The number of intensive on-site Arrow inspections to insurance businesses from the FSA has jumped 38% so far this year, with 47 visits in 2012 to (to September 30) compared to just 34 for the whole of 2011, according to law firm Reynolds Porter Chamberlain.

Arrow visits are in depth regulatory probes of individual businesses where the FSA demands a significant amount of documentation to assess risk handling and then conducts on-site interviews with senior management and other staff. The insurance sector finds these visits expensive because of paperwork and management time spent in dealing with them.

RPC explains that the FSA will be using its Arrow visits to scrutinise insurers’ readiness for Solvency II, their reserving against possible claims and any retail business the insurer has even if it is very small.

Richard Burger, partner at RPC, comments: “The level of regulatory scrutiny during an Arrow visit is intense. As well as going through the numbers and risk management framework with a fine tooth comb, the FSA will also conduct comprehensive interviews with senior management, especially if the insurer is writing new lines of business or has side stepped into asset management.”

“Arrow visits are gruelling, time-consuming and expensive for businesses under the FSA’s microscope.”

RPC says the rise comes despite the FSA’s decision to revise the ARROW regime because of previous failures like Northern Rock, which received an ‘all clear’ ARROW visit shortly before the bank’s collapse.

“Insurers will be disappointed that the winding down of the current ARROW regime has had such a sting in the tail for them,” Burger says.

The FSA’s failure to spot any problems during its 2006 Arrow visit to Northern Rock completely undermined the rationale for further inspections when the bank collapsed shortly after. Given how unpopular these visits are in regulated firms, Burger says it is little wonder the regulators have decided to revise their approach.

“The FSA has really put the insurance sector in the spotlight over the last year," he says. "The FSA may have decided that it’s the insurance sector’s ‘turn’, but that will be very unwelcome news to insurers who have seen significant increases to the cost of regulation since the financial crisis.”

“Insurers are very angry that they’ve been hit by the same regulatory backlash from the credit crunch as banks, even though the insurance sector has fared relatively well throughout the financial crisis and downturn.”

RPC says that many insurers are concerned that the replacement of the ARROW regime is going to lead to excessive regulatory burdens because there will now be two regulators rather than one.

Says Burger: “The insurance sector, which could be regulated by both the FSA’s replacements (FCA and PRA), could find that it is facing new inspections from two different regulators next year. This could be really problematic and hugely increase the cost of regulation for insurers.”

The one silver lining in this latest spate of inspections is that the FSA will have picked up a much better understanding of the insurance sector. "Given how poor its previous understanding of insurance business has been, this can only be a good thing even if it comes at a heavy price for insurers,” Burger adds.

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