Paul Myners

“I’m not an elected member of parliament, but I do have a constituency – the City,” smiles financial services secretary and peer Paul Myners to the assembled insurance executives and journalists at the ABI in Gresham Street, London.

“I think of it as a physical constituency like any other. There are areas where one treads with great caution in the dark – otherwise known as investment banks. The insurance industry is more like the safe suburbs of middle England.”

It’s music to the ears of his audience.

Myners is here this morning to outline the government’s latest thinking on Solvency II, the great regulatory change looming on the horizon. There are still a few years before it comes into force at the end of 2012, but politicians and the industry are now wrangling over the details of how it will be put into practice.

CEIOPS, the umbrella body for European regulators, has set out stringent proposals, to the dismay of the ABI – and Myners himself, it transpires. Insurers need to take notice because, according to analysts at Credit Suisse, capital requirements could soar by as much as 50% if the proposals go ahead in their current form.

A banker by trade, Myners is fairly new to the world of politics. He was brought into the Cabinet in October 2008 as part of prime minister Gordon Brown’s “government of all talents”, and took a key role in the UK’s bank bail-out. But Myners had a rough ride earlier this year from the press concerning RBS boss Fred Goodwin’s sizeable pension, agreed at £693,000 in the same year as the bank lost £24bn. The press expressed due outrage, while the Treasury Committee suggested that Myners’ “City background, and naiveté´ as to the public perception of these matters, may have led him to place too much trust in [the] RBS board”.

Man of many talents

Myners nevertheless has an impressive CV: as well as a high-level career in banking, he has held a clutch of directorships, managed a hedge fund, chaired Marks & Spencer – where he fought off a takeover bid from billionaire retailer Philip Green – and even had a stint as a financial journalist.

It’s a varied career, but it can still have hardly prepared him for the Herculean task of steering the City through the financial crisis. Myners helped draw up the bill that rescued three of the country’s biggest banks, and worked with their chief executives on the part-nationalisation scheme that is still playing out today.

But, as he himself says, insurance falls within his City constituency too. While the industry has come out of the financial crisis looking pretty clean, it too is suffering from the mistakes of the banks. Crucially, CEIOPS has decided that Solvency II should be more stringent than originally planned. The implementation proposals it has put together, which will be finalised over the next couple of weeks, massively increase the amount of capital that insurers would have to hold. They also cause other problems, for example favouring government bonds against other types of investment.

Standing at the front of the crowded room, Myners is at ease. He acknowledges that it’s a bit early in the morning for such serious topics, but nevertheless seems comfortable grappling with the complicated technicalities, though he praises his accompanying civil servants several times. “They’re the real experts,” he says.

It’s Myners, though, that today’s audience has come to see. Since CEIOPS issued its implementation proposals, the ABI has been vociferous in its opposition. Director-general Stephen Haddrill warned the chancellor Alistair Darling in September that the European insurance industry will be “destabilised”, EU insurers will lose out to competitors, and foreign insurers will avoid the EU under the current rules.

The government listened. In his speech, Myners follows the ABI’s line closely. “I have been a vocal advocate of better-quality capital,” he says. “A consistent, workable definition of capital across insurance, banking and investment will provide market certainty and promote market confidence.

“But Solvency II was conceived under benign economic circumstances. It is now being negotiated in a starkly different climate. It is important for legislators to resist calls for sweeping reform to the directive in the absence of robust data and analysis demonstrating a need for this.”

He echoes the industry’s cry that insurance is different to the banks. “The regulation of insurance companies should not automatically follow the blueprint of that for banks,” he says. “There are areas where consistency is desirable. But we should not have consistency for consistency’s sake.”

In the thick of it

Myners, fresh from a meeting with MEP Peter Skinner, who is steering the legislation through the European parliament, says the UK government is keen to lead the debate. “Level 1 was a success, but we cannot allow this strong start to be undone by well-intentioned but ill-conceived implementation at level 2,” he says. “In Solvency II, as with so much legislation, the devil is most certainly in the detail.”

He then speaks about the implications of Solvency II for life insurers; they argue that the regime needs to recognise a liquidity premium in the interest rate term structure used to discount certain liabilities, principally annuity liabilities. “We need to make sure that we do not overvalue the risks associated with annuity liabilities, thus requiring overly prudent levels of capital,” he says.

But there are plenty of issues affecting general insurance too. Myners says the government is committed to keeping the capital requirement standards sensible. “Similarly, we need to ensure that the rules dictating technical provisions are appropriately calibrated, and interact sensibly with other capital requirements,” he adds.

The main thing, Myners says, is to avoid the law of unintended consequences. “We share an over-arching concern with industry about the need to carefully assess the aggregate impact of all of the proposed measures, before we come to any final conclusions on each of the issues involved. We need to be careful to ensure the right structure of regulatory responsibilities and deliver a framework that supports the business of our international groups, and groups with subsidiaries based here.

“Fundamentally underpinning all of these challenges is the need to ensure that the eventual regulatory obligations of Solvency II do not go beyond the original intentions of the framework directive.”

As the session draws to a close, Myners skillfully fields questions about political continuity following the next general election. How will the government ensure it? “By getting re-elected,” he jokes. But it’s a serious point and, welcome as his speech has been, it seems unlikely he’ll be in government to see the legislation through.

The ABI, though, is going nowhere, and as the various factions keep slugging it out in Brussels’ corridors of power, it will be fighting hard alongside the UK insurance industry to make sure this crucial legislation comes out right. IT