Insurance updater - Europe

Publication | 25 April 2012


Welcome to our insurance updater. We will highlight key legislative and regulatory developments. We will also review court judgments and insurance market publications that are likely to be of interest to you.  

Julian Adams gives speech on the new approach to insurance regulation and the implementation of Solvency II

On 19 April 2012, Julian Adams, Financial Services Authority (FSA) Director of Insurance Supervision, Prudential Business Unit, gave a speech considering the Prudential Regulation Authority’s (PRA) approach to insurance supervision in the context of the Solvency II Directive.

Adams begins his speech by confirming that the PRA is expected to assume its statutory responsibilities in spring 2013, and that in order to make the change more manageable, the FSA was recently reorganised to reflect the future split in responsibilities between the PRA and the Financial Conduct Authority (FCA).

Adams then discusses the principal benefits of the new arrangements. According to Adams, the clear combination of macro and micro-prudential responsibilities within the Bank of England will allow supervisors to understand and manage the nature and extent of cross-sectoral risk transfer, and the potential effects this may have on the overall system. Supervising insurers and banks together ensures consistency of treatment between the two sectors, meaning that transactions will be treated in the same way if they are the same in substance, irrespective of their legal form. The PRA’s objectives will also result in a clearer focus from supervisors, concentrating on matters which go to the heart of the financial viability of firms, and their ability to meet commitments made to policyholders.

Adams explains that the approach of the PRA is an evolution of that taken by the FSA in relation to insurance supervision in recent years, and goes on to list some of its main features. Firstly, he stresses that the PRA is not intending to implement a zero failure regime. Rather, the PRA will look to minimise the probability of firm failure and bring about a situation where the impact of such failure, both on policyholders and the financial system as a whole, is minimised. The PRA will also replace the FSA’s current Advanced Risk Responsive Operating FrameWork (ARROW) with a new framework which brings together all strands of regulatory activity in a single supervisory strategy. The first stage of the new framework will be an assessment of the vulnerability of a firm’s business model, followed by consideration of a reasonable resolution approach, which could be adopted in the event of firm failure. For insurers there are a number of long-standing and well-understood resolution mechanisms (including solvent run-off and schemes of arrangement) and Adams states that the FSA is comfortable with how these operate in practice. However, in the future the PRA may need to develop new (and possibly mandated) resolution approaches for insurers. The PRA will also undertake a detailed analysis of a firm’s financial strength and consider the quality of a firm’s risk management and governance arrangements.

With the move to “internal twin peaks” within the FSA, Adams states that the first and most immediate change insurers will notice is that there will be separate supervision arrangements for prudential and conduct issues. From a prudential point of view, supervisors will start to implement various aspects of the new regime in addition to working with insurers in preparation for Solvency II.

Solvency II brings with it significant requirements for supervisors to exercise judgement when dealing with the firms they supervise. This is especially true in relation to internal model approval, but also applies more generally across the full spectrum of the regime. The Directive enshrines a principle of proportionality which cuts across all aspects of a supervisor’s work with firms. Adams explains that the principle does not provide scope to waive or otherwise disapply aspects of the regime for one group of firms or another. Instead, proportionality comes into play in the amount of work firms will have to do to demonstrate that a requirement has been met, and in the amount of supervisory time devoted to the review of firms’ evidence. To illustrate, Adams discusses the self-assessment template used for internal model applications. Whilst the template includes 300 or so requirements Adams reassures firms that the FSA does not expect 300 separate pieces of evidence and that its supervisors and actuaries will not carry out an in-depth review of the evidence which supports each and every requirement. Instead, the review work will be targeted at those issues which are of the greatest and most fundamental materiality to a firm’s overall solvency position. The approach will be judgement-driven and it is inevitable that differences of opinion will arise. Adams suggests that firms will see this in their relationship with the PRA more generally, and that the PRA will be more challenging than firms have been previously accustomed to.

Adams believes that the need to be robust is especially important in the case of model approval, as models represent an approximate view of the world and are only ever as good as the data and assumptions that underpin them. This applies at both the level of individual types of risk and the way in which different parts of the model interact with each other. As a result, over the coming weeks and months Adams informs firms that they can expect a much higher degree of feedback than has been the case to date, with the FSA now being in a position to draw meaningful conclusions, not only at firm level, but across peer groups. If the FSA is of the view that a firm will not reach the required standard by a date which makes model approval viable before implementation, Adams warns that it will cease to work with the firm, who will need to exit the process.

The need for a framework for intervention is another aspect which is recognised both by Solvency II and the PRA’s design. Last summer, the FSA set out its intention to create a proactive intervention framework for the PRA, which will be an extension of the “ladder of intervention” under Solvency II. This will set out a series of trigger points at which regulatory action will be presumed and dictate the actions expected of firms’ management and PRA supervisors. These actions will become more intensive as the firm’s position deteriorates and will start to involve greater degrees of contingency planning. Adams contends that the use of skilled persons’ reports is also likely to increase under the PRA.

