THE NEW head of financial regulation may adopt a less severe approach with insurance companies than with their banking counterparts.

This month Matthew Elderfield made it clear he plans to operate a much tougher regulatory regime in the banking sector than his predecessors. However, in an address to delegates at the European Insurance Forum in Dublin yesterday, Mr Elderfield said he was cautious about applying banking standards to insurance firms too readily.

“I am cautious of over-learning the lessons of the banking crisis for the insurance industry,” he said. “Insurance companies are inherently different from banks and, while there have been some notable exceptions, many insurance companies have weathered the financial crisis in relatively better position than their banking counterparts.”

Nonetheless, he warned there was a need to take a “sceptical” view of the internal risk management practices of insurance firms. In particular, insurers’ “internal models” – used to calculate their own solvency requirements – needed to be scrutinised rigorously, he said, adding that he had asked his staff to be “more challenging and assertive” when required.

“I suspect that many insurers still have some way to go to refine their models to make the grade for regulatory approval.”

The financial regulator was prepared to hand out “pass marks”, but only if insurers have “done their homework”, he warned.

Speaking about the challenges posed to regulators by Solvency II, (a directive which aims to establish a revised set of capital requirements for the European insurance industry), he said there was a need to match the level of supervision to the inherent risk of a particular firm or sector.

For example, the regulator would take a “common sense approach” with captive insurance companies, which are set up to insure the risks of their parent companies.

In order to deal with Solvency II-driven changes, the regulator would set up a dedicated team that would deal with prudential insurance matters.