XL Group boss Mike McGavick and the man leading the development of new European insurance regulations known as Solvency II produced a lively exchange of views during the inaugural Bermuda Monetary Authority International Regulatory Forum yesterday.

Mr McGavick argued that those jurisdictions who did not follow the Solvency II regulatory model would end up being shut out of the European market.

The increased capital requirements of the new rules, due to take effect in 2013, could make the insurance industry less attractive to investors and impact the industry’s ability to do its job of underwriting risks, the XL chief executive officer added.

Karel Van Hulle, who has led the development of Solvency II in his role as head of unit insurance and pensions, financial institutions, at the European Commission, said the world needed a solvency framework that could be applied consistently in different countries to allow regulators to achieve group supervision of multinational insurers.

He said there was no intention by Europe to impose its regulation on the rest of the world.

Asked about how Solvency II would treat captive insurance companies, Mr Van Hulle said regulators had made progress in talks with the industry.

The industry has argued that captives underwriting the risks of their own parent companies should not be subject to the same enhanced requirements as commercial insurers covering third-party risks.

“We have been discussing it with them and we have moved a long way in their direction,” Mr. Van Hulle said.

He added that several hundred captive insurers had provided data that would help regulators to decide how to apply Solvency II’s principle of proportionality, which takes account of the nature and complexity of the risks insurers underwrite. Those data were now being processed.

“It has never been our intention in Europe to impose our regulatory framework on the rest of the world,” Mr Van Hulle said. “This can’t be said of some other jurisdictions who have tried that.

“What the world needs to do is create a fully risk-based solvency standard. That’s something we are doing in Europe and you in Bermuda have also decided that it’s the right thing to do.” Mr. McGavick said if Solvency II ended up being a basis for the enhancement of trade between countries, then it would be a positive development. While it was clear that there was no malintent from Europe, he said it was clear that there was pressure on others to follow suit.

“The true price of not gaining equivalence is having a market closed to you and that is a heavy price indeed,” Mr. McGavick said.

For Bermuda, pursuing third-country equivalence with Solvency II was “unquestionably the right thing to do”, he added, because so much of its business was sourced from Europe. But the US - the biggest insurance market in the world - “remained unconvinced that this is the right method”.

Mr Van Hulle said there was a readiness from US regulators to move towards a risk-based approach, but that its state-by-state insurance regulation system created “difficulties” in assessing equivalence.

Mr. McGavick then said: “We’ve just had the worst financial crisis in decades. We [the insurance industry] were just stress-tested about as far as I can imagine. We were the ones who helped to stabilise the system.

“Our industry survived it quite well and we did not let policyholders down. So what is it that we’re trying to solve?”

Mr Van Hulle countered by saying there were still issues in the insurance industry that regulators needed to address, such as the publication of financial results that few outside the industry could understand. One of the pillars of Solvency II is transparency, the others being risk-based capital adequacy and corporate governance.

Mr. McGavick said Solvency II would favour larger insurers, like his own company, and make it more difficult for smaller players, who had been an innovative force in the industry.

Had the US structured its regulation similarly 25 years ago, he questioned how Bermuda would have been able to establish its market. The world was a safer place when multiple financial centres - sources of capital - were allowed to flourish, he added.

“We need to make sure that regulatory competition is still part of the world in which we do business, not one group of countries imposing its set of rules, and withdrawing its market if those rules are not followed,” Mr McGavick said.

Mr Van Hulle once more saw things differently. “I would disagree that Solvency would promote larger insurers,” he said. “Many smaller companies are very efficient and will benefit. So I do not agree with all this scary talk about consolidation.

“What I would like is for all to have the best standards and set an example for the banking industry, with our regulatory regime for insurance. Let’s have competition based on regulation that based on economic realities.”

Also on the panel were Bermuda Monetary Authority chief executive officer Jeremy Cox and Axis Capital chairman Michael Butt.

Mr. Butt said: “My concern is that in recession, there is protectionism. Protectionism is given as an excuse for not doing things that make sense. Our concern is that regulation is not going to be as efficient as we would like it to be.”

Asked what would happen if Bermuda failed to get equivalency, Mr Butt said the local market would survive, and would base platforms in EU countries, such as Ireland, to continue to participate in the European market.

He estimated that Bermuda wrote about 40 percent of catastrophe business with major buyers in Europe and 20 to 25 percent of other lines, as well as providing more than 30 percent of the capital at Lloyd’s.

Mr. Cox said: “We have an international industry and a global platform. We are the number three reinsurance and insurance centre in the world so we must operate to a high standard of regulation.

“The regulatory re-engineering we have been going through over the past few years is geared to get us there.”

It was suggested to Mr Van Hulle that if Bermuda failed to gain equivalency, some would see political reasons behind it. He said: “We will not take our task lightly. I don’t see any reason to fear that the process will not be carried out in anything other than a technical, professional and competent manner.”