put on that because I thought doing so was standard for
any of these sorts of cost benefit analysis. Moving on, I think she
mentioned something about the one in 200 calculation being standard or
regular in the UK insurance industry. Will she confirm that that is the
FSA regulation at the moment?
Kitty
Ussher: Yes, it
is.
Mr.
Hands: Okay, it is exactly one in 200. Will the Minister
also tell us how she would characterise the regime, because is not
dissimilar to how the Bank for International Settlements regulates
capital adequacy ratios for the banking industry? Will she outline how
the regime is different from the BIS regime for
banks?
Kitty
Ussher: It is the same in that it operates on a risk-based
principle. That is why there was an incentive to bring forward the
“Solvency II” framework to update the
“Solvency I” framework, which consists of a
number of different bits of legislation introduced during the past few
decades. The regime is similar in that it regulates through prudential
and capital adequacy requirements on the basis of risk, which we feel
is the most appropriate way. That is the same system as currently
exists for the
banks.
Mr.
Hoban: May I just take the Minister back to her previous
answer? She said that the one in 200 regime was the same under
“Solvency II” as under the FSA’s rules.
Yet, I believe that in looking at equities, the FSA considers a 40 per
cent. reduction in the value of equities, whereas
“Solvency II” only takes into account a 32 per
cent. fall in equity values. Will the Minister explain how those two
statements are consistent, given the reduction in the impact of
equities?
Kitty
Ussher: In order to have a one in 200 risk of a problem,
we believe that the equity ratio to which the hon. Gentleman refers
should be in the range of 38 to 40 per cent. That is being debated
across the EU, and has not yet been set. “Solvency
II” has not yet set a value on equity, and that issue will be
resolved at the level two arrangements that are made once the overall
outline of the directive has been reached. The overall principle has
been set and the FSA think that a figure in the range of 38 to 40 per
cent. is required, but the matter is still being debated, as the hon.
Gentleman
knows.
Mr.
Hands: Returning to the Basle and BIS capital adequacy
ratios, the Minister sounds familiar with their introduction to the
banking industry, but what lessons have been learned from their
introduction in the 1990s? What problems are being ironed out, and what
impact that has that had on this set of
proposals?
Kitty
Ussher: I suspect the hon. Gentleman is making a broader
point about capital adequacy and the financial services sector more
generally. The recent credit crunch
has, of course, had some implications, which are being discussed at a
Basle and EU level. However, it is not yet clear whether Basle II
requires amending; indeed, it might not. In terms of the general
lessons learned, we think that Basle II was extremely good and it was
implemented accordingly. That informs our view that the minimum capital
requirement and the higher capital requirement level should be risk
based. There is little dispute that it should be risk based and that
informs our negotiating stance at the moment. I hope that is
helpful.
Mr.
Hands: Will the Minister briefly outline how the one in
200 probability is calculated and provide the rough methodology of how
it is arrived at? Is the calculation based on historic data—in
other words, is it made by looking back over a number of years to see
the biggest possible move in equity prices and saying it should not be
in the worst half a per cent.—or is it based on current
volatility levels? Will the Minister give us some more detail on
that?
Kitty
Ussher: The hon. Gentleman has asked an extremely good
question. My advice is that it is a normal calibration standard.
However, on the specifics, perhaps he would permit me to respond
later.
Mr.
Hands: Finally, the European Scrutiny Committee looked at
the issue, and in our paper, on page 370 of the pack, the fifth and
final bullet point in the equity risk section states that
“agreement has
not yet been reached on this issue and further alternatives are being
considered”.
I cannot remember when
we wrote the paper, but will the Minister update us on what has
happened between the date that she wrote her letter, 23 May, and
today?
Kitty
Ussher: Not a huge amount, in that the issue remains
unresolved but there are intense ongoing negotiations at a European
level to try to reach a resolution. It is worth continuing to push for
the figure of 38 to 40 per cent. It would be fair to say that other
member states’ views are evolving, and I shall be happy to
update the Committee on that point perhaps later in the
year.
