London – 20 March 2006

THE UK’s Financial Services Authority (FSA) will today announce significant reforms to help the London market compete for fresh capital with rival underwriting centres.

The key changes that will be unveiled at the FSA’s conference in London are a speeding-up of the authorisation process for new insurers from the current 17-week standard to as little as four weeks, and possible plans for the creation of insurance special purpose vehicles (ISPVs) in the UK to help companies take advantage of the latest capital management tools.

The FSA is acting in response to last year’s extraordinary run of catastrophes when billions of dollars of fresh capital was invested in Bermuda to recapitalise existing players and set up new companies to take advantage of the expected improvement in underwriting conditions.

Most Lloyd’s operations revised plans to reduce capacity and actually increased their stamp for 2006. No new London company market operations were created, so there was nowhere near the same level of investment in London as there was in Bermuda . Moreover a number of big London operations such as Amlin and Hiscox set up major new Bermudian operations there themselves. Industry leaders in London and Bermuda deny there is a battle for capital or premium occurring between the two markets and others such as Zurich. They say there is more than enough demand around for everyone, particularly for catastrophe lines, and the current capacity crunch in retrocession supports that argument to an extent.

But other industry players say London definitely lost out to Bermuda and other domiciles again last year and the trend of London operations setting up in Bermuda should be a big concern for Lloyd’s and the International Underwriting Association.

Many argue Bermuda’s highly flexible supervisory environment, the speed of set-up and availability of innovative structures to effectively create capacity or capital relief via securitisation vehicles have given it a critical edge compared with the UK’s so-called goldplate regulatory regime.

Today FSA managing director Hector Sants will announce plans that should help level the playing field between London, Bermuda and other domiciles somewhat without lowering its standards. He will say that where the FSA has prior knowledge of a group it will authorise a new company in one month. Where it does not have prior knowledge the process will take 10 weeks from receiving the application, so long as standards are met.
“We recognised the need to make improvements in our authorisation process,” said Mr Sants ahead of his speech. “In a period of market pressure, such as that experienced last autumn, we have decided we will reallocate our resources so we can ensure we authorise a firm – where we have prior knowledge of the group – within one month of receipt of the application and within 10 weeks where we don’t.”

The FSA is also looking at drafting rules to allow the creation of ISPVs within London for use by the London wholesale market, which will enable them to take advantage of new opportunities offered by the capital markets.

The EU reinsurance directive enables states to make this change so long as the debt behind the SPV is subordinated to the reinsurance obligations of the vehicle. So the FSA will consult on the introduction of ISPVs into its rules starting with a consultation paper in June. But the use of ISPVs in London would only be allowed so long as any capital relief gained through the transfer of liabilities was matched by the transfer of economic risk.

There is no way the FSA is going to make it easier for companies to contravene the still developing rules on use and abuse of financial reinsurance and finite risk products. But the rising cost of reinsurance and retrocession for catastrophe lines and fast-rising capital costs of writing such business in particular, coupled with the abundance of cheap capital and falling transactional costs related to such deals, mean the concept is likely to appeal to UK insurers on that “clean” basis. The main stumbling block for the development of such business in the UK would be that other domiciles such as Bermuda, the Cayman Islands, the Channel Islands and Dublin still enjoy a significant tax advantage.

“Although clearly subject to consultation later over the course of this summer, our overall aim is to open up the SPV market,” said Mr Sants. “In doing so we believe we will be responding to market developments in this area, again working with the grain of the market rather than stifling innovation.”

Insurance Day – …but regulator told more enforcement not needed
EXCLUSIVE By Scott Vincent, 20 March 2006

LONDON market insurers have hit back at the prospect of the Financial Services Authority (FSA) introducing further measures to enforce contract certainty and have promised to deliver a market-wide solution without regulatory intervention.

The FSA is set to tell the market whether it intends to implement further enforcement measures at the annual general insurance sector conference in London today. Speculation in the London market has fuelled concern over the introduction of tougher measures, although an FSA spokesman would not confirm this ahead of the conference. And Simon Sperryn, chief executive of the Lloyd’s Market Association, defended the sector’s performance, calling for insurers to be given time to develop an independent solution.

“Our objective at the moment is to persuade the FSA not to start new enforcement measures,” he said. “We’re sure they want a market-wide solution but we want that and we will get it. But this takes time so they want to make a decision now to have a rule ready just in case. The market has overdelivered on its first target and it would be completely unnecessary to impose new enforcement measures.

“In our view they have all the enforcement powers they need. If they did decide they needed to impose new enforcement rules they wouldn’t need to start them on January 1. As a market we need to give them confidence that they will not need to take any further enforcement action. The FSA has already indicated it will be looking at capital loading if the market doesn’t deliver.”

John Muir, business project sponsor for contract certainty at broker Willis, backed Mr Sperryn’s stance. “We believe the entire industry is making very good progress towards contract certainty and I don’t believe further enforcement measures need to be taken,” he said. “Sustained progress can and will be achieved by getting all practitioners to abide by the principles in the contract certainty code of practice.”

But Andrew Bailey, head of legal and regulatory affairs at London insurer Markel International, said there had always been a possibility the FSA will look at further enforcement measures.

“I don’t think these are necessary,” he admitted. “The FSA has acknowledged the steady progress being made by the London insurance market on contract certainty. We’ve seen significant improvement since December 2005 as underwriters and brokers work together to drive contract certainty through. Given this progress, it would be disappointing if the FSA were distracted from other important work by the need to make new rules specifically for Contract Certainty.”

Mr Bailey also said that if the FSA decided to push for further enforcement measures it would be likely to increase the level of capital each insurer will need to hold. “While contract certainty is currently an important hot topic, it seems to me the absence of certainty is a risk each insurer must assess as part of its individual capital assessment (ICA),” he said. “If insurers mitigating controls are not effective, that should be reflected in the amount of ICA capital held.”

Adrian Ladbury, Insurance Day, 20 March 2006