Select Committee on European Union Minutes of Evidence

Examination of Witnesses (Questions 100 - 105)


Mr Peter Skinner MEP

  Q100  Lord Maclennan of Rogart: This is really by way of a footnote to your answer to Lord Woolmer. Sometimes it can be helpful to a comprehension of stances and attitudes to know where was the originating impulse for this Directive. Was it within the Commission? Was it from a sector of the industry or a Member country? How did it come about?

  Mr Skinner: My Lord, I could not tell you the exact space where it came from but I know that there was resistance from the insurance industry to any kind of interference at an EU level to any rules and legislation. I think that everyone has now started to grow up, shall we say, and that an internal market displays tremendous advantage for companies that are able to take advantage of it. The only way to take advantage of it is to have a level playing field. The Commission therefore looked at its previous Directives and I think there were 14 that were re-cast in terms of this Directive to propose a basic platform on which we could address many of those supervisory issues which became barriers to entry to companies. When companies realised what the market was like, having been out there and having seen the disadvantages of a fragmented supervisory process, it led to pressure inside the Commission that at the same time wanted to consider this and had the right to do so. The gates went up and just a few years ago it seems QIS1 and others led to the impact assessments which have now drawn the proposal from the Commission.

  Q101  Lord Kerr of Kinlochard: Like Lord Maclellan, I was struck by what Mr Skinner is saying and his refreshing optimism about how this is likely to go. But I detected three little hints of where you might be worried, Mr Skinner, in what you said. I assume that group supervision is one set of amendments that you will get that is one threat. On French health care you will be accused of being a neo-liberal that you are dangerously breaking down the specificity of La France profonde and its arrangements. Perhaps that is another set of amendments you will get, and not just from your French colleagues? Then you talked about South-East Asia. You and your colleagues in the Parliament represent the whole of Europe but nobody speaks for South-East Asia, and therefore nobody speaks for the big boys in the EU insurance market who are out insuring big complicated risks round the world: supertankers and whatever. It is possible that you will get a raft of derogations proposed to deal with the different "Lithuania" points or additional requirements, belt and braces, added on to deal with the French point. I do not know whether it might not all end up a bit too heavy for the interests of the huge companies which are trying to be very efficient in operating in the wider world, e.g. South-East Asia. So there are three different kinds of downside risk. How confident are you that this thing can be steered through? It has clearly started well but it has a long way to go. Will there be a genuine supervisory convergence? Will there be a single implementation date? Will the thing have no derogations attached by national authorities in last minute horse trading?

  Mr Skinner: I will deal with the last point first. It is maximum harmonisation which means that we should not accept derogation as a principle to this particular law, except as a very last resort. I could not really begin to see how that would be the case. There are issues of thresholds by which it would be sensible to address very few small to medium sized businesses. Indeed, for example, insurance of architects in France is one of the issues that has been brought to my attention. Nonetheless, any company wishing to stand outside the kite mark of Solvency II is asking, really begging, for a more robust investigation from the supervisory level, at the solo level particularly. I do not see derogation as being the issue. What I do see as being a potential threat to the integrity of the current proposal of course is the competitive instincts of nation states in terms of trying to forward their own potential issues and having them realised in this Directive. We will have occasion to see more of people wishing to gain advantage for their own particular companies. They will see that at the global level as well, whether it is the use of equities in terms of the capital requirements or surplus funds or whether or not tier 2 papers are accepted as they are currently proposed for certain companies within the UK. There are lots of advantages and disadvantages of course in us all surrendering too much too quickly just to hasten what looks like a very good proposal. I am very optimistic, though, that on the whole we can maintain the integrity of the paper, the proposal we have before us. We are not attending to third country companies outside the European Union in a way to suggest that we wish to involve them in every part of the key decision, but nonetheless their views are very important to us as well. The Americans and the Japanese for example have made quite strong headway in terms of trying to get my opinion on certain key issues about how diversification might work for them, for example. I think we will come back to this issue in your last questions, whether or not we have the global certainty in the insurance market that we really need.

  Chairman: That is most helpful. I will ask Lord Watson to put that question formally so that we can all pick at it.

  Q102  Lord Watson of Richmond: Let us take the two parts of that. It is interesting because when I asked this question a little earlier this morning the answer that we received was rather that there is not that much interest yet and focus, particularly in the States, about this Directive. I was a bit surprised by that. I thought there would be more, and so I am interested in what you have just said. The first question in that context: do you see this, assuming that it all goes through, as potentially at least setting a global standard? There is a lot of evidence within the EU now that when the EU does agree on a set of standards, they tend then to move around the rest of the world. California and the environment is a good example. That is one question. The other question really relates to what you were saying about competition. Competitively, do you see this as being good for the City? Does it play to our advantage in the sense that we are further down this track than most European countries in any case and so we would play to that advantage? Is it going to be good for the reputation of the City? Could you take both those questions, please?

