BIS countdown - Sean McGovern interview: Getting to grips with government

Despite having only taken on his latest responsibility — managing US regulatory affairs — in February this year, Lloyd's general counsel Sean McGovern certainly appears to be getting to grips with the role — and the speak.

This is most evident when he starts quoting fictional chief of staff Leo McGarry, from the US political television series The West Wing: "There are two things in the world you never want to let people see how you make 'em: laws and sausages."

While Mr McGovern's knowledge of the finer points of butchery remains unknown, he is undoubtedly becoming increasingly well-versed in law making, both at home and overseas. He has overseen Lloyd's input into consultations on everything from the Dodd Frank Act in the US to the ongoing debate closer to home on Solvency II.

A seasoned veteran of the Lloyd's market — having joined in 1996, when he admits he took the first in-house job on offer — Mr McGovern has played a key role in everything from the impact of 'reconstruction and renewal' and the influx of corporate capital; to the consequences of 11 September 2001 terrorist attacks and outsourcing the market's back office to Xchanging.

With a remit now far removed from his initial in-house legal role, it would appear that a range of key policy decisions are exercising a significant chunk of both Mr McGovern's mind and time. For starters, in the UK the new coalition government's plan to overhaul financial regulation is naturally of great concern, given its potential implications for the competitiveness of Lloyd's overseas.

"I have been heavily engaged over the past few months in building relationships with the new government, and really making sure our issues are on the agenda in terms of what we want to achieve and, more importantly, to prevent insurance being dragged into other agendas," he explains. "I have been getting in front of ministers and have had a couple of meetings with [financial secretary to the Treasury] Mark Hoban, who is obviously a key figure going forward."

Strong single voice
To further his aims, Mr McGovern has joined several high-ranking thought-leadership groups, not least City UK: "One of the things that came out of the [Sir Winn] Bishchoff and [Bob] Wigley reports on London's competitiveness was that the City needs to start speaking with a single voice on financial services. So, we are using that body to make sure our insurance agenda is fully included in the wider one about London's competiveness." He is also part of a group called the International Regulatory Strategy Group, which aims to act as an interface with government on issues of regulatory policy.

"We had a meeting with Mark Hoban last Monday, which was a good opportunity for Lloyd's to be at the same table as Morgan Stanley, Deutsche Bank and the London Stock Exchange. The IRSG is the vehicle we will look to engage government on regarding European-led initiatives like Solvency II, or the Markets in Financial Instruments Directive — all of the things where we are trying to secure the government's understanding of the insurance industry's position."

He continues: "Our message to government is largely that the biggest risk facing the financial services industry in London is the current uncertainty surrounding implementation [of the government's financial services plans].

"On one hand, the industry wants certainty and clarity, but it also wants things to happen quickly and there is a tension between the two. The government is trying to do the right thing by carefully implementing what is a major change to our regulatory structure but, by doing so, time is ticking along, which is creating anxiety about how it will impact policy development over that period."

Mr McGovern admits he has some concern over the Financial Services Authority's "finite life" but stresses that it has to continue engaging in important policy debates and discussions in Brussels and Basel. "There is clearly an issue for us in how the regulatory changes are going to impact the ability of the FSA to deliver on policy issues surrounding Solvency II, of which there are a lot and, frankly, going to be a lot more.

"It will be difficult for the FSA to retain its key people during this period of transition and talent is thin on the ground. This is compounded by the fact people in the industry might view the FSA as rich pickings for talent, especially as it may be feeling slightly unsettled."

Mr McGovern's sympathy for the FSA stems partly from the problems he concedes Lloyd's itself has had — now resolved — after Solvency II staff were "poached" by the market: "We have basically sent out a message to say this is not helpful and we can't guarantee the market will be as influential as it could be if we don't have the resource to do it."

Arguably the FSA needs the best possible resource, more than other European regulators, because Mr McGovern predicts it will have more internal models to approve than its continental counterparts — due to its position in the overall global insurance market and the type of business written in London: "This only further ratchets up the pressure on the FSA to make sure it delivers."

Massive challenge
When asked about his views on the body overseeing Solvency II, the Committee of European Insurance and Occupational Pensions Supervisors, Mr McGovern begins diplomatically by commenting on the "massive challenge" it faces and "hugely constraining timeframes". But, as a consequence of this, he notes that both Lloyd's and other industry bodies have become somewhat concerned about the advice coming out of Ceiops, describing it as "quite isolated". He adds: "Sometimes it doesn't appear to appreciate the cumulative impact of its proposals when put together. And that is partly responsible for the worrying development of Solvency II's direction in terms of capital requirements."

Referring to the FSA's fourth Quantitative Impact Study dry run — which the regulator ran at the start of the year — Mr McGovern says, based on this, Lloyd's would have to double its capital, which he summarises as "clearly inappropriate and not risk-sensitive enough".

He adds: "The fundamental challenge facing the industry is that Ceiops' view of the outcome of Solvency II is somewhat different to that of the industry. It also appears to be different to the consumer's. Ceiops, as the group of national regulators, is inevitably focused on the financial crisis and looking to set the right level of capital for the industry.

