Insurance focus

Publication | December 2013


In this edition of Insurance focus, we look ahead to 2014 and highlight the key legal developments across our global practice.

From our London office, Matt Ellis discusses the increasing focus in the Lloyd’s market on effective oversight and management of coverholders and highlights the key changes in the revised code of practice for managing agents.

Regulation of the insurance industry across Asia Pacific varies significantly from country to country. Anna Tipping from our Singapore office considers the common themes and differences in regulatory regimes across the region. Barclay Nicholson in our Houston office explores the risks posed by hydraulic fracturing and the range of policies that exist to cover these risks.

In our case notes section, we reflect on the UK Supreme Court’s landmark decision in the Alexandros T following a long and complex jurisdictional battle. We also include a case from Canada on prospective subrogation of an insurer.

Finally, our regular international focus section features brief summaries of topical issues in Australia, China and Germany, as well as the latest on Solvency II.

2014 - what is on the horizon?

In preparation for the new year, we take a look at the key legal developments on the horizon across our global practice over the next year.

United Kingdom

  • The Law Commissions will publish a draft Bill to amend aspects of insurance contract law which will impact commercial insureds. The Bill is likely to cover duty of disclosure and remedies for breach, a new regime for warranties and insurers’ remedies for fraudulent claims.


  • A draft Bill, known as Loi Hamon is expected to be adopted in December 2013. The Bill aims to strengthen consumer protection in banking and financial services (including insurance) and introduces various changes in these sectors. For the insurance industry, changes include cancellation of the insurance contract by the policyholder at any time after the first year of the policy, additional obligations in distance sales, and a cooling-off right where similar risks are covered by another policy. In addition, the legislation introduces class actions into French law.
  • The life sector will be affected by changes in the taxation of life assurance contracts, the creation of two new types of life contracts (‘Euro-croissance’ and ‘Génération Vie’) and a draft Bill that includes provisions for unclaimed life assurance contracts and banking assets.


  • The value-added taxation of a so-called ‘lead premium’ for the services of a leading insurer within an insurance consortium (e.g. co-insurance for multinational insurance programmes) will remain a hot topic in the German market.


  • Amending Directive 'Omnibus II' is expected to be agreed by the European Parliament and Council. Omnibus II will introduce significant changes to the Solvency II Directive and will enable the next steps in implementation of the risk-based solvency regime to progress.
  • The European Parliament and Council are expected to vote on a revised Insurance Mediation Directive which will develop a single market for broking insurance business in the EU. 
  • While it appears as if the European Commission has put its proposals to change the VAT rules governing insurance services on hold, many other countries will continue to focus on VAT and Insurance Premium Tax, as a means to collect revenue; the coming year may therefore see further legislative changes and case law challenges to the scope of VAT insurance exemption.


  • Australia will continue to see an increased number of class actions arising from collapsed investment schemes. One of which, the Great Southern litigation is headed to the High Court with final clarity to be achieved around the advancement of defence costs by insurers.  Leave to appeal to the High Court of Australia has been lodged by the plaintiff in Chubb Insurance Co v Moore following the unanimous decision of the NSW Court of Appeal in July 2013 ruling in favour of insurers. The special leave application will be heard in February or March 2014 and if leave is granted the issue will be finally determined by the end of the year. The application follows the appeal in New Zealand in Bridgecorp where the NZ Supreme Court ruled that a D&O policy could be the subject of a statutory charge with the consequence of precluding the insurer from advancing defence costs without risking having to pay more than the limit of liability. The decision in Bridgecorp has further muddied the waters and the High Court of Australia’s ruling will determine the position in Australia.
  • The Insurance Contracts Amendment Act 2013 finally received Royal Assent on 28 June 2013, almost 10 years after the announcement that the Insurance Contracts Act 1984 (ICA) would be subject to comprehensive review. The amendments will have a significant impact on the insurance industry and insurance brokers. Key changes which will be important to consider going forward include:
  • An amendment to the effect that a breach of the duty of utmost good faith will constitute a breach of the ICA, extending to third party beneficiaries.
  • The general duty of disclosure in the ICA has been amended so that the objective test of “reasonable person in the circumstances” is to be applied with regard to the nature and extent of cover to be provided under the relevant policy and the class of persons ordinarily expected to apply for such insurance.
  • Insurers now have more onerous obligations regarding informing an insured of the nature and effect of the duty of disclosure prior to entering into the policy.
  • Various rights and obligations conferred on third party beneficiaries has been extended.  The existing provision is repealed and replaced by one which provides that the person who funds the recovery has priority over the proceeds to the extent of its payments and the costs of the recovery action, with the balance to be paid to the non-funding party.
  • Whereas previously the Australian Securities and Investments Commission (ASIC) only had a general authority to administer the ICA, it is now able to intervene in a proceeding arising under the statute and be represented in that action. Where an insurer has breached the duty of good faith ASIC may intervene to vary, suspend, revoke or cancel a licence or ban an insurer from providing a financial service.

Insurers need to be aware of the increasingly onerous disclosure notice obligations and should ensure their procedures comply with the amendments. Brokers and insurers also need to be aware of their increased risk exposure through the expansion of third party beneficiaries.

  • In 2013, Australia had a change of government. The new government is to wind back some of the previous Labor government’s Future of Financial Advice (FoFA) reforms to disclosure standards and removing the opt in requirements. The measures are seen by some as reducing consumer protections and could have implications for risk management practices, particularly for the smaller financial planning advisers.  
  • In terms of regulators and their focus, the Australian Prudential Regulation Authority (APRA) has begun to implement regulatory reforms (in particular, in relation to capital requirements) to the life and general insurance industry.  Reforms on the cards include:
    • Improving the stress-testing regimes for insurers. In doing so, APRA is calling for heavier board engagement in the stress-testing process, such as playing a role in developing scenarios to be tested and being informed of the basis for stress test inputs. Ultimately, APRA expects boards to be involved in reviewing the outcomes of stress-testing and challenging management.  
    • Collecting reinsurance counterparty data on an annual basis, the purpose of which is to inform APRA of any reinsurance counterparty risks and to limit the exposure of general and life insurers to those risks. APRA has consulted with general insurers and will soon release reporting forms and guidelines. APRA is currently consulting with life insurers on their reporting requirements.

South-East Asia

  • The Association of South East Asian Nations (ASEAN) has the goal of regional economic integration by 2015, with the result being the ASEAN Economic Community (AEC). The AEC will transform ASEAN into a region with free movement of goods, services, investment, skilled labour, and a freer flow of capital. To date, the ASEAN Insurance Regulators Meeting (AIRM) has agreed to share insurance statistics and observe core principles related to insurance markets, implement compulsory motor insurance and conduct research and capacity building programmes for insurance regulators. The 17th ASEAN Finance Ministers Meeting in 2013 noted that ASEAN insurance regulators have also been working on improving insurance penetration, developing regulatory frameworks to promote insurance products and promoting consumer education to increase awareness. However, as noted in an article by Anna Tipping, published in Asia Insurance Review in November 2013, while encouraging, these steps do not amount to harmonisation among domestic markets.


  • Singapore implemented Risk-Based Capital (RBC) I in 2004 and is the leader of insurance supervision in Asia. In June 2012, the Monetary Authority of Singapore (MAS) published a consultation paper regarding RBC II which included, among other things, more sophisticated risk requirements and Enterprise Risk Management. Responses were due by August 2012. The MAS response remains eagerly awaited in preparation for the new year.


