TUESDAY 20 NOVEMBER 2007

Mr Peter Vipond and Mr Philip Long

  Q38  Chairman: Good morning. I am not going to try to introduce you to everybody round here because you can see all our name plates and you can see who is addressing you. We have radio engineers in attendance recording the meeting. As with all witness sessions we put it on the record, record it for a webcast and therefore please use the microphones. You will receive a transcript and be allowed to sort it out in terms of what you said in the session. Welcome very much to you both. You have had a list of the sort of questions we want to ask you, but would you like to start with a description of your organisations and an opening statement, if either or both of you would like to make one. It is your choice; you can skip the opening statement and we will ask questions.

  Mr Vipond: I am Peter Vipond and I work for the Association of British Insurers which has the overwhelming majority of insurers on the life and GI side in the UK as members. Also, as perhaps befits a UK industry within financial services, we have a very international focus, so we spend a great deal of our time these days lobbying in Brussels at the Comité Européen des Assurances and at the international level at the International Association of Insurance Supervisors, so we have a very international remit as well as something I am sure you are very familiar with which is domestic debates on flooding, pensions and all that very important material.

  Mr Long: My name is Philip Long and I head up Group Risk at Prudential plc. I would like to say a few words about Prudential plc and the CRO Forum. Prudential plc is an international retail financial services organisation with a focus on savings for retirement and security after retirement. We operate in the UK, the US and 12 Asian countries. One of the key features of our strategy is the financial and operational optimisation that we get stemming from the geographical diversification of our business. On the CRO Forum; the CRO Forum is comprised of the Chief Risk Officers of 14 leading European insurers; it is a professional risk management group focussing on developing and promoting industry best practice in risk management. There are three key objectives of the CRO Forum: firstly the alignment of regulatory requirements with best practice risk management; secondly the recognition of group synergies in particular in diversification benefits; and thirdly the simplification of regulatory interaction. Prudential and the CRO Forum are very supportive of the Solvency II developments. The CRO Forum have been active contributors to the Solvency II directive and has published a number of papers on technical issues regarding Solvency II. We do believe that while there is a lot of progress to make in Solvency II, the directive is a good one and we would like to pay tribute really to the people in Europe and also in the UK, namely CEIOPS, the Commission, and the CEA; and in the UK the HMT and the FSA and colleagues here, the ABI, who have done a great deal to progress this in a particularly good way.

  Q39  Chairman: Just to get us started I am going to ask the first question which is why do we need a new solvency framework? Why is the old one not good enough?

  Mr Vipond: The old one is not good enough because essentially it does not put capital against risk in a terribly rational or efficient way. It is not good enough because it does not look at modern financial services companies and the group structure that many of them have; they need to think about capital and diversification on a group basis. Finally because, as an old Directive, it does not take account of the integration of a single market for financial services and the need to have a common framework for supervisors across Europe. That is not to say that we support a single supervisor; I think that is not on the agenda at the moment. What is on the agenda is much more cooperation between supervisors in dealing with groups, but also when they are dealing with smaller firms, that they supervise them in a broadly consistent way. That is why we need Solvency II.

  Mr Long: I agree with Peter here. The current framework was severely tested in the 2001/2002 equity market shocks plus the general trend towards lower interest rates around the world. Many European companies got into trouble during that time. Effectively the current solvency framework, however appropriate it was when it was developed at the time, was found wanting in those situations. It was not risk sensitive enough. We also can look at the US situation where in the 1990s similar issues occurred in the US market and they introduced a US risk based capital system which I think has helped greatly in preventing a lot of problems for US insurers. Solvency II is, I think, a better system than the US RBC system and it is an appropriate reflection of the developments in risk management and risk measurement that has been developed over recent years. Looking from a company point of view, for Prudential plc for example, we like Solvency II because internally over the last three years we have been developing many risk measurement techniques that have a similar basis to Solvency II. We price products on a market consistent basis, we measure the risk on this basis, we are also starting to manage performance on this basis and we will now be providing supplementary accounting reporting on this basis, on a market consistent embedded value of the Prudential Group. If a regulatory regime is actually incentivising us to do the right thing we are all for it.