Principle-based regulation preferable, but regulators won’t rule out making rules

Canadas insurance regulators are working with the industry to establish a foundation for a new principles-based (as opposed to rules-based) approach to regulation, but that doesnt mean regulators are likely to throw out more prescriptive approaches should they be deemed more appropriate, the executive director of the Financial Services Commission of Ontario (FSCO) told an Insurance Bureau of Canada (IBC) seminar.The seminar looked at the industry take-up of the IBCs five Standards of Sound Marketplace Standards. They are: Offering competitive products Informed and transparent sales transactions Competent representatives that conform to a code of conduct Fair claims settlement and claims handling Timely, accessible and responsive complaint handlingThe IBC has encouraged insurers to implement their own best practices based on the above standards. The idea is that if insurers can be trusted to adopt the principles outlined above, regulators will feel more comfortable adopting a principles- and/or risk-based based approach to regulation. The IBC believes risk- and/or principles-based approaches make regulation more efficient, effective and transparent.But insurers should keep in mind, FSCO executive director Grant Swanson told the IBC seminar, that regulators will not likely abandon the possibility of using more traditional, transaction-based and rules-based approaches. Theres no one regulatory approach that fits every situation, Swanson said. As weve been looking at different issues, we feel that there are certain circumstances in which risk-based approaches work especially well, and there are certain situations in which a prescriptive approach can also work very well.Ill give you a simple example: You can have a general admonition [or principle] for people to drive safely, but I think most of us here feel most secure when the light turns red and everyone is supposed to stop [i.e. following rules]. There will be some cases where appropriate choices need to be made as to which kind of regime works best. Were not necessarily looking at throwing out one thing and replacing it wholesale with something else. On the same side, were not looking at layering or duplicating one regime on top of another which also would not be a good outcome.