  • The recent establishment of the Shanghai Free Trade Zone (SFTZ) has been a significant milestone for China’s reform of the market economy. Liberalisation of the insurance market will play an important role in the SFTZ in 2014. China’s Insurance Regulatory Commission (CIRC) has indicated its support in making the SFTZ an experiment zone to test some much debated pilot projects such as:
    • the admission of foreign invested specialised health insurance carriers (in anticipation of raising the current 50 per cent foreign shareholding restriction);
    • Chinese yuan-denominated cross-border reinsurance business;
    • catastrophe insurance, new product creation and expanding the application of liability insurance;
    • developing marine insurance and establishing marine insurance exchange; and
    • liberation of overseas insurance fund investment.

All of these projects are still in the early stages but they offer great opportunities for both Chinese and foreign insurance companies. CIRC will work with Shanghai local government to roll out detailed rules next year.

South Africa

  • In 2014, insurance regulation in South Africa will move towards the implementation of the Twin Peaks programme that will separate prudential and market conduct regulation of insurance companies overseen by a Financial Stability Oversight Committee.
  • Consumer credit insurance will be reviewed and more tightly regulated so that point-of-sale and affinity business is controlled in the interests of consumers and a competitive market.
  • Draft micro-insurance legislation will be published in the first half of 2014.
  • Cell captive insurers will be regulated so that cell captives will need a separate licence and will have to comply with a regulated, formal structure. The regulator will seek to prohibit alternative arrangements (for example preference share arrangements for sharing profits).
  • The market is expecting a greater emphasis on treating customers fairly. The regulatory authorities can be expected to monitor performance against customer expectations and ensure that treating customers fairly principles are adopted by insurers from the top down.


  • At stake for insurers, reinsurers and market intermediaries in the Canadian market, will be issues of compliance with stringent requirements imposed by legislators regarding solvency, disclosure and implementation of equitable consumer protection measures including the protection of personal information.
  • Based on a recent Supreme Court of Canada decision, involving a Canadian domestic insurer, The Sovereign, increased pressures will be put on insurers to ensure that the business practices of their distribution network is compliant with applicable provincial legislation. Insofar as direct insurance providers are concerned, following recent public consultations, it is anticipated that provincial legislators will propose a new and updated legal and regulatory framework for the conduct of these activities to deal with numerous challenges posed by the constantly evolving information technology environment.
  • The issue of carriage of oil is currently garnering scrutiny by various government agencies following recent catastrophes in Canada involving the derailment of trains carrying crude oil. There have been calls for the relevant authorities to review and overhaul the regulatory regime governing the transport of oil and other hazardous and noxious substances by train which is deemed outdated and not reflective of the increased role that rail traffic has taken in the transport of oil products. As this has been the case with marine transport, it is expected that not only the safety but also the suitability of the compensation for oil spills and the financial responsibility of the stakeholders will be carefully reviewed. Insurance requirements will likely be reviewed for carriers. In the end, any development in this regard may result in greater exposure for a greater number of players involved in the trade and transportation of oil products in Canada.
  • As Canadian courts continue to clarify avenues by which claims may be made and the possible basis for same, we may see a growth in class actions by indigenous peoples seeking remedies for losses resulting from the development in their traditional areas.
  • Cyber insurance will obviously continue to be an area of growth in Canada. Businesses are becoming increasingly alert to risks associated with greater reliance on information technologies.

United States

  • The Patient Protection and Affordable Care Act (PPACA), or ObamaCare as it has come to be called, was signed into law in 2010 with the goal of providing more Americans access to affordable, quality health insurance and to reduce health care costs.  On 1 January 2014, three main pieces of the health reform law will come into effect:
    • No insurer will be able to deny an adult coverage due to a preexisting condition.
    • Insurers will no longer be able to apply annual limits on insurance coverage.
    • All Americans who can afford health insurance will be required to purchase it under the law. Individuals who can afford to purchase health insurance but choose to remain uninsured will be required to pay a penalty to the government to offset the cost of their healthcare.
  • Coverage lessons from the BP and Transocean Litigation. A dispute arose in relation to a drilling contract for exploratory drilling in the Gulf of Mexico. The Fifth Circuit Court of Appeal’s ruling provides coverage lessons for both indemnifying and indemnified parties, who must pay close attention to the language of additional-insured and indemnity provisions and policies.
  • Cyber security and data privacy breaches are a problem for companies of all sizes and in all industries. Just a single security breach can wreak havoc on a business’ reputation, bottom line, even its very existence. With the rise of cloud computing, significant quantities of sensitive data now travel across national borders,  and large data centers host data from citizens and businesses all over the world, posing the possibility of global data breaches. Companies must do all they can to protect the integrity of client and company data against a backdrop of tightened government regulations, growing personnel costs and budgetary concerns.
  • Following the 9/11 attacks and the resulting $40 billion estimated insured loss, reinsurers largely withdrew from the market for terrorism coverage. Without reinsurance, primary insurers were then compelled to exclude terrorism. In 2002, the Terrorism Risk Insurance Act (TRIA) was created as a temporary measure and was renewed as the Terrorism Risk Insurance Program Reauthorization Act (TRIPA) of 2007, with an expiration date of December 31, 2014. Many insurance companies have used conditional terrorism exclusions that will discontinue terrorism coverage if TRIPA is not renewed past December 2014.  If there is no renewal, terrorism insurance may become highly commoditised, especially in high risk areas such as New York City and Chicago.
  • Increase in exclusionary terms or provisions in Directors & Officers’ policies.
  • Evaluation of reinsurance structure. Casualty clients are continuing to re-examine their reinsurance structures, and in some cases restructuring programs, with a movement from quota share towards qualifying quota share.
  • Issues between US and Japan relating to insurance and automotive market. The areas of concern for the US were access to Japan's auto and insurance markets, as well as other nontariff issues like intellectual property protections and regulation standards.

Lloyd’s attention turns to coverholders and delegated underwriting

Coverholder arrangements are of great importance to the Lloyd’s market, being the source of approximately 30 per cent of the market’s premium income. However the legacy of significant market losses caused by ineffective oversight of coverholder relationships, and the increasing regulation of outsourcing arrangements by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA), continue to drive Lloyd’s policy for greater, and more proactive, systems and controls in respect of delegated underwriting. The latest development has been the implementation by Lloyd’s of a revised code of practice for managing agents. In this article, Matt Ellis highlights a number of changes to the Code of which coverholders, managing agents and their respective advisers should be aware.

The revised code of practice for delegated underwriting (the Code) became effective in September this year and replaces entirely the code issued by Lloyd’s in February 2012. The Code must be read in conjunction with principle 3 (Delegated Authority) of the Franchise Standards for Underwriting Management, and the minimum standards required by Lloyd’s to comply with that principle (the Minimum Standards). Both the Minimum Standards and the Code are made by Lloyd’s under the Underwriting Byelaw (No 2 of 2003), and both constitute 'requirements of the Council', breach of which may give rise to action under the Enforcement Byelaw (No 6 of 2005). Failure to comply with the Minimum Standards or the Code could also lead to civil action against the managing agent, including breach of agency duties.

The Minimum Standards

Principle 3 of the Franchise Standards for Underwriting Management requires managing agents to have 'effective systems and controls wherever underwriting authority has been delegated to another entity'. The systems and controls in place must meet the Minimum Standards, which require the managing agent to:

  • have a clear strategy for writing and managing delegated underwriting business;
  • have carried out thorough due diligence of coverholders to which it proposes to delegate authority;
  • ensure that it has binding authority agreements in place with each coverholder clearly defining the conditions, scope and limits of authority and which comply with Lloyd’s requirements; and
  • proactively manage the delegated underwriting contracts it puts in place to ensure compliance with their terms.

