MERGERS CREATING REGULATORY CHALLENGES

LONDON-The era of the global insurance and reinsurance player is upon us, presenting many challenges that the market and regulators must address.

The belief that "big is beautiful" shows no signs of waning, said Ron Whyte, managing director of broker Johnson & Higgins Ltd. in London. Instead, the top insurance players need "to have a certain critical mass and to have a developed and efficient infrastructure around the world," Mr. Whyte said as he introduced J&H's "1997 U.K. Insurance Market Review and Forecast."

The wave of mergers and acquisition will continue to gather momentum in the wake of recent deals, including the union of Royal Insurance P.L.C. and Sun Alliance Group P.L.C. (BI, May 13, 1996) and Union des Assurances de Paris S.A. and AXA S.A. (BI, Nov. 18, 1996), Mr. Whyte predicted. The end result of this activity will be between eight and 10 major global insurers, including reinsurers that are already "becoming ever more visible to direct clients," he said.

Mr. Whyte projects that between three and five major global brokers will dominate the field, with J&H among their number. He did not mention which other brokers he sees in the top ranks.

The broker's role will move further away from the traditional areas of insurance placement, splitting into three distinct areas, he said. First, the broker will provide analysis of a client's total risk and address it with financial and risk management strategies. Second, using this information, the broker will "find the best solution in the insurance market" to meet a client's needs. And, finally, the broker will provide "traditional day-to-day requirements," also offering guidance on loss prevention and mitigation.

Mr. Whyte's view of a global insurance marketplace is not uncommon. However, what government officials have not yet addressed is just how this marketplace will work. Questions of cross-border trading and regulation are only beginning to be confronted.

Speaking at a recent Institute of London Underwriters/Kroll & Tract L.L.P. meeting, Jonathan Spencer, insurance director at the U.K.'s Department of Trade and Industry, which regulates insurers, tackled this thorny issue. "At present there is quite a wide divergence in how individual countries regulate their insurance industries," he pointed out to the audience of underwriters, brokers, lawyers and a delegation from the Louisiana Department of Insurance. Mr. Spencer compared the British system with its emphasis on financial strength and "fit and properness" to the Japanese approach, which, before it was recently relaxed, focused on product rather than company regulation.

"It is this divergence in regulatory practice, coupled with the limited ability or willingness of regulatory authorities to cooperate with each other, which has created barriers to international insurance," Mr. Spencer explained. "Most notably, many countries-on prudential grounds-completely ban the provision of insurance services except by companies established within their own territories."

But this limits capacity and product availability in the local markets, reducing the options for insurance buyers.

Even in the acknowledged international arena of reinsurance, certain countries' regulators-including those in the United States-demand locally held trust funds. "This does not in my view promote the optimal use of capital or the prudent spread of risk," said Mr. Spencer.

The fundamental problem is one of non-cooperation between different countries' regulatory authorities. With the exception of Europe-which has a degree of harmonization through 1992's Third Life and Non-Life Insurance Directives-"mutual recognition of each others' regulatory approaches has largely been deemed inappropriate, unachievable or impossible," he asserted.

But regulators are feeling the pressure of the increased globalization of the business, and responded in 1993 by forming the International Assn. of Insurance Supervisors. Although the IAIS has been running alongside the National Assn. of Insurance Commissioners, it will this year set up a separate secretariat in Basel, Switzerland.

The IAIS's aims are "to ensure improved supervision of the insurance industry at the domestic as well as at the international level," explained Mr. Spencer, "in order to maintain efficient, fair, safe and stable insurance markets for the benefit and protection of policyholders."

Its first priority is to establish proper arrangements for the exchange of information, improving on the current "at best patchy and at worst non-existent" arrangements. Following its annual meeting in Paris last October, the association now has the authority to develop international standards for supervision.

Work got under way almost immediately. A technical committee set up in November has already begun two projects, one involving the draft of principles for national standards.

Adopting these will be at the choice of the IAIS member, though "as many members as possible will be encouraged to embrace the standards" and the standards will be designed to "encourage convergence towards common approaches to supervision without attempting detailed harmonization of members' supervisory techniques."

The second project-U.K.-based and led by the DTI-is developing proposals on supervising international insurance groups and their overseas interests. "No foreign insurance establishment should escape supervision," said Mr. Spencer, "and each country has a duty to ensure that foreign insurance establishments in its territory are supervised."