The risk of “reckless prudence”

I thought this term, “reckless prudence” was interesting; and take this opportunity to share the speech here. …

Source: eDaily | 24 Oct 2014

The current emphasis on regulations is leading to a serious risk of “reckless prudence”, said Mr Howard Davies, Chairman of the Board of Directors, Phoenix Group, at yesterday’s IAIS Annual Conference panel discussion on the developments and challenges in insurance supervision.

“We are so risk adverse that we are requiring levels of capital that are probably beyond what is sensible, and intrusive supervision which I think is not really sustainable,” he added.

There has been a very sharp swing of the pendulum post-global financial crisis for the financial system as a whole, he said. Pre-crisis, politicians were talking about the importance of not getting in the way of the financial sector which was seen as a great wealth generator; but that has now “switched to a language that is all about intrusive supervision and much more directed control by regulators”.  While it is an inevitable consequence of a crisis of that scale, the pendulum has swung too far back, he said.

What is needed now, is for supervisors and firms to try and move the pendulum back to a sustainable position, said Mr Davies.

And one way this can be done is through the development of a more mature relationship between the supervisor and the supervised entities, with greater communication, said Mr Karel Van Hulle, Professor, KU Leuven, Goethe University Frankfurt. Touching on potential regulatory challenges, he said a top-down approach to regulations will not be the right approach. There needs to be mutual learning, and bilateral and multi-lateral cooperation in the development of regulations, he said.

However, in his keynote speech, Mr Jeroen Dijsselbloem, Dutch Minister of Finance and President of the Eurogroup, said that after the impact of the crisis on the insurance industry, there was good ground for some new and firmer regulations, and hence at this moment, having “too much regulation” in the industry was not the greatest concern.

A few years down the road, it may be viewed differently and adjustments may be made. But right now, it would be more prudent to keep in mind lessons learnt from the aftermath of the crisis. “I think we should look forward with the wisdom and experience that we have only recently got on board. Let’s not forget what happened,” he said.

Mr Dijsselbloem also called on the IAIS to build upon the work that has been done in Europe, so as to further enhance global cooperation that is necessary for effective supervision. “Large insurance groups have become very complex and interconnected with other financial institutions and markets, so worldwide cooperation is necessary for effective supervision. In short, the EU has a clear interest in joining forces with its partners from around the world.”

On the EU’s part, the European Insurance and Occupational Pensions Authority (EIOPA) will also play an instrumental role in ensuring the consistent implementation of Solvency II through the promotion of supervisory convergence and establishment of a common supervisory culture in Europe. “You will witness an intensified cooperation between supervisors from 2016, in particular in the monitoring of insurance groups,” said Mr Dijsselbloem.

The 21st IAIS Annual Conference’s theme is “Enhancing policyholder protection and financial stability through governance and risk management”. Hosted by De Nederlandsche Bank (DNB) in Amsterdam, the conference ends today.

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