The Code

The Code provides specific guidance on compliance with the Minimum Standards, and other matters related to delegated underwriting arrangements, including delegated claims handling and the regulatory procedures for the approval of coverholders. In this latest iteration of the Code, large sections have been revised for the purpose of updating language and style, but only a few sections have been substantively changed. The key areas that have changed include the following:

Conflicts of interest

The guidance provided by the Code reinforces and expands on the Minimum Standards as they apply to the management of conflicts of interest. Lloyd’s now requires all binding authority agreements to contain clear provisions addressing how conflicts of interest are to be managed, and to expressly preclude the coverholder from having any conflicts that impair its ability to perform its duties under the agreement.

All approved coverholders provide an undertaking to Lloyd’s that they will 'manage any conflicts of interest, between ourselves, our customers and Lloyd’s managing agents in a fair and open way'. However, it is the obligation of the managing agent, and not Lloyd’s, to monitor compliance with this undertaking and Lloyd’s conflicts requirements. This is to be achieved by the managing agent proactively:

  • reviewing the coverholder’s conflicts arrangements as part of its due diligence process; and
  • conducting audits that consider the coverholder’s understanding of local regulatory requirements in respect of conflicts and review the suitability of the coverholder’s conflicts arrangements.

Managing agents should consider the extent to which they should provide additional guidance to coverholders to ensure their compliance. Where actual conflicts exist, or where circumstances suggest that conflicts may arise, managing agents should exercise greater prudence. Such circumstances may include:

  • where the coverholder has a financial interest or other incentive which may incentivise the coverholder to favour one underwriter over another;
  • where the coverholder is also a broker and therefore may have conflicting obligations to the policyholders for which it acts and underwriters; and
  • where the coverholder has both claims settling authority and delegated underwriting authority.

Coverholders are advised to have a conflicts policy and appropriate management procedures in place that take into account the guidance contained in the Code. However, the Code emphasises that there is no 'one size fits all' approach that can be adopted – conflicts management must be specific to the coverholder's business and circumstances. As such, systems and controls put in place by a coverholder, and any specific guidance provided by managing agents to coverholders, should be tailored to the coverholder's business, should be proportionate and should take into account applicable local laws in jurisdictions where the coverholder operates.

Financial Crime

Coverholders must have systems and controls in place to comply with anti-money laundering legislation, international sanctions and the Bribery Act 2010. Importantly, the Code makes it clear that it is the managing agent’s responsibility to ensure these systems and controls are proper and adequate and to ensure that coverholders comply with their legal requirements.

The key for managing agents is thorough auditing. The Code now specifies that coverholder audits should include specific questions around compliance with financial crime legislation and regulations. At a minimum, managing agents must ensure that coverholders can demonstrate that they have procedures in place to:

  • recognise and report on suspicious transactions;
  • ensure that staff are trained and aware of the relevant requirements; and
  • keep appropriate records in respect of these matters.

The penalties for failing to comply with financial crime legislation and regulation can be severe; and managing agents should therefore take very seriously their obligation to monitor coverholders compliance in this area.

Claims handling

It is the responsibility of managing agents to ensure that any coverholder or third party claims administrator (TPA) is competent to perform its obligations under the delegated claims authority. The Code now contains obligations on managing agents to perform appropriate due diligence on any TPA appointed; there are separate due diligence obligations that already exist in respect of coverholders, as per the Minimum Standards.  

Managing agents must be satisfied that the TPA meets the minimum suitability requirements set out in paragraph 36A of the Intermediaries Byelaw (No. 3 of 2007). Lloyd’s will not centrally assess or approve TPAs; however Lloyd’s will maintain a central record of TPAs appointed by managing agents. As such, managing agents must notify Lloyd’s of any appointment and Lloyd’s will assume on receipt of such notification that the managing agent has conducted appropriate diligence.

The Code now contains a number of mandatory conditions and requirements in respect of the terms of agreements to appoint a coverholder or TPA to conduct claims handling activities. The requirements are extensive, and managing agents should review their existing binding authority agreements and TPA agreements in light of them to ensure the contracts are compliant.  

The Code also emphasises the need for managing agents to adhere to Lloyd’s Claims Management Principles and Minimum Standards, Principle 6. This requires that 'disciplined procurement and pro-active management procedures should be employed in the selection and use of third parties'. In order to comply with the Principle, the Code suggests that managing agents should have:

  • procedures in place to document the decision-making process undertaken prior to the appointment of a coverholder or TPA;
  • clear agreement with any coverholder or TPA in respect of the scope, quality and timeliness of reporting requirements (for example, in respect of claims notifications and delivery of bordereau);  
  • appropriate systems to monitor the coverholder’s or TPA’s compliance with the delegated claims authority, including key performance indicators and service levels, as appropriate; and
  • an audit framework in place that includes details of the scope of audits, controls over auditors and the processes for follow up, escalation and resolution of identified issues.

Master and group policies

Lloyd’s has removed its historic distinction between master and group policies, noting that the terms are, for its purposes, interchangeable. As the nature of these policies often allow the policyholder to add additional beneficiaries to the policy post-inception, there is a conceptual similarity between master/group policies and delegated underwriting arrangements. Lloyd’s does not require policyholders of master/group policies to be registered as approved coverholders, provided that the policies issued do not provide any delegation, or operate to place the policyholder in the position of an insurance intermediary. As such, master/group policies:

  • should only provide cover for individuals and those individuals must belong to a clearly identifiable and genuine group connected by a common relationship (other than the mere fact of being a beneficiary of the policy);
  • should only be written where the policyholder has a legitimate interest in providing cover for that defined group of beneficiaries. The ability to generate fees, commission or other payments would not constitute a legitimate interest. The principal business of the policyholder must not be the procurement of insurance for its members;
  • ought not to be written where the policyholder receives remuneration other than for the administration of the policy. Managing agents must consider the possibility of conflicts of interest arising where the policyholder is remunerated in a way that exceeds the costs of administration;
  • the policyholder should have no discretion as to who can be declared a beneficiary of the policy, the premium charged or the terms of coverage. The policyholder should also have no delegated claims authority from underwriters; and
  • the policyholder should not produce any insurance documentation on behalf of underwriters, although it must (subject to any local regulatory requirements) provide to beneficiaries appropriate confirmation of the cover.

Managing agents must ensure that local tax and regulatory requirements are met when risks are written, or parties are insured, in foreign jurisdictions. Extra care must be taken in respect of master/group policy programmes in the USA and Australia, where local tax and regulatory requirements are detailed and more onerous. Managing agents proposing to enter into such arrangements in the USA must be familiar with local requirements (or engage external lawyers), have adequate controls in place and document its review of compliance with local tax and regulatory requirements. All master/group policies written in respect of Australian risks must be approved by Lloyd’s general representative in Australia.

Managing agents must regularly review any master/group policy arrangements to make sure they comply with the above requirements, and must maintain a record of all master/group policies written, along with evidence that a proportionate review has been carried out.

Notification obligation

Managing agents are now required to notify Lloyd’s of any serious concern or issue that arises in their dealing with a coverholder. A 'serious concern or issue' is one which if substantiated and uncorrected, would result in either:

  • the Compliance Officer or Underwriter of the Managing Agent deciding to terminate the contract or commence legal proceedings against the coverholder; or
  • indicate that the coverholder may no longer be suitable to be approved as such.