"But you have to remember Solvency II was not a response to the crisis; it has been in the works for a long time. Yet the regulators have been influenced, there has been some collateral damage and the industry's fear is that we are seeing an overreaction from Ceiops in the technical detail."

He continues: "There's a disconnect. What we are hearing from the EC is that there is no expectation Solvency II will lead to significant increases in industry capital. But, the way the technical rules are being developed, that is exactly what we will see. So my message to Mark Hoban and others is that we need to close that disconnect — otherwise Solvency II will not deliver what it is supposed to deliver.

"If you go back to the start, the objectives were greater market integration, consumer protection and improving the ability of EU insurers to compete internationally. Now, as things stand, you are not going to get better consumer protection because while good levels of capital are great in protecting against insolvency, they will also take capacity out of the market because people won't write the premium they did before due to onerous capital requirements. That is not good for the consumer, especially when you get into personal lines and life & pensions products."

Reflecting on Solvency II's impact on international competitiveness, Mr McGovern notes that it will not help Lloyd's because most of its business is non-EU: "We have been suffering a bit regarding jurisdictions such as Zurich and Bermuda in terms of tax and want to make sure Solvency II is a competitive enhancement — not a material dampener — on our ability to compete.

"And it is a big issue because the European reinsurance market is the largest single one in the world. In premiums terms it represents about 43% of all reinsurance and that is a market worth protecting. The question is whether we will be able to if Europe is competing with others who are not saddled with the compliance and capital burden Solvency II is going to create?"

Equivalence omission
One of the latest Ceiops developments causing much consternation within Lloyd's is its plan to omit the US — but include Switzerland, Bermuda and Japan — in the first wave of jurisdictions to be considered for Solvency II equivalence assessment.

"The Commission asked for advice on who should be in the first wave and it came up with those three countries," explains Mr McGovern. "It did not propose the US and gave various reasons, largely around complexity and resource. Now I think there will be quite a strong call for the US to be included in the first wave, especially if you think of the importance of it as a market to the European industry. And I suspect the US industry will also lobby for it to be included."

Mr McGovern understands that the new Federal Insurance Office in the US — created by the Dodd Frank Act — would now lead these equivalence discussions as and when they take place, and sees the body as a positive development: "For us, the key thing is that it has the power to pre-empt inconsistent state law, most importantly where it is discriminatory. It also has the right to enter into agreements with foreign governments, so it is an office with which the EU could negotiate."

Looking internally at how Lloyd's is preparing for Solvency II, Mr McGovern is pleased with the progress being made, although he jokes the cost to the market — currently put at £50m — rises every time it asks the managing agents for their projections. "We had to start early and throw a lot of resource at it because, for Lloyd's, implementation is going to be that little bit more complicated given our structure.

"So, if you benchmark us against others — and if you listen to what consultants, accountants and the FSA are saying — it is all very positive. We took a conscious decision to be very public about our implementation and put our guidance into the public domain.

"We did that not only because it is good for us to show leadership but because if we can set the agenda it effectively makes sure we stay of ahead of it. And so, in detail terms, we are ahead of everyone else. We are also ahead of the FSA regarding the guidance we have issued. But the sheer volume of material that insurers are expected to read in the context of Solvency II is just staggering and simply serves to reinforces what a challenging implementation this is going to be."

Ultimately, when all the policy discussions concerning Solvency II are done, oversight of the regime will pass to Lloyd's finance director Luke Savage who is charged with implementation. Or to use Mr McGovern's earlier political TV influenced analogy: make sure the sausages pass the taste test, without spending too much time focusing on what the ingredients are.

Sean Mcgovern on...
The impact of Solvency II on Lloyd's new entrants
"With any new entrant we are looking for them to explain how they plan to meet the challenges of Solvency II, because anyone coming in over the next 12 months is going to have to do a lot to get there in terms of planning and prioritisation."

The impact of Solvency II on consolidation
"Solvency II raises an interesting issue about how big you need to be to start an insurance operation. And the reality is you will need to be bigger. There has been a lot of chatter about Solvency II ultimately driving consolidation in the industry but it is certainly going to raise the barrier to entry, not just at Lloyd's but for start-ups anywhere in Europe."

The ultimate timescale for implementation
"We have seen it rolled back by a couple of months, which is better because it now fits in with the financial year-end. It would be a shame if it is rolled back again and I think the Commission is pretty determined for that deadline to remain. However, if we continue to see the disconnect in the direction of Solvency II and capitalisation issues — and if people don't think we have got time to deal with that — you may start seeing them lobbying for a delay. That would be a shame and could damage Solvency II's reputation internationally."

Solvency II: the debate
Sean McGovern is general counsel at Lloyd's and will participating at the British Insurance Summit on Wednesday 22 September when he will join high profile panellists — including Carlos Montalvo Rebuelta, secretary general, Ceiops; Olav Jones, chief risk officer, Fortis Insurance; and Val Smith, programme director for Solvency II, Financial Services Authority — to discuss the implementation of the new regime. This will address how to lower the required capital due to usage of internal Solvency II models; the diversification benefits and increased performance by risk selection; on-going solvency management issues and integrating Solvency II with core business strategies.

The industry event of the year
Click here to book your place at the inaugural summit.