Adams suggests that the PRA’s stated approach will be dependent upon its ability to collect and analyse high quality data, and the new data and reporting system for Solvency II will help in this regard. As well as informing the PRA’s work, the Solvency II data requirements, and in particular the new disclosure regime, should have the effect of significantly enhancing the degree of market discipline to which firms are subject, through publication of reports which are compiled on a consistent basis across Europe.

In the final part of his speech, Adams concentrates on what is currently happening with Solvency II. The FSA is now moving toward the submission stage of the internal model approval process and, as previously noted, firms could be forced to withdraw if they have not made sufficient progress. With this in mind, Adams believes it useful to highlight some of the points that the FSA has noted in its review work to date. Firstly, Adams states that some firms are falling behind with their own implementation plans and that this is beginning to cast doubt on their ability to achieve their submission slots. More specifically, the FSA has observed that: validation workstreams seem to be significantly behind other workstreams within firms; a perception exists amongst some firms that expert judgement is a “magic bullet” which can be used to explain away any aspects of a model which are not properly documented or justified; supporting documentation is often weak or underdeveloped; and much of the work the FSA is seeing on model change policies is weak.

Whilst Adams mainly concentrates on internal model work throughout his speech, as we move into 2013 attention is turning to those firms who are intending to use the standard formula, and he concludes by stating that the principles expressed above are every bit as applicable to this work as they are to internal model approval.

For further information: The new approach to insurance regulation and the implementation of Solvency II

Government responds to House of Commons Transport Committee report on the cost of motor insurance

On 20 April 2012, the House of Commons Transport Committee published the Government’s response to its follow up report on the cost of motor insurance, which was originally published on 12 January 2012 (for further information, please refer to Insurance updater 17 January 2012). In the response, the Government confirms that it is committed to:

  • Implementing Lord Justice Jackson’s reforms in the Legal Aid, Sentencing and Punishment of Offenders Bill (including banning referral fees in personal injury cases).
  • Extending the threshold for claims in the road traffic accident personal injury claims protocol from £10,000 to £25,000.
  • Reviewing and reducing fixed fees that lawyers can earn from road traffic accident personal injury claims.
  • Working with the industry and others to identify options and implement changes to reduce the number and cost of whiplash claims.
  • Continuing to tackle uninsured driving and fraud by working with the insurance industry to have better access to drivers’ records.
  • Working to improve young drivers’ risk and safety, including encouraging the growth of telematics.

The Government also responds to specific recommendations made by the Transport Committee. Firstly, on the subject of whiplash the Government restates its view that whiplash claims and costs should not be rising. On 14 February 2012, the Prime Minister and the Secretary of State for Transport met the insurance industry at a Downing Street summit, at which they stated that the Government would work with the industry and others to identify and investigate appropriate ways to effectively reduce the number and cost of whiplash claims. To this end, the Government confirms that it will consider the Transport Committee’s recommendations, which advocated the need for objective evidence of a whiplash injury before compensation is paid.

In relation to referral fees, the Government states that the ban contained in clauses 54 to 58 of the Legal Aid, Sentencing and Punishment of Offenders Bill, will capture the key players; preventing solicitors and claims management companies from paying, and insurers receiving referral fees. This will cut off the source of funding for others, such as repair garages and credit hire services. Under the provisions, the Lord Chancellor will also have the power to extend the prohibition to other types of claim and legal services, should the case for doing so be made out. On 14 December 2011, the Office of Fair Trading (OFT) launched a market study into private motor insurance in the UK, which focuses on the provision of third party vehicle repairs and credit hire replacement vehicles to claimants (for further information, please refer to Insurance updater 14 December 2011). The Government will consider the results of this investigation and any recommendations made by the OFT when they are made available. The Government also confirms that it will implement the referral fee ban in April 2013 and states that it has commissioned a report on the road traffic accident protocol and portal, the results of which will be published later this year.

In the Transport Committee’s report it suggested that custodial sentences should be introduced for offences under section 55 of the Data Protection Act 1998. Section 55 provides an offence for anyone who knowingly or recklessly obtains, discloses or procures the disclosure of information without the consent of the data controller. The Leveson Inquiry has been set up to consider “the culture, practices, and ethics of the press, including … the extent to which the current policy and regulatory framework has failed including in relation to data protection”. Given this remit, the Ministry of Justice has decided to await the outcome of the inquiry before considering the issue further. The first stage of the inquiry is expected to report in summer 2012. The Government also asserts that there are already effective sentences in place to deal with much of the reported behaviour in this area. Similarly, the Government considers that adequate regulation already exists to tackle cold-calling intended to generate personal injury claims and does not believe that the investigation suggested by the Transport Committee is necessary. It will, however, continue to ensure regulators exercise their powers to intervene when they discover malpractice.

