The European insurance industry is facing a time of increasing regulation and instability. Jonathan Swift talks to the director general of the CEA, the European insurance and reinsurance federation, about lessons to be learnt from banking, Solvency II, and the pan-European market.
Michaela Koller, the director general of the CEA, the European insurance and reinsurance federation, is very honest when she describes herself as "an old Brussels animal".
Indeed "old" may be stretching it, but she has worked in Brussels for the last 17 years and prior to joining the CEA in February 2007 was a member of the management committee of the European Savings Banks Group and the World Savings Banks Institute. But Ms Koller appears to be as enthusiastic today as when she first walked into the corridors of power in Belgium.
Banking v insurance
So having worked in the banking sector what convinced Ms Koller, a German national, to change tack and work for an insurance body instead? "When I went into insurance some of my banking colleagues asked me ‘why would you want to do that, nothing ever happens in insurance?' but honestly -and I am not saying it because I am here - I have not had a dull moment since I took the role," she explains. "The CEA was looking for someone with Brussels experience who knew the environment having worked within the European Federation before and I fitted the bill."
As such her lack of insurance knowledge was no impediment, because the CEA insisted she would be able to learn about the market in her own time. And coming from a banking background, those who appointed her were convinced a lot of the groundwork in establishing its profile had been done as Ms Koller already knew the relevant movers and shakers.
"In the parliament there is a group of MEPs who are really interested in financial services and they look at it not withstanding whether it is banking or insurance. Some might have preferences, but you have a few MEPs who are really interested in this area and it just so happened I had worked with them before," she admits.
"It was about me coming in with my contact network in Brussels and understanding the financial services approaches tend to be similar, especially as regulation is often read from banking across into insurance."
Restructure and refocus
Ms Koller has already stamped her mark on the CEA, having streamlined the organisation and closed its second office in Paris to be more focussed on the European decision makers.
"We had roughly 70 working [sector] bodies before, and we are now down to 15. We had two offices in Paris and Brussels. We are now only in Brussels. We have also reformed our statutes and have a new budget system. Basically the members asked me to reform their governance and that is what has happened."
Asked how the CEA stacks up against the ESBG and WSB, Mr Koller reflects: "The insurance market offers such a broad spread of subject areas. We are discussing everything from solvency and pensions to prudential and accountancy requirements. But tomorrow I could be confronted with climate change, and the next day I may be preoccupied with motor issues. And that is a difference compared with what I was doing before."
Within five minutes of sitting down with Ms Koller it is inevitable the conversation turns to Solvency II, and the comparisons with the Basel II banking system she knows all to well from her previous experience.
"When I compare the approaches there are huge differences in that the Basel system was already developed by The Basel Committee on Banking Supervision. So it was developed by an international body and the commission translated the regulations into Brussels law with the Capital Requirements Directive, while Solvency II was something genuinely developed by the commission," she responds.
"The second difference is that because it was developed by the commission, and the EC subscribes to the better regulation principles it was created with a lot of consultation with stakeholders and supervisors, with impact assessments, cost benefits analysis and all the things we did not have with Basel."
It may come as shock to those who knew Ms Koller from her banking days or a true sign that she is now a dyed in the wool insurance convert that she adds that Basel II is placed side-by-side Solvency II its content is "quite frankly not as advanced".
She qualifies this by noting that Basel II did not involve "an holistic" approach in Europe, even though Brussels - as is its whim - went further in translating the rules into law. Instead she praises the Solvency II approach for - among other things - covering all assets and liabilities, imposing much more responsibility on insurer's boards and being consistent.
"When you look at the two sets of regulation, it is a bit unfair to give them the numerical value two, because it implies that they are on a par but they are not. It is also interesting that Solvency II as a project was developed after the last crisis - albeit a much smaller one, the bubble in 2001/2002 - but it was genuine response from the supervisors supported by the industry based on the lessons learnt. And those are still valid today - in that if there is not enough capital to cover the risks, what you need is a more sophisticated and intelligent approach to get it better aligned.
"You need to make CEOs and boards take much more responsibility for risk management and we have that with the fact enterprise risk management and own risk solvency assessments are embedded in Solvency II."
Ms Koller also praises Solvency II's engagement of the various insurance supervisory bodies, and the fact it has accepted that the financial markets tend to be cyclical: "Basel needs to catch up with some of the ideas in Solvency II such as the group supervision rules which are stronger.
"But what I have certainly concluded is what works for banking does not necessarily work for insurance and vice versa. But you can develop genuine approaches for both that then lead to the same policy objectives. And for me that was one for the lessons I have learnt."
Despite her praise for Solvency II when asked about the detail in getting to the objective, she admits that despite being satisfied with the framework directive, there are obviously issues with the means of implementing it, which has seen the CEA come out in protest against some of the guidance and proposals being put forward by the Committee of European Insurance and Occupational Pensions Supervisors. Not least the excessive levels of capital it has proposed insurers set aside, especially in the non-life market.