The Code provides a non-exhaustive list of circumstances of which Lloyd’s would expect to be notified. These include where the coverholder has:

  • become insolvent/bankrupt;
  • committed a criminal offence or acted fraudulently;
  • written business beyond the scope of its authority;
  • failed to pass on funds received from policyholders; and
  • acted in a way that has risked damage to Lloyd’s licences, the Central Fund or the reputation of the market.

Time to review coverholder and TPA arrangements

The introduction of the revised Code is one of a number of indications that Lloyd’s is turning its attention to the proper oversight and management of coverholder and TPA arrangements. More recently (see Market Bulletin Y4739 dated 8 November 2013) Lloyd’s has indicated that a new approval process for coverholders will be implemented (including the removal of the restricted coverholder category) and more onerous diligence obligations will apply to address the risk of poor consumer outcomes or the failure to treat customers fairly where insurance products are sold under delegated authority arrangements to consumers. Lloyd’s is clearly seeking to maintain the same pace and focus as the FCA in these areas.

The matters described above are only those that have changed significantly from earlier versions of the Code. Managing agents and coverholders should nevertheless consider the Code in full both as a reminder of their obligations and to get a full appreciation of their regulatory obligations. Now is the right time to review all coverholder and TPA arrangements, the binding authority agreements and TPA agreements in place and ensure that systems and controls are robust, well documented and fully compliant. We expect that this will remain a key area of regulatory focus over the coming year.

For more information contact:

Matt Ellis

Ten things to know about insurance regulation across Asia – a summary

This article was first published in the Asia Insurance Review.

Regulation of the insurance industry in Asia is subject to wide variation as well as frequent, and often extensive, revision. In this article, Anna Tipping explores both the constants and variables of regulatory regimes across the Asia Pacific region.

1 The Regulators

Reassuringly each country across the Asia Pacific region has an insurance regulator. The more mature markets are moving towards regulators that are independent from the relevant government. Recently, developing countries have benefited significantly from the role that the International Association of Insurance Supervisors has played in identifying the key features that an insurance regulatory regime should have and many have been assisted by their more sophisticated neighbours by way of assistance with the drafting of the rules.

2 Key industry roles and functions

Each country across Asia consistently recognises the following primary roles in its insurance industry:

  • insurer, split into life and non-life, being the economic risk carrier;
  • insurance agent, being an agent of the insurer; and
  • insurance broker, being the agent of the insured.  

But there the similarities stop.

While all countries recognise individual insurance agents, only a handful recognise corporate insurance agents, instead requiring each and every individual to be an agent rather than allowing employees to operate under the umbrella of a corporate approval.  

This directly influences how corporate distribution can be structured, mainly resulting in distribution arrangements based on an introduction model rather than an agency relationship. Because of this, some countries that only recognise individual agents allow banks to act as insurance brokers in order to distribute insurance under bancassurance arrangements.   

This causes a significant conceptual issue: a bank in a bancassurance distribution relationship is usually more interested in acting on an exclusive basis to maximise its revenue, yet when acting as an insurance broker, the bank, as agent for the insured, has a duty to act in the best interests of the insured. This is difficult when the bank only offers products from one insurer.

Other regulators consider that where a bank acts on a referral basis, allowing the bank to act as an exclusive distributor (by introduction) of a single insurer’s products is not in the best interests of the customers and mandate that banks must make available the products of a minimum number of insurers, usually three. In reality only one insurer’s products are ever given preference. To ensure this is not a problem some regulators mandate that a bank must not earn more than say 25 per cent of its insurance related income from any one insurer. In this scenario there is little incentive for insurers to create competitive products.

3 Operating entities and foreign direct investment restrictions

Slightly more countries across the region allow foreign insurers to operate through locally established and duly authorised branches than do not. However there is an increasing trend for regulators to apply disincentives upon branches in order to encourage them to ‘domesticate’. Regulators prefer the additional control as to both prudential matters and conduct of business that having a locally incorporated entity gives them.  

There is a relatively even split between countries in the region with some form of foreign direct investment restriction and those with none. In line with the domestication trend, there is an increasing trend towards relaxing, although not to the point of allowing absolute control to a foreign investor, the various foreign direct investment regimes.

4 Capital calculation

As one would expect, the more mature markets in the region have adopted and enforce a risk-based capital (RBC) model. The nascent markets understandably adopt a formulaic solvency margin approach. The middle ground comprises RBC without a full enforcement or solvency margin with intent to move to RBC at a date in the future. While a number of countries have indicated that they will seek equivalence under Solvency II (which will require the adoption of a capital regime that is broadly equivalent to Solvency II) none other than Australia and Singapore have moved substantively towards a Solvency II, enterprise risk management approach.

In line with the capital regimes noted above, those with a solvency margin approach typically require the full amount to be provided by way of equity. A bank deposit of around 20 per cent of the capital requirement and the balance to the entire capital requirement of an insurer, must be met with ordinary equity.

In the more sophisticated regimes there is a recognition of Tier 1/Tier 2 capital.  A fast growing insurance business is capital intensive. International insurance groups ordinarily raise capital in their home markets. Local insurers seek cash from their shareholders. There is little appetite for innovative capital instruments such as contingent loans to monetise ‘value in force’ or future profits streams.  

5 Assets

In many countries, insurers still have to make a significant bank deposit, often up to 100 per cent of the minimum capital requirement. The more mature markets allow relative freedom in asset classes and jurisdiction for investment, subject only to credit risk weighting and counterparty exposure requirements. At the other end of the scale only domestic investments are permitted and often this is limited to government bonds.

6 Controllers

All regulators require directors of an insurance company to be ‘fit and proper’. Most assess the fitness of direct shareholders to own and thus control an insurance company and some analyse the fitness of shareholders right up to the ultimate group controller. Increasingly, regulators require full disclosure of all aspects of a transaction.

Most regulators also impose as a minimum a notification requirement on the change of ownership of shares in an insurance company above a certain threshold, usually 5 – 10 per cent, however some countries require any share transfer to be notified and approved.

7 Group supervision

Only a very few regulators are interested in ‘group supervision’ in the sense that this requires them to look at the ultimate parent undertaking of an insurer and all undertakings in the same group for the purpose of ensuring that each regulated entity within the group has adequate capital for its own requirements, and that the group as a whole has ‘positive’ regulatory capital.  

8 Policyholder protection

More than half of the countries considered have a stand-alone scheme for policyholder protection. The remainder rely on the mandatory bank deposits or statutory funds required for particular classes of business (or both). A handful of jurisdictions give policyholders priority over other creditors in an insurer’s insolvency.

9 Portfolio transfers

Most countries recognise and have provision for portfolio transfers of amalgamation by scheme of arrangement. However a few of these, notwithstanding the existence of an express regime, still require policyholder consent as a matter of practice, negating the benefit and effect of a scheme of transfer.

10 Outsourcing

There is significant variation between countries as to whether insurers must perform ‘core activities’ themselves or may outsource ‘core activities’ with regulatory approval. The definition of ‘core activities’ also varies significantly from country to country. Some require non-core outsourcing to be approved or notified, others are only interested in material outsourcing, and they are split when it comes to allowing offshore outsourcing, for example to a centralised service centre. So it is impossible for a multi-national insurer to formulate a consistent approach across the region with respect to outsourcing.  


