No blind regulation: How the EU develops regulations for the insurance market

On 12 July, a bill No. 9422-1 was registered in the parliament, which serves as an alternative to the previously submitted bill No. 9422, titled "On Amendments to Certain Legislative Acts of Ukraine Regarding the Improvement of State Regulation of Financial Services Markets". The need for such an 'alternative', according to its initiators, arose because the provisions proposed in the base version of the bill would lead to unpredictability in the regulation of the financial services market. This concerns the requirement for the National Bank to publish drafts of its regulatory legal acts. If this requirement is revoked, it will restrict players in the financial market from accessing information about the regulator's future decisions. Moreover, the expansion of forms for conducting inspection audits of banks through remote access to all their documents during banking operations will lead to increased financial and administrative expenses for banks. Such complications will also affect insurers.

Why have such contradictions arisen, how will they affect the insurance market, what can they lead to, and how to avoid them, based on European experience? Industry participants share their insights exclusively for Mind.

Over the past three years, following the transfer of supervisory powers over the non-banking financial market to the National Bank of Ukraine (NBU), there has been active updating of the legislative and regulatory framework for nearly the entire non-banking market, including its crucial segment – insurance. This is happening, in part, to harmonise Ukrainian norms with European approaches. A robust regulatory framework is a guarantee for the stable long-term development of the industry, as it establishes the rules of the game in the market.

"When we talk about aligning national legislation with the fundamental principles and approaches applied in the EU, which is necessary for our country's path to Europe, it's important to consider not only the legislative principles and requirements themselves but also the peculiarities of the process of preparing and adopting laws and regulations," says Viacheslav Cherniakhovskyi, CEO of the Insurance Business Association.

In his opinion, European countries have a clear system and decades of experience to ensure maximum efficiency and transparency in the creation and modernisation of the legislative and regulatory framework necessary for the functioning of financial institutions.

The leaders of industry-specific insurance associations in European countries, transmitting their acquired experience, emphasise a key point: such a procedure must adhere to all-European principles of necessity, reasonableness, predictability, openness, consistency, proportionality, and stability. Therefore, the general approaches to the legislative processes are similar across different countries, and each country has distinct legislative mechanisms and practices for implementing these principles into the everyday dialogue between government and business.

How is legislation developed for the insurance market in the EU? Johan Lundström, Head of the Legal Department of the Swedish Association Svensk Försäkring (Insurance Sweden), explains that before the government can introduce a new legislative initiative, the issue addressed in the document project must be analysed and assessed. Evaluation bodies, independent of the government, may involve market experts, their associations, government officials, and politicians. Reports containing their conclusions are published in a series of official reports by the Swedish government.

"Before the government takes a position on the commission's work results, for instance, proposals for changes to legislation, its report must be submitted for consideration by the relevant authorities. This part of the legislative process is fundamental for a well-balanced and efficient functioning of the government," he emphasises. "The requirement to submit such recommendations for consideration by interested parties to obtain their comments is clearly stated in our country's Constitution."

Lundström explains that such relevant authorities can be central state institutions, special interest groups, labour market parties, local government bodies, or other structures whose activities could be affected by legislative innovations. This process provides important feedback from civil society and allows the government to assess the level of support a legislative or regulatory initiative could receive.

How is the dialogue structured? If such bodies provide unfavourable feedback, the government usually tries to find an alternative solution. Information about comments on document projects from interested parties is made public, and the government also explains why its proposals do not align with the comments made.

Representatives of the Swedish professional association note that they receive approximately 50–60 reports for review regarding the assessment of regulatory acts annually.

"We always respond to them by providing written comments, which are typically based on the positions expressed by the member companies of our association. Sometimes, when feedback is urgently needed, this process can take the form of a meeting, where interested parties provide their remarks verbally," concludes Lundström.

French industry experts note that "regulatory documents that will be signed by ACPR (French Prudential Supervision and Resolution Authority) are previewed by FFA (French Insurance Federation).

Furthermore, according to their statements, there is a significant number of insurance industry structures whose decisions need to be approved by committees comprising representatives not only from relevant ministries and government bodies but also from the insurance business, meaning individuals working in commercial insurance companies.

Here is what the leaders of industry associations in neighbouring countries of Ukraine have shared. Nina Kolchakova, the General Secretary of the Association of Bulgarian Insurers, notes, "Insurance legislation (both laws and regulatory acts) is developed by consulting the public and interested parties, just like all other legislation in our country."

According to her, in accordance with the Bulgarian Law on Normative Acts, the development of regulatory documents, including laws or sub-legal acts, follows the principles of necessity, reasonableness, predictability, openness, consistency, legality, proportionality, and stability. During the process of developing regulatory laws, public consultations with individuals and legal entities are required.

"Before submitting a document for approval by the competent authority (parliament for laws or another authority for sub-legal acts), the author (in the insurance sector, either the regulator – Financial Supervision Commission, FSC, or the Ministry of Finance) publishes it for open discussion, along with justification and a preliminary impact assessment of the document," Kolchakova clarifies.

The final deadline for submitting proposals for draft regulatory acts published for public consultations should not be less than 30 days. In exceptional cases and for valid reasons, the developer can set a different deadline, but not less than 14 days.

Nina Kolchakova emphasises that the legislative process must adhere to the principles of "transparency, accountability, democracy, and pluralism," for which requirements have been introduced, including public disclosure. "After completing public consultations and before the adoption of the bill, its author publishes a report on the proposals received during public consultations, along with justifications for rejected proposals, on the website of the relevant institution."

Similar approaches to legislation and regulation were outlined by Janis Abasins of LTAB (Latvian Insurers Association). "According to national legislation, representatives of market participants and their professional associations have the right to participate in meetings of the Council of the Bank of Latvia. However, in practice, the regulator, the Bank of Latvia, most often sends all legislative and regulatory acts for review and comments to each professional association, whose participants may be affected by the proposed new regulations. Each regulatory proposal is considered by the Consultation Council, which includes representatives from all market participants," he explains.

If the regulator is not willing to consider the proposals and comments from industry representatives, an explanation is provided. This legislative rule is also used in the work of the Latvian parliament.