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February 5, 2013 11:51 pm
The head of a leading UK life assurer is set to make one of the most outspoken critiques yet of regulators’ plans to slap capital surcharges on insurers they deem too big to fail, warning the idea flies “in the face of all the evidence”.
In a speech set for Wednesday night, Nigel Wilson at Legal & General is also expected to criticise a form of embedded value accounting – still used in the sector – as akin to Betamax, the redundant videotape format.
His comments come as regulators prepare to publish a list in April of insurance companies they consider systemically important, after completing a similar exercise for banks.
Those designated too big to fail face targeted capital surcharges and restrictions on lines of business that regulators deem “non-insurance” or “non-traditional”, such as derivatives trading and financial guarantees.
They will also be required to prepare so-called living wills – wind-down plans in the event of collapse.
But Mr Wilson is expected to say the plans risk harming the economy given insurers’ role as long-term investors.
“How much would be spent on compliance which could otherwise be invested in – for example – addressing the crisis in affordable housing?” he is preparing to say. “I would . . . urge taking a look at the economic reality.”
Supervisors are trying to avoid a repeat of the failure of AIG, which was considered one of the world’s strongest insurers before its government bailout.
The International Association of Insurance Supervisors may deem up to 48 insurers systemically important but has signalled the number will be significantly smaller in practice.
Size per se will not be as important in the selection criteria as the amount of non-traditional business the groups carry out.
With a market capitalisation of £8.77bn, Legal & General is the fourth-biggest listed insurer in the UK and 11th in Europe but ranks only 40th globally.
Still, Mr Wilson is expected to raise concerns that national regulators will consider putting similar restrictions on other insurers that do not meet the globally systemically important criteria.
He is likely to argue insurers are “different animals” to banks, that the UK sector is already well capitalised and that the industry has adequate procedures in place for companies that run into trouble.
The L&G chief executive is also set to attack policy makers for encouraging market consistent embedded value accounting – “a redundant methodology which cost my firm £7m”.
“This now sits in the metaphorical garage, gathering dust alongside the Betamax,” Mr Wilson is expected to say.
Legal & General does disclose European embedded value – another version of the insurance methodology – in its results but emphasises the more conventional international financial reporting standards.
Mr Wilson’s planned speech demonstrates that he is willing to be just as outspoken about regulation and public policy as his predecessor Tim Breedon, whom he replaced last year.
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