There are some common themes that run through the construct of insurance regulation and the regulatory regimes across Asia Pacific; however the method of implementation and interpretation differs significantly from country to country.  It is not possible to say “it is done like this” across the region. From a commercial perspective this increases operational and compliance cost with no upside. From a legal perspective it simply increases the risk of getting it wrong. In a world of increasing scrutiny into insurance operations, the stakes are being raised for regulators across the region to take a consistent approach even if there is no full harmonisation of regulation.

For a more detailed country by country analysis, please see the full “Ten Things to Know about Insurance Regulation” series which covers 19 APAC countries at

For more information contact:

Anna Tipping

Insurance and hydraulic fracturing

Obtaining natural gas from shale formations has quickly become a vital part of the United States’ future energy plans, not only because of the estimated volume of gas, but also because of the use of horizontal drilling and hydraulic fracturing. Hydraulic fracturing (also known as ‘fracking’ or ‘fracing’) has been used for decades in the oil fields and involves the injection of highly pressurised fluids and proppants into shale or other non-porous hydrocarbon formations in order to increase production from oil and natural gas wells. In this article, Barclay Nicholson from our Houston office takes a look at the risks posed by hydraulic fracturing and the insurance policies bought by oil and gas companies to manage those risks.

In spite of its potential long-term economic benefits, fracking attracts substantial criticism, mainly for the chemicals used in the process and for the ‘flowback’ or ‘produced water’ generated at the end of the process. Concerns have been raised about the reduction of citizens’ water supplies due to the large volume of water used in the fracturing process, the alleged chemical contamination of aquifers that supply drinking water, the appropriate disposal of or recycling of the flowback or produced water, and earthquakes allegedly caused by fracking.

Lawsuits against the oil and gas companies are being filed across the US with lessors and neighbouring landowners asserting causes of action for negligence, negligence per se, trespass, nuisance, strict liability, toxic tort, breach of contract, premises liability, and violations of environmental statutes and seeking compensatory damages for personal injuries and for damaged real and personal property as well as punitive damages. The oil and gas companies will turn to their insurers for assistance – but, will the insurance companies cover these claims and damages? 

Associated risks

As with any oil and gas operation, there are environmental risks associated with the development of oil and gas from shale plays. Even where best practices are used, there can still be incidental releases of fluids. With hydraulic fracturing, some risks include:

  • Extensive use of water resources which may affect municipal water supplies.
  • The possibility of spills, leaks and overflows from ‘frac tanks’ and/or specially constructed ponds or pits that hold the water, fracking fluids, chemicals, mud, drill cuttings, and flowback water.
  • Insufficient cementing of the vertical casings.
  • The impact on near-by ground water and drinking water resources.
  • The potential for a blow-out or loss of well during the drilling phase.

Prudent operators will minimise these risks by following best practice for storage, use of fluids and construction of the well bore. Proper contingency and spill plans should be in place to quickly handle any releases and protect workers and others near the well site. All employees will be trained in correct response techniques and how to use any specialised equipment that may be needed.

Given these risks, operators will want to manage the financial risk through insurance policies, including commercial general liability insurance (including excess and umbrella coverages), environmental site liability insurance, operator’s extra expense policy, and directors and officers’ insurance.

Commercial general liability insurance

Most companies carry Commercial General Liability (CGL) insurance which covers third-party claims against the insured for personal injury and/or property damage caused by an occurrence during the policy period.  An occurrence may be a single event (i.e. an earthquake or a spill of produced water) at a specific point in time or a series of events over a period of time.  Many of the claims for hydraulic fracturing-related damage, such as ground water contamination, fall into this latter category.  

In the 1970s, with environmental issues coming to the fore, insurers added a pollution exclusion to the CGL policy, only providing coverage for ‘sudden and accidental’ pollution incidents. The focus of the pollution exclusion is on the discharge that leads to the loss:

“This insurance does not apply to bodily injury or property damage arising out of pollution or contamination caused by oil or arising out of the discharge, dispersal, release or escape of smoke, vapor, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon the land, the atmosphere or any water course or body of water; but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental.”

With the passage of the Superfund legislation in 1980 and the possibility of new loss exposures, the insurance industry quickly amended the CGL policies to include a ‘total and absolute’ exclusion for claims arising from the release of contaminants.

This insurance does not apply to:

  1. ‘Bodily injury’ or ‘property damage’ which would not have occurred in whole or part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’ at any time…(a) at or from premises owned, rented or occupied by the named insured; (b) at or from any site or location used by or for the named insured or others for the handling, storage, disposal, processing or treatment of waste;…(c) which are at any time transported, handled, stored, treated, disposed of, or processed as waste by or for the named insured,…
  2. Any loss, cost or expense arising out of any:

(a) Request, demand, order or statutory or regulatory requirement that any insured or others test for, monitor, clean up, remove, contain, treat, detoxify or neutralise, or in any way respond to, or assess the effects of ‘pollutants’; or

(b) Claim or suit by or on behalf of a governmental authority for damages because of testing for, monitoring, cleaning up, removing, containing, treating, detoxifying or neutralising, or in any way responding to, or assessing the effects of, ‘pollutants.’

A ‘time-element’ provision can also be attached to the pollution exclusion, requiring that the pollution condition be discovered and reported within a specified, limited time period.  For example, the policy may require the insured to discover a pollution discharge within 30 days of its commencement and to report the incident to the insurance company within 60 days of the commencement of the release. 

This ‘time-element’ provision can provide some coverage for pollutant releases that can be immediately discovered, such as a blow-out or a spill; but, the risk of undiscovered contamination requires operators to find additional insurance coverage. And, it should be remembered that a failure to notify the insured of the release within the specified deadline can result in denial of coverage.

What the policy considers a ‘pollutant’ will determine whether the exclusion applies to alleged contaminants from hydraulic fracturing:

‘Pollutants’ means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals or waste. Waste includes materials to be recycled, reconditioned or reclaimed.

Many policies do not define ‘pollutants’ so the courts may need to decide what is or is not covered. Some US state courts have determined that natural gas is not a pollutant. Fracking fluid is made up of 99.5 per cent water and sand, with the remainder 0.5 per cent consisting of proppants, chemicals and other agents to open the fractures and release the shale gas. Causally connecting such small percentages of alleged contaminants to hydraulic fracturing operations may be difficult, if not impossible, since many of the gases and substances released throughout the process occur naturally.

The insurer may raise the policy’s ‘expected or intended’ exclusion provision as a defence. Did the insurer expect or intend the pollution to occur? If the insured drilled next to a drinking water source, should not the pollution have been expected? For the exclusion to be inapplicable, the insured must have acted without any intent or expectation of causing any injury, however slight. Depending on the insurance policy, this exclusion will either appear in the definition for ‘occurrence’ (describing it as an accident) or in a provision foreclosing coverage for harm that was intended or expected. For example, ‘occurrence’ may be defined as:

[A]n accident or event including continuous repeated exposure to conditions, which results, during the policy period in personal injury or property damage neither expected nor intended from the standpoint of the insured.

The governing principles relating to ‘expected’ or ‘intended’ vary by state and may be determined by specific policy language; but coverage will be precluded if the insured knew that:

  • the damages would flow from its intentional act;
  • the harm was more likely than not to occur;
  • the injury or property damage was reasonably anticipated;
  • the injury was practically certain, and/or
  • the harm was the natural and probable consequence of the intentional act.  

Courts have applied objective and subjective standards (or a combination of the two) to assess the insured’s prior knowledge of the harm.  