Mr.
Hands: Will the Minister outline which issues are still
not yet resolved? Will she list them? I was not entirely
clear.
Kitty
Ussher: As I said in response to the Opposition
Front-Bench spokesperson, the hon. Member for Fareham, there is not yet
any agreement about the level of the capital charge in the standard
formula for the solvency capital requirement. However, it is being
tested through various quantitative studies that the Commission has
organised. Discussions are ongoing between industry and Governments
throughout the EU, but that is the main area of disagreement and it is
as yet unresolved.
Mr.
Breed: I want to explore some of the potential practical
difficulties with cross-border supervision. Will the Minister confirm
that information will be shared between all the
supervisors—between those who supervise subsidiaries and those
who supervise the group?
Kitty
Ussher: Yes, and various committees have been set up at a
European level to deal precisely with those issues. It is extremely
important that supervisors share information as much as possible. In
fact, on a separate and broader point, the hon. Gentleman will be aware
that my boss, the Chancellor, recently proposed to his European
counterparts a system of supervisory colleges for some firms. That is
separate from the hon. Gentleman’s point, but the
consensus—the prevailing mood—throughout Europe is that
that is precisely the area in which greater informal but effective
co-ordination is required.
Mr.
Breed: Given that insurance companies often fall foul of
the same large disaster, and that the risk of something very large,
such as the New Orleans tornado, is spread among the different
insurance operations, is it not possible that two subsidiaries in two
different countries might have difficulties and rely on the same
group’s capital adequacy? Who would be the arbiter of which
subsidiary had a better claim on the group reserves to get out of
trouble if two or three subsidiaries had the same difficulty because of
a major world risk?
Kitty
Ussher: Legally, the situation would be the same. The
important point to realise is that protection for each policy holder
would be the same whether the situation involved just one company
operating in one country or a group office that the company was legally
required to support. In extreme circumstances when a firm is unable to
meet its liabilities, there are separate insurance, reinsurance and
compensation arrangements, but an individual policy holder would be no
different from an individual group; it would come down to law in the
end.
Mr.
Hoban: May I ask the Minister about article 131, which
relates to the restriction of assets permitted within an insurance
unit-linked contract? Currently, the FSA has rules that restrict the
use of assets. Article 131 sweeps away that restriction, yet the FSA
has tabled an amendment to reinstate it. I believe that the FSA has not
discussed that with the industry or consulted on it. Could the Minister
explain why it has taken that
approach?
Kitty
Ussher: That is probably a matter for the FSA, as it
tabled the amendment. The Government are aware of the industry’s
concerns about the issue, but we are also aware that the FSA is
concerned that it might not be able to protect retail policyholders if
“Solvency II” were to prevent any limitation
of the kind of assets to which a unit-linked policy can be
linked. The
modification of the directive text that we are seeking would allow
supervisory authorities to impose rules on the assets to which
unit-linked policies can be linked, but only for retail policyholders.
There would be no possibility of such rules for products sold to
institutional policyholders. In addition, we are seeking to limit the
scope of any rules that are imposed in respect of products sold to
retail policyholders so that they are not more restrictive than those
for comparable investment
products. This
may help Members to understand the situation: it is important to note
that the changes that we are seeking will not impose any rules at all
on the assets to which a unit-linked policy sold by an insurer
authorised
in the UK can be linked. We are seeking only to allow for the
possibility. Whether any such rules are actually imposed, and their
precise nature, would be a matter for the FSA and, of course, subject
to normal consultation processes with the industry course. I am not
sure whether it is appropriate at this stage to decide that under no
circumstances should there be even a possibility for the FSA to impose
rules on the nature of assets to which unit-linked policies can be
linked. This is more about keeping open the option, but I understand
that the industry has recently raised the matter, and I would encourage
it to talk to the FSA about
it. Mr.
