For most of us, government regulation of any industry is, at best, a necessary evil and, at worst, unwanted interference - shades of the "euro-sausage" regulatory mentality famously ridiculed by Jim Hacker in Yes, Minister.
For the insurance industry, however, regulation is a serious business.
Recent developments have made the subject topical. In the UK, pensions mis-selling could arguably have been prevented by tighter regulation while here publicity has surrounded the alleged "churning" of some life assurance policies.
Add to this the complexity of many life assurance products, combine it with a certain unease in some quarters about self-regulation, throw in some highly publicised broker failures, and you have a mix which seems to lead inexorably towards greater regulation of the insurance industry. But should the sector be more highly regulated, and if it should how much regulation is good regulation?
Two areas of regulatory change illustrate the dilemmas. The first might be called the "super-regulator" issue, in which a Government advisory committee is understood to favour the creation of an institution to regulate the entire financial services sector, including banking, investment advice and insurance.
Supporters of this "single regulator" concept argue that it may be more effective than the current regime in bringing all regulators under one roof and giving them more focus and cohesion, and that it may be more efficient, through economies of scale. They also suggest that the super-regulator may be more accountable and transparent than a more fragmented regime.
Critics argue that there is little evidence that any of these benefits follow automatically from centralising regulatory functions in a single institution. In reality, they say, each of the many different industries forming the financial services sector has its own complex products, processes and existing legal and regulatory framework, so that any new body would simply be made up of distinct subgroups of specialist regulators.
As for accountability and transparency, the critics argue, a super-regulator sounds good, until the first crisis of confidence puts the entire system in jeopardy. Some even wonder whether a trend towards over-elaborate regulation of financial services could damage the important international sector in the IFSC, where Ireland has acquired an enviable reputation for its robust but flexible regulatory regime.
The second topical regulatory issue concerns the proposed rules for disclosure of life assurance policy details to customers. Items to be disclosed fully include not just the remuneration of the broker or agent (or a calculated equivalent in the case of an insurance company selling through its own direct sales force), but also details such as the surrender values, investment assumptions, and so on.
Surely no one could object to more information being given to the consumer at point of sale? Almost nobody does, but there are some very thorny issues buried in the detail of the new rules.
For example, the notion of calculating an "equivalent" remuneration for all sellers of life assurance products in the different distribution networks is fraught with definitional difficulties and practical problems. These will take time, and money, to address.
Who pays for all this regulation?
Arguably, consumers pay in the long run, so there must be a trade-off between over-complicated regulation and its cost. There is no way to be certain that the right balance has been achieved, and regulation alone cannot prevent fraud. After all, robbing banks is not legal, but it still occurs.
So what does the future hold?
We can safely say that insurance regulation will increase and so, therefore, will the costs of achieving compliance. But, with damage to reputation now perceived as a major business risk, insurers will doubtless consider that first class regulatory compliance is a must, not an option.
Dargan FitzGerald is a director in the insurance practice of Ernst & Young. The views expressed are his own.
