By Ed Harrison, Principal at LCP
This article explores the issue of regulatory politicisation in the US, the extent to which it could be catching on in Europe, and some of the risks it poses to insurers.
What is the challenge in the US?
Politicisation of regulation is increasingly a challenge for insurers and other organisations in the US. The most topical example of this is the rise of “anti-ESG” bills in republican-controlled states. These aim to discourage or prevent firms taking actions such as providing diversity training, or divesting from fossil fuel investments.
Texas’ “senate bill 13” is an example of legislation was intended to prevent the latter by banning state agencies from investing their portfolios with companies that are “boycotting” fossil fuels. Boycotting has a broad meaning and includes offering ESG investment products that exclude the oil and gas industry.
This regulatory position is at-odds with the UK and EU approach, where ESG issues are becoming increasingly embedded in day-to-day regulation. For example, both the PRA in the UK and the CBI in Ireland have outlined clear regulatory expectations in relation to climate change, and the EU’s update to Solvency II is widely expected to contain climate change mitigation and disclosure requirements.
The divergence in regulatory standards means insurers operating in both the US and European jurisdictions are increasingly caught between a rock and a hard place, needing to navigate through compliance with both pro-and anti-ESG policies.
Is politicised regulation contagious?
Differing perspectives on ESG also highlight a wider issue - the extent to which regulatory politicisation might catch-on on this side of the Atlantic.
We have already seen some early warning signs in the UK that the political landscape is becoming more populist and partisan. For example, regulation became a political issue following Brexit, and Rishi Sunak’s pitch to be Prime Minister infamously included a video of him putting copies of EU legislation into a shredder. Regulation is more likely to become politicised in such an environment.
So far for the insurance industry, the political focus in the UK has been on ensuring that the country is a competitive place for insurers to do business, in order to demonstrate that the UK is taking advantage of post-Brexit freedoms. This focus has driven the recently announced changes to Solvency II and led to the PRA’s new remit to ensure that the market remains competitive.
Whilst these changes themselves have been well received by insurers, there is a risk that politicised regulation could go further in the future, and focus on areas that are more challenging for the industry. For example, the UK government’s “war on woke” and very recent tilt away from environmental issues are areas where a future government could bring forward legislation that departs significantly from expectations.
What are the risks to insurers?
Politicised regulation brings with it a range of risks that insurers (and other organisations) need to consider in the medium / long term:
• Regulatory instability: Regulation aimed at supporting populist objectives may be introduced at short notice, signposted but never delivered, or be at odds with the previous direction of regulatory travel. This increases the uncertainty associated with long term business planning, particularly on issues such as climate change strategy. Such strategies may take time to agree within a company and are therefore prove difficult to pivot to address sudden regulatory changes.
• Regulatory divergence: Firms doing business globally benefit when regulations align. When regulations diverge, this typically increases the costs of doing business. European nations and the US are currently diverging on issues such as ESG. The UK and EU are set to be less aligned on prudential solvency regulation going forward. Following the 2008 financial crisis, regulators around the world had the same priorities – but differing political objectives are now translating into regulatory divergence between western economies.
• Increased compliance costs: Managing the effects of regulatory instability and divergence adds to firms’ costs and also absorbs time within the risk / compliance teams, first understanding the proposed changes, and then supporting with implementation.
• Correlation with reputational risk: The politicisation of regulation usually hits hardest on hot-topic or divisive social issues. Populist politics can make these issues more divisive within society, meaning insurers face increased reputational risk irrespective of which side of any debate they sit.
What next?
The UK and EU political and regulatory environments are still very different to the US, so the risks of regulatory politicisation have yet to emerge in Europe. However, it’s often said that when the US sneezes, the world catches a cold, and perhaps we can see the first signs of a runny nose in the UK today. Reflecting on this, insurers must continue to be proactive in assessing and mitigating risks, ensuring that the risk and compliance teams work hand-in hand.
Insurers should engage with regulators, keep abreast of political developments, and adjust their long-term business strategies accordingly. It's crucial to prepare for a landscape where regulatory shifts could be faster and driven by political agendas, rather than emerging over time in response to market or risk considerations.
|