  Mr Skinner: I think this will be excellent for the City. Anything that rolls out the very best of efficient processes, which you can identify as having an origin inside the City's own practices, has got to be good for the City's interests because it is a practice they are able to recognise in other markets. Whether or not it is good for everybody across the European Union is the opinion which is to be found by talking to other MEPs from those countries. The second point is about global standards: yes, I think this will be a global standard. I hope it will be one which is appreciated in the International Association of Insurance Supervisors—and I attended their event in Florida just recently to discuss with other regulators—that does not argue now about the principles/rules approach. They see the sense in getting a proper balance. Already this is a conversion for many. There are of course others in the United States who perhaps feel less inclined currently to move towards the modernising process of regulatory supervision. When you first said you were surprised that there was very little consternation or interest in Solvency II, I would say the opposite: there is tremendous interest both at the Administration level and at individual Congressional level. I am in contact with Paul Kanjorski, who is the Chair of the sub-committee that deals with finance and insurance. There are two congressmen, Ed Royce and Melissa Bean, who are sponsoring a bi-partisan Bill in the Congress at the moment for the North American Insurance Act to try to modernise, to create an official supervisory structure that can start to address some of these concerns. I do not think that their level of success today is going to be the measure of the performance of their attitude; it is going to be what happens in the next five years or so because it is petering down now throughout Congress. It certainly has an effect at the level of the Administration. I attended the Trans-Atlantic Economic Council meeting as an adviser. I was there as much as anything else to draw attention to the international financial implications of getting recognition and convergence of standards. There is nothing but approval from people who sit at the top level about this type of approach.

  Q103  Lord Watson of Richmond: May I comment briefly on that. I was at a conference organised by KPMG in Berlin a week ago which was about regulatory convergence between the EU and the US. Of course Merkel has advocated that. I was astonished at just how positive the American side were. I had not expected it at all. Maybe something strange is moving in the woods of Washington.

  Mr Skinner: If I could add to that, there is activity from those advocates of changing within the US. I have been a student, if you like, on this since the reinsurance days, five or six years now of watching no change, little change, some people brave enough even to discuss change, and those who are adamantly against it. You may be aware that in the FT recently I have been exchanging letters with supervisors in the US. I am going to be quite robust in this statement. We are yet to have a recognised regime inside the US at an international level because the NAIC that makes up 50 states within the US is not a recognised regulatory regime to deal with international insurance issues. They are 130 years old and have had their charter for the last 45 years. They have tried to get some reasoned international access and they have not done this. It has been a failure which I think is helping to sink the American insurance industry which is now being dwarfed by the European companies on the whole. At the same time, they still require this distinct advantage of posting collateral for reinsurance companies like Lloyd's, Hanover Re and Munich Re inside the US for no apparent regulatory advantage to the US regulator. At the same time, companies in Lloyd's cannot spend that money if they have to face an event like hurricanes or other events, and they still have to keep that in the banks. There are lots of vested interests in keeping the status quo in the US and that has to be challenged. It is challenged by what the European Union is doing by setting a standard which will otherwise lose a lot of American companies their competitiveness if is not absorbed in the US.

  Q104  Chairman: That ought to inspire us to do it, ought it not? Can I have a sweep-up question? Lord Kerr asked about supervisory convergence. Do you anticipate a single implementation date like there was on MIFID, that one day you will do that?

  Mr Skinner: Yes, I do. For me it is 31 December 2008. For the Commission I think it is 1 January 2012. By that date by which we will have had the full transposition and implementation stages and no extra amount. I remember under the Reinsurance Directive we allowed 12 months extra on top for certain countries, Portugal and France mainly, just to introduce changes to the collateral issue. Other than that, I expect the two years to be abided by and the date of 1 January or 31 December to be the strict date held to.

  Q105  Chairman: That was most helpful. Have I overridden any colleague in asking a question who would you now like to do so? In that case, thank you very much indeed, Mr Skinner, for coming to see us. At this point, the subject has come alive as far as I am concerned when we discuss the political difficulties of actually getting it through, and we wish you every good luck in the world.

  Mr Skinner: Thank you very much, my Lords.

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