Hoban: Is not there a risk that insurers will end up
having to create two classes of fund—one for institutional
investors and one for retail investors—and are there not better
ways of protecting retail investors through, perhaps, the rules around
the sale of
products?
Kitty
Ussher: There could well be, which is why the FSA would
consult before actually using the powers that it is seeking in this
regard, if it is successful in seeking them. This is at a very early
stage, and perhaps the industry should speak to the FSA about the
details.
Mr.
Hoban: I want to move on to the separate area of
annuities. Clearly, many insurance companies write annuities—it
is an important area of business for them and for consumers. What
thought has the Treasury given to the impact that
“Solvency II” might have on
annuities?
Kitty
Ussher: As I said in response to a point that was raised
earlier, we published a partial impact assessment because we believe
that it is best to start as early as possible to attempt to quantify
the costs and benefits. The evidence on the cost of writing annuities
under “Solvency II” is only beginning to
emerge. We want to work with the industry to ensure that we have a
shared understanding of how the directive will
work.
Mr.
Hoban: At what point will the Government finally sign up
to “Solvency II”? The Minister identified an
important area about which there is still some uncertainty. We would
not want the process to go so far that we cannot stop it and then find
that the cost-benefit analysis does not support the introduction of
“Solvency II”. Where will the Minister draw
the
line?
Kitty
Ussher: The hon. Gentleman has put his finger on a crucial
point. That is why we have been clear from the start that we want to
work with the industry to identify, as a general point of principle,
whether the directive offers a good opportunity for UK companies. The
answer that we are getting back clearly is yes, which is why we are
proceeding. Everybody
knows that part of the implementation will not be done at the high
level that is currently being discussed but through the level 2
Lamfalussy-type committees, at which point we will go into battle again
with our arguments through the agreed mechanisms. We would not be
following that route if we did not think that we had a good chance to
get an overall outcome that would work to the UK’s advantage. We
believe that we are bringing the industry with us in
doing this in the way that we propose, which is the normal way to
implement EU directives in the financial services
sector. Mr.
Hoban: So am I right therefore in saying that we could get
to a position where the Government have signed up to
“Solvency II” but would still be working out
the details through a Lamfalussy process at the second level? We could
end up at level 2 with the run of the debate against us and a
cost-benefit analysis that does not quite
work.
Kitty
Ussher: That is theoretically possible, but I would be
surprised if we did not end up in a situation that was not to the net
benefit of UK industry. However, the industry will know—as the
hon. Gentleman knows and as we know—that these things are done
in two stages, because that is seen as the best way to make decisions
in a complicated, technical
area. The
hon. Gentleman is right, theoretically, in terms of the sequence, in
that we are hoping to get substantial agreement in the second half of
this year—it could be the first half of next year, under the
Czech presidency—and the level 2 discussions will probably only
be starting just as the substantial agreement has finished. He is right
theoretically; however, I come back to my earlier point, which is that
we are confident that the balance of argument lies with us and that
British companies will end up having more opportunities, not less, as a
result of
this.
Mr.
Hoban: Can I just check the sequencing of this? Clearly,
one of the best ways in which the Government can secure benefits from
“Solvency II” is to get the right group
supervision arrangements in place. Will those be properly signed off,
in terms of ensuring that the balance is right between the lead and
local regulators, prior to signing off solvency II as a
directive?
Kitty
Ussher: The general principle of group supervision is in
the higher level directive agreement, so as far as I am aware the
answer to that question is yes, although the detail must be worked
through under the liability
process.
Mr.
Hoban: That is where my concern rests, because the way to
maximise a value for “Solvency II” is in how
the group supervision will work. The weaker the position of the group
supervisor, the less benefit there will be for UK insurance companies.
I want to make sure that the Minister knows how important it is to get
those arrangements set out in as much detail as possible at the
directive level, so that there can be no doubting the relative
strengths of the lead supervisor and the local
supervisors.
Kitty
Ussher: Yes, we are fully aware of that and are doing
precisely
that.
| 