Additionally, the Government reports that it is currently working with the insurance industry on the detail of the systems design for a solution which allows them access to the Driver and Vehicle Licensing Agency driver record. The industry has agreed in principle to fund the infrastructure build and, subject to agreement on the detailed design and costs, the system could be implemented by early 2014. It will also consult on whether the fixed penalty fines for motoring without insurance are appropriate relative to comparable offences and what the potential impact would be on repayment levels if the fixed penalty notices were increased. A follow up summit with insurers is planned for later in the spring.

For further information: Cost of motor insurance: follow up - Government response to the Committee's Twelfth Report of Session 2010-12

Linda Woodall gives speech on preparations for the RDR

On 17 April 2012, Linda Woodall, FSA Head of Investments Department, gave a speech considering the Retail Distribution Review (RDR), the final rules of which are due to come into force on 31 December 2012. According to Woodall, for many firms, there is still a lot to do to be ready for the RDR and she uses her speech to explain what the FSA has done to help firms prepare themselves, the progress made by firms, and the FSA’s efforts to inform consumers of the forthcoming changes.

Based upon recent FSA surveys, firms are taking positive steps in preparation for the RDR. For example, 69 per cent of respondents have developed and begun to implement a plan to be compliant with all RDR requirements. Woodall confirms that the FSA will continue to carry out its own ongoing analysis of issues in the retail investment market and that it will look to have more face-to-face time with firms to assess progress over the coming months. The FSA will also visit larger firms with more complicated business models, including banks, building societies and insurers, to ensure readiness for the new regime. The FSA has already produced a range of materials on implementation and held briefings for larger firms that focussed on the risks that affect them. For example, in the life insurers’ briefing, the FSA discussed manufacturing RDR compliant products. These briefings will restart later in the year.

Woodall states that the FSA is constantly being asked to confirm what is being done to promote understanding amongst consumers about the benefits the RDR will bring, and explains that, in order to target the right messages, the FSA has segmented consumers into two groups. For “engaged” consumers (those people who already seek investment advice), the FSA has published a leaflet explaining the new approach. For “non-engaged” consumers (the rest of the population), the FSA appreciates that a different approach is required and it is currently discussing this with consumer groups and organisations. The awareness campaign will gather pace as the year progresses and Woodall stresses that a joint effort will be required in order to reach all those that need to be informed.

The FSA recognises that the RDR represents a huge change to firms’ businesses and Woodall suggests that it is unsurprising that the 2012 Retail Conduct Risk Outlook highlighted a potential risk around how firms are transitioning their business models in preparation for the RDR. The FSA recently assessed the quality of consumer outcomes arising from the increased use of centralised investment propositions and published a report entitled Assessing Suitability, which gave examples of good and poor practice found during the review. The FSA wants to help firms get to where they need to be and Woodall explains that these guidance papers give examples of the best practice it is looking for.

On the subject of the professionalism requirements, Woodall provides figures showing that compared to summer 2011 the proportion of advisers with an appropriate qualification has risen from 50 per cent to 71 per cent. Indeed, 93 per cent of advisers should complete the appropriate qualification on time. Having said this, gap-fill is one of the weaker areas and Woodall stresses that it is important that advisers now press on and achieve an appropriate Level 4 RDR qualification and obtain a Statement of Professional Standing (SPS). To this end, the FSA has approved eight accredited bodies to help with and verify the gap-fill and qualification requirements, and to issue the SPS.

The FSA is also concerned that it has encountered some firms that are yet to take steps to develop an adviser charging structure. Implementing a suitable charging model has the potential to be the most challenging element of the RDR as it takes time to put together a proposal, communicate the change to clients and test it. Woodall contends that putting this off represents a huge risk, both to a firm’s business model and its clients, and if firms have not yet started they should do so now. Firms need to fully consider whether providing an independent or restricted advice model best serves their client base and to help firms with the new independent advice requirements, the FSA has recently published guidance which addresses common questions. The FSA has noted that the number of advisers choosing to offer a restricted advice model has increased and Woodall points out that this is not a second class option and advisers will still need to adhere to the same qualifications and suitability requirements.

Finally, Woodall confirms that towards the end of the year, the FSA is planning to share its supervision strategy and discusses the transition to the FCA. The FCA should begin life in the first half of next year and Woodall explains that it will largely retain the FSA’s day-to-day supervisory methods. Firms will, however, see a big difference in the intensity and speed with which the regulator acts, particularly when the FCA sees things happening that could or have already started to pose big risks to consumers.

For further information: Getting ready for the Retail Distribution Review

James Dalton gives speech on whiplash claims

On 24 April 2012, James Dalton, Association of British Insurers (ABI) Head of Motor and Liability, gave a speech on “Britain’s whiplash epidemic” and considers whether whiplash should be compensatable.

