2nd UPDATE: UK Insurers Face More Regulations With Proposals

U.K. insurance companies and their overseas operations could in future be subject to coordinated international regulation if recommendations are implemented from a report published Wednesday by Financial Services Authority Chairman Adair Turner.

"Prudential oversight of financial institutions should ideally be coordinated in integrated regulators (covering banks, investment banks and insurance companies) reducing the dangers of inconsistency and arbitrage between different authorities within one country," Turner said. This proposition would also affect banks and investment banks as operations in these three industries sometimes overlap.

For example, the report noted that troubled U.S. insurer American International Group (AIG) was deeply involved in the credit-default swap market, "taking trading risk similar to that facing investment banks, but was subject to an insurance regime rather than a bank trading regime."

The near-collapse of AIG is often cited as one reason why investors fear the crisis among banks could lead to a similar funding crisis among insurers.

The report noted that, currently, the supervision of banks and other financial services firms "is entirely in the hands of national supervisory and regulatory authorities" and that the level of supervision "varies by country."

It said any future global agreement on regulatory priorities should include the principle that "offshore centers must be brought within the ambit of internationally agreed financial regulation, whether relating to banking, insurance or any other financial sector."

Stephen Haddrill, the Director General of the Association of British Insurers, said the review "is an important contribution which could be a significant step towards improving regulation."

Haddrill said Turner's recommendation for a European regulatory authority "is a welcome acknowledgment of our arguments that we need more effective cross-border supervision."

He said a "supervisor of supervisors" will benefit U.K. insurers, who form the largest insurance sector in Europe.

"However, we believe the FSA should go further and support such a body having the powers to settle disputes between regulators over cross-border companies," Haddrill said.

The Confederation of British Industry was cautious over the report.

"The CBI supports measures to improve the coordination of European regulators, but does not support the need for a single regulator. Lord Turner has come up with some interesting ideas in this area, which the CBI will study with care," said CBI Deputy Director General John Cridland.

Some U.K. insurers contacted by Dow Jones Newswires declined to comment immediately, saying they would first need to study the Turner report.

-By Vladimir Guevarra, Dow Jones Newswires, +44 (0) 20 7842 9486, vladimir.guevarra@dowjones.com

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