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nsurer Commitments May Be Secure, But It Doesn't Feel That Way to Many Customers(BestWire Services Via Acquire Media NewsEdge) As panic sets in amid the worldwide turmoil in financial markets, there is a growing sense of urgency when it comes to assuring insurance policyholders they will be protected. Regulatory guarantees are in the spotlight. Thus far, much of the panic has dogged banks as they take most of the hits from frozen global credit markets and worthless mortgage-backed securities. But the nature of this financial crisis is reaching into the insurance market as well, partly because many European insurers are closely tied to banking operations, and partly due to the heavy investments of many insurers in mortgage-backed assets. As we have seen with the government takeover of Dutch-Belgian financial services group Fortis and the U.S. government bailout of American International Group, policyholders believe they do have reason to fear. The AIG Dilemma If a domestic insurer fails in a developed market, there is usually little to fear for policyholders, as government-imposed safety measures kick in to ensure policies will be honored. The collapse of Japan's Yamato Life Insurance Co., for instance, is manageable, given the midsize life insurer's policyholders fall under the protection of the country's regulator. But for the customers of large multinational insurers, the unknowns are truly unknown, at least from their perspective. When AIG faltered and the U.S. government announced an $85 billion (62.6 billion euro) loan program (since kicked up to $122.5 billion), policyholders in Singapore, Hong Kong, the Philippines and elsewhere swamped the offices of local AIG affiliates, wanting to know if their coverage would be intact. In all these cases, the funds to back up such policies are locally available, separated from those of the parent company. But it's not easy to shake the perception that the failure of an insurance giant regulated in a distant country might make domestic coverage disappear. We've seen this kind of worry before, with the ongoing saga of failed U.K. insurer Equitable Life Assurance Society. When Equitable collapsed in 2000, U.K. policyholders had to be covered for at least 1.5 billion pounds (1.9 billion euros) in unfunded liabilities. But Equitable's failure sent alarm bells across the European Union, because the life insurer had substantial numbers of policyholders in countries like Germany and Ireland. Equitable's failure prompted the European Parliament to investigate, and then to chastise U.K. regulators for their alleged failure to properly implement EU directives related to insurance regulation. Solvency II Late? It now looks as if the Equitable Life row was just a preview of problems to come. As the current worldwide financial crisis deepens, the EU government is looking to shepherd its Solvency II directive through the adoption process with a growing sense of urgency. Solvency II, a plan to impose uniform solvency standards on EU-based insurers, would be a check against just such a crisis of confidence we are now seeing in financial markets, its backers say. The directive has just cleared the European Parliament's committee on economic and monetary affairs, and is headed to the full Parliament for consideration. With luck, it will be in place by 2012. Despite the kudos Solvency II is winning from both industry and government, the question of whether it would have helped prevent insurance company failures in the current crisis is theoretical. A more concrete assertion, perhaps, is that Solvency II at least would have prevented the piecemeal and uncoordinated government response to the current crisis we have seen so far. While the uncertain health of various banks is causing plenty of worry (and in Europe, insurers tend to be tied more closely to banking than in other markets), the confused approach of EU member governments to the problem can only add to the sense that everything is out of control. Germany, Greece and Ireland, for instance, moved unilaterally to protect their domestic bank depositors, sparking a flight of deposits from other countries' banks. Under Solvency II, the supervision of insurers operating across state lines would fall to a single regulator -- that of the insurer's home country -- perhaps creating a greater sense of ease through simplicity. Unfortunately, the plan is not in place to be tested by the current real-world stresses. (By David Pilla, international editor, BestWeek: [email protected]) Copyright ? 2008 A.M. Best Company, Inc. |