Dalton begins his speech by addressing the current situation regarding whiplash claims. Dalton states that last year, 570,000 people claimed to have suffered a whiplash injury costing Britain’s car insurers over £2 billion representing a fifth of all motor claims. Furthermore, in the last three years, claims for whiplash have risen by a third. With whiplash adding £90 to the average car insurance premium, Dalton states that the insurance industry together with the Government is determined to address the spiralling costs of whiplash claims. Dalton argues that the difficulty in diagnosing whiplash as an injury combined with a compensation system that is too convoluted, too complex and too costly has led to increased claims for whiplash. Insurers are addressing the problem on a number of fronts, however, Dalton argues that in order to tackle the problem a change in the law is required.

Insurers have supported the Legal Aid, Sentencing and Punishment of Offenders Bill from the outset and Dalton states that it should deliver important behavioural changes in the system. Dalton goes on to argue that, as a priority, tackling the compensation paid for whiplash needs to be addressed. Dalton offers some solutions for the Government to consider including: whether whiplash should still attract general damages when there is no objective medical evidence of an injury; capping or reducing the level of damages awarded; having independent, accredited doctors examining whiplash claims; and facilitating insurers’ use of bio-mechanical evidence to help weed out exaggerated or fraudulent whiplash claims. Dalton concludes by stating that the Government and the insurance industry must work together to bring about fundamental reform and argues that public debate is needed to address the current whiplash epidemic.

For further information: Do Insurers want to ban whiplash?

Germany: Broker not entitled to remuneration if bound/linked by cooperation agreement with insurance company

An insurance broker entered into an agreement with a customer to solicit a life insurance policy, for which the customer was to pay the broker a fixed amount of remuneration. The brokerage agreement contained a provision stating that the broker only had to solicit a life insurance policy and owed no further advice or similar obligations. It subsequently transpired that the broker had entered into a cooperation agreement with the insurance company that issued the life insurance policy to the customer. The broker did not disclose the financial benefits earned or received under the cooperation agreement and the policy documents used by the insurance company implied that the broker was a representative of the company. The customer refused to pay the agreed remuneration.

Germany’s Federal Supreme Court ruled in favour of the customer and held that independence is a key criterion for an insurance broker. A broker who is a shareholder or commercially linked with an insurance company is not entitled to remuneration for insurance policies solicited with that insurance company. Although the customer could not prove what financial benefits the broker had received from the insurance company (and the broker himself did not disclose them) the court held that the mere fact that a cooperation agreement with an insurance company exists creates a commercial advantage for the “broker” and makes it likely that in case of any dispute or difficulty the so-called broker will support the interests of the insurance company as opposed to his customer. A true “broker” has a legal obligation to serve the interests of his customer. In such a situation the “broker” no longer qualifies as an independent broker in the legal sense and is not entitled to any brokerage commission.

For further information, please contract Dirk Otto in Frankfurt.

Italy: Supervisory authorities publish enforcement criteria for the new interlocking prohibition

In December 2011, the Italian Government enacted an “interlocking prohibition”. According to the rule, persons who are members of management, supervisory and controlling bodies or top managers of a company or group operating within the financial services markets (either in the credit, investment or insurance sector) are prevented from taking similar roles in competing companies or groups carrying out the same business, except for those companies or groups which are linked by a control relationship as defined under Italian competition law.

If a person’s election or appointment falls foul of the interlocking provision, they then have a 90-day period to opt to remain in one position or the other. If a decision is not made, they will automatically lose office in both of the competing companies.

On 20 April 2012, the supervising authorities of the Italian financial services markets (the Bank of Italy, the Italian securities exchange supervisory authority, CONSOB and the Italian insurance market supervisory authority, ISVAP) published a joint position paper listing the criteria that they have agreed to enforce the interlocking prohibition. The position paper aims to guarantee the consistent interpretation of the interlocking prohibition by the authorities.

In the insurance market, competing companies will be identified based on the criteria given by the Italian antitrust authority, AGCM. Under the criteria, insurance companies are considered to be competitors if they are operating in the same class of business. Similarly, distributors are considered to be competitors if they are operating in the same class of business and in the same distribution channel (i.e. agencies/direct marketing, bancassurance brokerage, etc).

According to the position paper, positions held within the branches of foreign companies based in Italy fall outside of the scope of the prohibition as the Italian authorities would not have the power to require a relevant person to leave their position.

The new provision and related position paper aim to prevent interlocking directorates, which are of particular significance in Italian financial markets and which have prevented competition and the development of Italian financial institutions. Many directors and managers have already given up key roles in banks and insurers in compliance with the new regulations, and many more are expected to follow in the coming weeks.

For further information, please contact Nicolò Juvara in Milan.



David Whear

David Whear

Noleen John

Noleen John