2014 – what is on the horizon for the insurance industry?

Publication | February 2014

Introduction

We take a look at the key legal developments on the horizon across our global insurance practice over the next year.

UK

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.

France

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.

Germany

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.

EU

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

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

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.

China

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
  • 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.

Canada

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 came into effect: no insurer can deny an adult coverage due to a preexisting condition; insurers are no longer able to apply annual limits on insurance coverage; and all Americans who can afford health insurance are 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 centres 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 US$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 31 December 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 include access to Japan’s auto and insurance markets, as well as other non-tariff issues like intellectual property protections and regulation standards.


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