Operator’s extra expense insurance

Operator’s Extra Expense Insurance (OEE) is a specialised policy available to oil and gas well operators that provides coverage for perils identified within the policy terms, such as a blow-out or loss of the well. The policy may provide for reimbursement of costs incurred when regaining control of a well blow-out, re-drilling expenses, damages paid to third parties for harm caused by seepage and pollution and costs for remedial clean-up measures. It may also provide coverage for damage to third-party equipment under the operator's care, custody or control. Generally these OEE policies contain ‘time-element’ restrictions, as described above.

Environmental site liability

Environmental Site Liability (ESL) is a form of pollution specific insurance that covers third-party claims for bodily injury or property damage caused by pollution at or escaping from the specific location covered by the policy. ESL policies respond to losses arising from pollution conditions that migrate beyond the boundaries of the insured’s property.

‘Pollution conditions’ means the discharge, dispersal, release or escape of smoke, vapours, soot fumes, acids alkalis, toxic chemicals, liquids or gases, waste materials or other or other irritants, contaminants or pollutants into or upon land, the atmosphere or any watercourse or body of water.

Generally these policies are claims-made, which allows coverage for pollution events that took place before the policy period began (which may be limited by a retroactive date) as opposed to the occurrence-based CGL policies which only cover events within the specific policy period. Also unlike an OEE policy the ESL policy is not limited to named perils. Thus, ESL policies fill in gaps left by the CGL and OEE policies.  

ESL policies treat multiple claims arising from a single pollution incident as one claim, subject to one limit of liability and one deductible. An ESL policy may also provide coverage for offsite clean-up, civil fines and government penalties, defence costs and business interruption costs. However, the policy will exclude coverage for known pre-existing conditions, deliberate non-compliance with environmental laws, nuclear liability, acid rain, war, and products and completed operations.

Directors and officers’ insurance

Directors and officers’ (D&O) insurance protects a company’s directors and officers from certain types of liability for claims arising from alleged mismanagement or other negligence in the performance of their duties. Generally there are three types of coverage within a D&O policy: coverage for individual directors and officers in situations where the company cannot indemnify them; coverage for the company when it does indemnify the directors and officers; and coverage for the company when it is a defendant (usually for securities-related claims).

In recent years, oil and gas company shareholders have actively sponsored resolutions relating to hydraulic fracturing, seeking more information and disclosures about the environmental risks associated with the operation. These shareholders may file class actions or shareholder derivative lawsuits, alleging failure to disclose, misrepresentation or mismanagement of the risks associated with hydraulic fracturing, resulting in lost revenues, loss of market share, stock price declines or damage to the corporation’s reputation. In addition, there is the increased possibility of regulatory investigations for misleading or faulty disclosures.

What is considered a ‘claim’ under a D&O policy controls whether the policy will apply in specific circumstances. A lawsuit is certainly covered by most D&O policies – but what about administrative or regulatory proceedings, such as US Securities and Exchange Commission subpoenas or requests for information? The precise definition of ‘claim’ in the policy and the nature of the issue involved will determine if coverage is provided.

D&O policies often exclude: pollution claims; claims ‘for’ or ‘arising out of’ bodily injury and property damage (which are covered by the CGL policy); fines, penalties, and taxes; intentional or criminal acts; and punitive, treble or exemplary damages.

A UK perspective

The London market has written fracking risks for some time and wording exists which will be appropriate as a basis for the UK and other non-mature markets. Insurers considering underwriting fracking risks in the UK can use the experience of the US as a basis for pricing the risks but should also take into account that, in the UK, environmental risks are expected to pose greater issues due to the regulatory background and population density. The EU Environmental Liability Directive imposes potentially very significant duties to remedy environmental damage. Given this additional exposure, fracking risks written in the UK may include further cover such as additional environmental liability cover, bespoke OEE cover and earthquake cover.


Many insurers and reinsurers are reluctant to cover hydraulic fracturing risks, mainly because there are many unknowns and conflicting information surrounding the process. Insurers need to understand and quantify the risks in order to price a policy’s premium. Insurers must consider the high cost of defending hydraulic fracturing lawsuits with class action allegations, discovery issues and complex claims requiring expert testimony. Until operating, regulatory and legal liability issues become clearer and best practices are adopted, insurers are unlikely to provide coverage for all the risks associated with shale gas development and hydraulic fracturing.

For more information contact:

Barclay Nicholson

Case notes

English Supreme Court rules in favour of insurers in jurisdictional dispute

Starlight Shipping v Allianz Marine & Aviation Versicherungs AG, the “Alexandros T” [2013] UKHL 70


Starlight Shipping Company (Starlight), the Greek owner of the Alexandros T, issued proceedings in the English courts against insurers in relation to a claim for the total loss of the vessel in May 2006. The insurers denied liability on the grounds that the vessel was unseaworthy and that there had been a failure properly to report and repair damage to the vessel. Starlight commenced proceedings in England, and in the course of preparing for those proceedings, Starlight alleged that the insurers had tampered with evidence and bribed key witnesses. Starlight further alleged that the deliberate refusal of insurers to make payment had caused it substantial consequential loss amounting to nearly US$80 million. The claims were settled by two agreements in December 2007 and January 2008, and the proceedings were stayed under Tomlin Orders.

The settlements were governed by English law and subject to English exclusive jurisdiction. In April 2011 the assured commenced proceedings in Greece alleging torts equivalent to malicious falsehood and defamation. The insurers commenced proceedings in England seeking the lifting of the stays under the Tomlin Orders, damages for breach of the releases in the settlement agreements, damages for breach of the exclusive jurisdiction clause, declarations of non-liability and indemnity against the costs of the Greek proceedings.

At first instance, Burton J held that the Greek proceedings were in breach of the English exclusive jurisdiction clause and the settlement agreements and, therefore, the insurers were entitled to an indemnity against each of the claims made in the Greek proceedings. The decision was overturned at the Court of Appeal, which held that:

  • The English proceedings had to be stayed under Article 27 of Council Regulation 44/2001/EC (the Brussels Regulation). The Greek and English proceedings involved the same cause of action, and the Greek courts were first seised so they had exclusive jurisdiction.
  • Had the point arisen, the English proceedings would not have been stayed under Article 28 of the Brussels Regulation. The Greek and English actions were related, but the Greek proceedings were also related to the original claims under the policy, so that he English court had been first seised of those related proceedings.

Supreme Court judgment

The insurers appealed granting the Supreme Court its first opportunity to examine the jurisdictional rules in the Brussels Regulation. The Supreme Court unanimously overturned the Court of Appeal’s decision, although there was some disagreement as to whether the cause of action was the same. The Supreme Court held:

  • None of the causes of action relied upon in the Greek proceedings had identity of cause or object with the original claim for indemnity.
  • Article 27 of the Brussels Regulation required a comparison of the claims made in each jurisdiction, disregarding defences, so it was not appropriate to compare what each party wished to achieve. The insurers’ claims for damages and declarations as to the meaning of the settlements were in contract and were different from those in the Greek proceedings, which were based in tort. It would have been different if the insurers had sought a declaration of non-liability in the Greek proceedings. Lord Mance dissented to a limited extent, holding that the claims for a declaration that the Greek claims fell within the terms of the release in the settlement agreements were the same cause of action as the Greek proceedings themselves. A reference to the Court of Justice of the European Union (CJEU) was not required as the position was clear, other than in respect of the application for a declaration that the Greek claims fell within the terms of the settlement, where a reference should be made unless that claim was abandoned.
  • To the extent that the insurers sought a declaration that the Greek proceedings fell within the terms of the settlements, the Greek courts were first seised of the issue. However, if the insurers maintained their claim for a declaration that the Greek claims fell within the release in the settlement agreements then it would be necessary to refer to the CJEU the question whether the English or Greek court was first seised of the causes of action which were the subject of the Greek proceedings, given that the new claims were added to the original English proceedings which had commenced before the Greek proceedings.
  • A stay of the English proceedings would be refused under Article 28 of the Brussels Regulation. Article 28 required a comparison of the proceedings themselves and not the claims made in those proceedings, and it was not disputed that the proceedings were related. The stay granted of the original English proceedings did not bring an end to them, so that when the Greek proceedings were commenced there were existing related English proceedings in place. It might have been appropriate to make a reference to the CJEU on the first seised issue, but in the event it was not critical: even if the Greek courts were first seised, a stay would be refused as a matter of discretion given that it was arguable that the Greek proceedings were in breach of the settlement agreements.

