Insurance regulators from around the world met last week in Budapest for their annual conference. They weigh up whether insurance companies have assessed the risks they face correctly and have put enough capital aside to protect their policyholders. Overall, they have done a good job.

Insurance companies are not immune to the crisis, but through their own efforts, and those of their regulators, they entered it better prepared than other financial services. The failings of AIG and Fortis were due to their banking and derivatives — not insurance — operations. So what can we learn from the way in which the insurance regulators, including the Financial Services Authority (FSA), do their job?

First, insurance companies and their supervisors have recognised that security requires capital and that the level of capital depends on the level of risk. They assume that the unexpected will happen. By requiring insurers to cover risks up to those likely to occur once every 200 years, insurance supervisors effectively require companies to protect themselves against extreme market turmoil. If the banks and their supervisors had approached risk assessment of their assets and liabilities with similar caution, the risks for all would have been much reduced.

Secondly, the European Commission and others have called for big international insurance groups to be supervised by a lead regulator, from the country where each company is based, working with a college of supervisors covering the other markets in which the company trades. Co-operation across borders is essential to securing consumer interests in global financial markets. This will require cultural change among regulators who have been brought up to protect their national interests.

Thirdly, as Lord Turner of Ecchinswell, the new FSA chairman, has said, we need better supervisory staff in our regulatory bodies. Supervisors are too often inexperienced and change jobs too quickly. This must be addressed. The FSA must recruit people who have good incentives to stay and it must implement strong measures to prevent early departure. The industry and its customers pay for the FSA, so they must be assured that extra money for regulatory staff will produce a better result.

In one respect above all, the FSA must change to achieve this. The glory boys of the FSA have been its policy teams, conducting marketwide reviews and often making piecemeal reforms to the rules. Now the focus must be on the bread-and-butter work of effective supervision by people who are able to identify real problems, secure the respect of boards and take rapid action against problems in particular firms rather than launching more industrywide initiatives.

The FSA has responsibility for promoting financial education among consumers. For a long time, consumers have been steered to the best short-term returns by league tables. Nobody has advised them that security is not cheap, that capital to cover risk costs money. Consumers require more sophisticated advice on where to find security. The product with the highest rate of interest is not necessarily the best.

— Stephen Haddrill is the director-general of the Association of British Insurers

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