Although Ms Koller reflects positively that the EC decided to depart from Ceiops recommendations and ease the capital burden on insurers under the QIS 5 draft, she adds: "The commission has corrected the Ceiops advice - which from our perspective was the right thing to do - and we much closer now to QIS 4. But even there we had capital requirements that were going up.
"We are still discussing on a number of issues with the commission, as are the supervisors, because they are not happy it corrected them. So it could move up again but we will try and reverse that by convincing the commission that is the best solution."
With the ramifications of the global crisis still being played out Ms Koller admits to being somewhat exasperated that her members are often on "the receiving end of a lot of activity in the banking sector".
She adds: "The regulators have looked at what happened during the crisis and have decided that the quality of capital in the banking sector was insufficient. But we are now having the same debate in insurance. And we have asked them what has changed compared to before?
Facing the battle
"The European insurance industry went through the hardest stress test it could face without any major hitches. A result that does not justify a debate on the need for insurers to hold much significantly higher levels of capital, it is not logical or understandable."
The CEA's constituency includes all 27 EC members, plus Switzerland. Liecthenstein, Norway and Iceland - which are all in the European Economic Area - EC hopeful Croatia and Turkey which was a founding member of the CEA. Outside of this group countries like Russia and Ukraine are designated as observers.
Despite the relative infancy of some of these insurance markets when compared to the UK, Ms Koller explains: "When you look at the market it is amazing how the Eastern and Central European countries have caught up in terms of development. They have gone through a period of rapid development in such a short time. I have seen many supervisors from central and Eastern European countries embracing Solvency II very strongly and they are on a par with their western colleagues. I don't see a quality gap or difference"
Asked about her general outlook on the Solvency II process, Ms Koller admits that people should not be misled by her calm exterior: "I am a professional optimist. And as long as we have time and there are possibilities to talk, we should be in strong dialogue with the supervisors.
"And while we do disagree, more often than when we agree. It is good because we sometimes misunderstand each other, and if you are locked into a misunderstanding you will not advance. The more we can talk, the better chance we will have of explaining why we believe the things we do."
Despite being European in outlook, the CEA is increasingly playing a role on the global front in its lobbying and regulatory activities: "Based on premium income, Europe is the biggest market in the world. And when you add reinsurance we are a net exporter to the US and not an importer which is the opposite of banking."
Widening the net
As a result Ms Koller notes that it works with more international bodies such as the International Association of Insurance Supervisors and even the G20 which is taking a broader interest in financial services: "And we engage with other federations around the globe in a lose network. For example, before our recent conference in London we had a meeting of the international insurance associations, and we had representatives from the US, Canada, Mexico and Brazil, and that is an indication we take these things very seriously.
"While at our conference we had speakers from all over the world including Singapore, Mexican and American supervisors sitting on a panel. With regard the CEO panel we had representatives from Asia, Europe, US and Bermuda. And on the consumer panel we had someone from Mexico and Canada. All of these things are ongoing and there is an exchange of views that does not just extend to the US and Japan."
Ms Koller on:
Whether Europe has a genuine pan-European market
"There are early signs of a pan-European insurance market. But it depends at what you look at. It is probably harder on the retail side because you still have a lot of common goods rules in the countries that require adaptation to local rules, but on commercial lines, which are more European in approach, policies are sold to businesses across the continent. And reinsurance is very much a European if not international product so there we are more advanced than when you compare it to a couple of years ago."
Widening the scope of the CEA
"At a certain point we will have to have a debate with our membership on what we want to do about broadening the scope. But the idea at the moment is to focus on Europe and our core European countries and we will see where we get to."
Splitting up the CEA into three constituent groups: life, general and reinsurance
"There has not been a single day that I can remember where I have heard this suggestion. Members are very happy and see it as an advantage for the three areas to be covered by one body. Obviously we have a reinsurance committee and we meet with the CEOs of the largest reinsurance companies to get their feedback.
"As for life and non life, when I look at the key activities of the CEA, and things like Solvency II, it is relevant for all three. If you split up the organisation you would need three different organisations looking into Solvency II and I don't think that would improve the quality of what is being done."
CV - Michaela Koller, the director general of the CEA, the European insurance and reinsurance federation
Michaela Koller has worked in Brussels for the last 17 years. Prior to joining the CEA in February 2007, she was a member of the management committee of the European Savings Banks Group and the World Savings Banks Institute.
In her earlier career she was head of the European Office of German Building Societies and deputy managing director in charge of the interest representation of the European Federation of Building Societies. Ms Koller has served as a member of various advisory groups established by the European Commission and testifies regularly in hearings organised by European Union institutions.
Ms Koller is a German national and holds a law degree from Augsburg University.
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