The case is far from over but the insurer’s successful appeal marks a significant step in how complex jurisdictional disputes will be considered by the Supreme Court and casts light on the interpretation of the first seised rule in a commercial context.

Norton Rose Fulbright LLP represented Lloyd’s market insurers in this matter.

For more information contact:

Chris Zavos

Anna Haigh

New application of “prospective subrogation” of an insurer in Quebec

In a recent ruling by the Quebec Superior Court, Justice Martin Bureau rejected a motion to dismiss filed by a defendant-in-warranty, Swiderski Engineering Inc. (Swiderski), in connection with a complex dispute involving several defendants and defendants-in-warranty.

The City of Sherbrooke, principal plaintiff in the case, is suing Norcan Hydraulic Turbine Inc. (Norcan) and its liability insurer, Lloyd’s Underwriters (Lloyd’s), and two other defendants in relation to the breakdown and preventive shutdown of two turbines at the Rock Forest hydroelectric plant. The plaintiff contends that Norcan, as the entity that supplied the turbines when they were purchased in the late 1990s, is liable for an alleged breakdown of turbine no. 1 and the preventive shutdown of turbine no. 2 after the breakdown.

Shortly after the proceedings were taken, Norcan filed four motions to institute proceedings against four of its subcontractors and/or suppliers of services for the design and construction of the turbines. Norcan’s liability insurer, Lloyd’s, also brought four warranty actions against the same parties, despite having filed a defence alleging that the claim against Norcan is not covered by the insurance.

One of the defendants-in-warranty, Swiderski, filed a motion to dismiss Lloyd’s warranty action on the grounds that Lloyd’s could not sue Norcan’s subcontractors because it had no legal relationship to them. Swiderski went on to argue that there was no connection between the suit brought by the principal plaintiff against Lloyd’s and the one brought by Lloyd’s against Swiderski. Justice Bureau rejected Swiderski’s motion to dismiss.

Critical to Swiderski’s argument was the question of whether Lloyd’s had a sufficient legal relationship to Swiderski to take its own proceedings. It submitted that an anticipatory recursory action could not be taken against it because no form of solidarity exists between Lloyd’s and Swiderski and no legal subrogation had taken place since Lloyd’s was alleging that there was no coverage. However, Lloyd’s defence clearly indicated that it had decided to take up Norcan’s defence, subject to its right to deny coverage with respect to its obligation to pay any amounts claimed by the City of Sherbrooke.

Justice Bureau saw the payment of Norcan’s defence costs by Lloyd’s as payment of an 'indemnity' within the meaning of article 2474 of the Civil Code of Québec, which was sufficient to subrogate Lloyd’s to certain rights of Norcan against Swiderski. Justice Bureau rejected Swiderski’s argument that payment of Norcan’s defence costs did not amount to an indemnity because it would be theoretically impossible for Lloyd’s to claim from Swiderski the defence costs that it incurred in the case. Rather, Justice Bureau acknowledged that there was a purpose, and even a necessity, to LIoyd’s proceedings, both in regard to the defence costs paid by it and even in anticipation of an award ultimately being issued against it in the principal action brought by the principal plaintiff. In doing so, Justice Bureau reiterated the principles set out in certain decisions of the Quebec Court of Appeal which had characterised the payment of defence costs as indemnities, even though the situation in those cases was not the same as the situation in this case.

Justice Bureau has now affirmed these principles in a ruling which, to our knowledge, is one of the first to allow an insurer sued directly to call a third party in warranty even before a decision is issued on the applicability of the insurance coverage. It is a decision that, in our view, is entirely consistent with the spirit of articles 4.1 and 4.2 of the Code of Civil Procedure and with the principles of prudent case management, proportionality of proceedings and potential legal costs resulting therefrom. There can be no doubt that the possibility for an insurer to commence its own proceedings against third parties who may turn out to be liable will avoid duplication of proceedings and serve the interests of justice better in the long run.

Norton Rose Fulbright Canada is representing Lloyd’s in this matter.

For more information contact:

Nathalie Durocher

Charles A. Foucreault

International focus


Solvency II: progress at last

On 13 November 2013, agreement was finally reached between the European trialogue parties on the Omnibus II Directive. The final compromise Omnibus II text has now been published and is expected to be approved at first reading in the European Parliament, currently scheduled for 25 February 2014.

Omnibus II contains amendments to the Solvency II Framework Directive and includes the provision of specific tasks for the European Insurance and Occupational Pensions Authority (EIOPA). In particular, it clarifies the role of EIOPA in ensuring harmonised approaches on the calculation of technical provisions and capital requirements.

Progress on Solvency II had stalled because of negotiations on the treatment of long-term guaranteed products and issues related to the calculation of annuity liabilities. The agreed version of Omnibus II means that insurers will continue to be able to match long-term liabilities with investments in long-term assets such as infrastructure projects. Omnibus II will also contain measures to mitigate the effects of artificial volatility, such as a matching adjustment for annuity business, a volatility adjustment, extrapolation of the risk-free interest rate, transitional measures and the extension of the recovery period.

In addition, the Omnibus II agreement contains measures to alleviate the burden in terms of reporting for what the Commission describes as small and medium-sized insurers, as well as transitional measures on third country equivalence which could include long term (e.g. 10 years) equivalence assessments by the European Commission which could be of significant value for international groups.

Once the European Parliament has voted on the final text, work can begin on the delegated acts. The Commission must produce detailed implementing rules on a range of matters such as:

  • calibrations for capital requirements for assets;
  • calculation of the standard formula;
  • principles for evaluating internal models;
  • assessments of third-country equivalence;
  • the contents of the Own Risk and Solvency Assessment; and
  • measures to ensure that small insurers are not overburdened by the new system.

The Commission intends to publish the level 2 delegated acts in April 2014 and plans to adopt the document in August or early September. EIOPA has stated that it will consult on the level 3 technical standards and guidelines as soon as possible during 2014.

Meanwhile, the second ‘quick fix’ Directive was adopted by the European Parliament on 21 November, and the Council of the EU on 5 December. The Directive extends the timetable as follows:

  • the deadline for transposition into national law is now 31 March 2015;
  • the application date is extended to 1 January 2016; and
  • the Solvency I regime will be repealed on 1 January 2016.

The Directive was published in the Official Journal of the EU on 18 December 2013.

For further information contact

Bob Haken


Establishment of complaints management function and annual complaints reporting obligation to BaFin

As of 1 January 2014 insurance firms will be required to establish a complaints management function. From 1 March 2015, firms will also need to report certain information about complaints management to the Federal Financial Supervisory Authority (BaFin).

EIOPA's Guidelines on Complaints Handling by Insurance Undertakings will be implemented into German supervisory practice through a collective administrative act and circular 03/2013, dated 20 September 2013. In addition to German insurers, the guidelines will also apply to many insurance firms operating in Germany (e.g. on a freedom of services basis).

Firms are required to implement their own complaints handling guidelines. The complaints management function needs to investigate complaints correctly and fairly and mitigate potential conflicts of interest in the best possible way. Irrespective of management oversight, the complaints management function needs to ensure compliance with the firm's complaints management guidelines. These guidelines need to provide organisational arrangements for the submission of complaints, the process for handling complaints and training requirements. The complaints management function also needs to ensure adequate information is reported to management.

BaFin also sets out some minimum requirements regarding the definition of “complaints” and “complainants”. Further minimum requirements regard the internal registration of complaints, information the complainant should receive about his or her complaint, the complaints handling process and investigation of the complaint.

Insurance firms are required to provide complaints data to BaFin on an annual basis. The complaints report needs to be submitted by 1 March each year, for the previous calendar year. Submissions can be made in writing or via a submission platform and need to include, at a minimum, the following information:

  • the report's definition of the terms “complaint” and “complainant”;
  • the number of complaints (total and broken down by types of insurance) and a summary of the current status and duration of the respective complaints handling;
  • an overview of the various grounds for complaint, stating the number of cases respectively; and
  • statements about how many complaints during the reporting period were at least partially successful for the complainant.

For further information contact

Eva-Maria Barbosa


Reforms to the Insurance Contracts Act 1984 - 10 years in the making

The Insurance Contracts Amendment Act 2013 (Cth) (ICAA) finally received the Royal Assent on 28 June 2013, almost 10 years after the Howard Government first announced it would be undertaking a comprehensive review of the Insurance Contracts Act 1984 (ICA). The amendments will have a significant impact on the insurance industry and insurance brokers.

The key amendments are as follows:

1. Section 13 of the ICA has been amended so that a breach of the duty of utmost good faith constitutes a breach of the ICA, and it extends to third party beneficiaries.

2. The general duty of disclosure in Section 21 of the ICA has been amended so that the objective test of “reasonable person in the circumstances” is to be applied having regard to the:

  • nature and extent of insurance cover to be provided under the relevant insurance policy; and
  • the class of persons ordinarily expected to apply for such insurance.

This amendment does not take effect until 28 December 2015, and only applies to contracts that are entered into or renewed after this date, providing a transition period for the industry and brokers to take on board the implications of the amendment.

3. Insurers now have more onerous obligations regarding informing an insured of the nature and effect of the duty of disclosure prior to the policy being entered into. Section 22 of the ICA has been extended to require an insurer to inform an insured of:

  • the general nature and effect of the duty of disclosure; and
  • that the duty of disclosure applies up until the proposed contract is entered into.

If there is a period of more than two months between the last disclosure and the commencement of the contract, an insurer must give the insured a reminder notice stating that the duty of disclosure applies. Where an insurer fails to do this, it is unable to deny coverage if an insured has failed to comply, except in cases of fraud.

4. One of the most expected but significant changes by the ICAA is the extension of the rights and obligations conferred on third party beneficiaries. In addition to extending the duty of utmost good faith to third party beneficiaries, the ICAA has:

  • extended to third party beneficiaries the right to request an insurer inform them in writing whether the insurer admits the policy applies to the claim, and if so, whether the insurer proposes to conduct, on behalf of the insured, the negotiations in any legal proceedings on their behalf.
  • clarified section 48(2) so as to make it clear that an insurer may raise, as against the third party beneficiaries, a defence based upon the conduct of the insured (such as non-disclosure or breach of conditions);
  • extended section 51 so the third party can exercise similar rights in relation to a third party beneficiary covered under the relevant policy.

5. The ICAA has repealed the existing provision of the ICA dealing with subrogation and inserted a new section 67 which provides that the person who funds the recovery has a priority over the proceeds of the recovery to the extent of its payments and the costs of the recovery action, with the balance to be paid to the non-funding party. This regime applies equally to third party beneficiaries. It is also subject to any agreement to the contrary either contained in the policy or entered into subsequent to the loss.

6. Whereas previously the Australian Securities and Investments Commission (ASIC) only had general authority to administer the ICA, ASIC is now able to intervene in a proceeding arising under the ICA, and be represented in that proceeding. In relation to a breach of the duty of utmost good faith by an insurer, it may vary, suspend, revoke or cancel an Australian financial services licence or ban an insurer from providing financial services.   

Going forward insurers need to be aware of the more onerous disclosure notice obligations imposed by section 22 and whether their existing claims procedures and documentation comply. The amendment favours insureds by providing ongoing obligations on insurers to follow up on disclosure documents whether directly or via insurance intermediaries.  However the changes will provide all parties with greater clarity around the disclosure requirements particularly where there is a delay from initial application to agreement as to terms.

Insurers and brokers also need to be aware of their increased risk exposure through the expansion of the rights of third party beneficiaries.

It will remain to be seen whether the amendments to section 21 will mean that the reasonable person in the circumstances test will be applied more consistently by the Courts, particularly as the factors to be considered are non-exhaustive, and raises the question of what other factors should be considered.
For further information contact

Nicole Wearne

Lauren Ritchie


Shanghai Free Trade Zone: what are the opportunities for the insurance sector?

On 18 September 2013, the State Council issued the long-anticipated master blueprint for the pilot free trade zone in Shanghai, officially named as the China (Shanghai) Pilot Free Trade Zone (the Pilot Zone). On 1 October 2013, the Pilot Zone, which covers four ports and airport areas in Shanghai, opened for business.

Late in September, with a view to implementing the master blueprint and regulating insurance business operations within the Pilot Zone, the China Insurance Regulatory Commission published a statement outlining eight initiatives in the Pilot Zone. These initiatives, which will be supplemented by detailed rules, are aimed at encouraging:

  • the establishment of foreign invested professional health insurance companies in the Pilot Zone, likely to ease the existing 50 per cent foreign shareholding restriction (i.e. allowing the establishment of a wholly foreign owned health insurance company in the Pilot Zone);
  • insurance companies to set up branches/subsidiaries in the Pilot Zone and carry out Renminbi cross-border reinsurance business, and supporting the research and exploration of catastrophe insurance schemes;
  • insurance companies within the Pilot Zone to carry out outbound investments on a trial basis by expanding the scope and ratios of outbound investments by insurance companies within the Pilot Zone;
  • internationally renowned servicing entities (including professional insurance intermediaries) and organisations/personnel engaging in reinsurance business to carry out relevant business within the Pilot Zone;
  • the development of marine insurance in Shanghai, marine insurance operating entities and individual brokers, and Shanghai marine insurance association;
  • insurers to create new products and expand the application of liability insurance. Property and casualty (P&C) insurers may see potential growth in marine/cargo insurance and liability insurance which may eventually help diversify P&C insurers’ product portfolios and improve profitability;
  • the development of the Shanghai insurance market, including the establishment of insurance entities such as a marine insurance pricing centre, reinsurance centre and insurance funds operation centre; and
  • the establishment of connections and mechanisms to promote financial reform and innovation in the Pilot Zone and, therefore, growth of Shanghai as an international financial centre.

For further information contact

Lynn Yang

Ai Tong



Maria Ross

Maria Ross

Laura Hodgson

Laura Hodgson