Insurance updater - Europe

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.

In October 2011 the Financial Services Authority (FSA) published proposals for new rules governing the sale of non-investment products as part of a packaged bank account (CP11/20). The FSA has now published feedback (CP12/17) on its proposals and sets out some further amendments and steps to implement the new rules with effect from 31 March 2013.  The FSA believes that this date will allow sufficient time for firms to implement the changes.

What are bundled products?

A packaged bank account is typically a current account bundled with a range of insurance policies and other benefits such as access to airport lounges and music downloads. This market has grown significantly in the UK with more bank accounts being offered for a fee with additional benefits.  

The issues identified by the FSA

Although in many cases such products can represent good value, even where parts of the package are not used, the FSA is concerned that consumers may not understand the limitations which may have an impact on their eligibility to claim under the policies. Policies are sold without sufficient attention to their suitability for the individual customer. One common issue is that travel policies are bundled without sufficient attention being paid to the exclusions under the policy for certain pre-existing medical conditions. A customer who might rely upon the insurance included in their bundle may not have had the opportunity to understand what is included and the value of that product. Furthermore, bundling products makes it difficult for customers to understand the cost of the insurance they are purchasing. Consequently, the proposals in CP11/20 focused on eligibility, suitability and price transparency.

The proposals

The new eligibility rules to be included in the Insurance Conduct of Business Sourcebook (ICOBS) specify the steps a firm must take to establish whether a customer is eligible to claim under each policy in the package, and to inform the customer whether or not they would be eligible to claim. Where the customer proceeds with the policy, a firm must record the eligibility assessment and retain it for at least three years.

Firms will also be required to provide customers with an annual eligibility statement. This is intended to remind customers to review their eligibility under each policy on an annual basis. Firms have requested that the FSA clarify the requirements for the content and distribution of the annual eligibility statement. CP12/17 proposes an additional rule to ensure that the customer is alerted to the relevant information. This rule also takes into account feedback suggesting an exception to the general rule (that the statement does not need to include personalised information) for travel insurance. Ineligibility under a travel insurance policy is a significant risk and the FSA believes this to be the one area where it would be proportionate to include personalised information, such as when a customer reaches the age limit under the policy. The rule therefore provides that:

• where a firm is aware that anyone covered under a travel insurance policy is already over the age limit or will reach the age limit for cover under the policy before the next statement is due, it must state this clearly and prominently in the statement; and
• the statement must not be part of another document or mailing and must contain only the information required under the annual eligibility statement rule, i.e. the qualifying requirements to claim each of the benefits under the policy.

As an additional point, the FSA makes it clear that the new eligibility rules will apply to all types of policies provided as part of a packaged bank account, including payment protection and pure protection policies. To avoid confusion, the FSA intends to switch off the specific eligibility provisions that currently apply to payment protection policies in a packaged bank account (contained within ICOBS 5.1.2R and 5.1.3G). Similarly, specific guidance on suitability of protection policies found in ICOBS 5.3.2G will be switched off.

The FSA received a variety of responses in relation to transparency. Although the FSA is keen to improve transparency in the bundled products market, it acknowledges that it is difficult to know what information would be most beneficial for consumers when choosing a product. There is a risk that customers will not be interested in the information they receive and the amount of disclosure required will have the effect of putting customers off buying bundled accounts. The feedback on the proposals in CP11/20 did not indicate one answer for improving transparency and, therefore, the FSA will consider a possible suite of measures to help consumers compare packaged products using the regular information it receives from firms.

In contrast, respondents unanimously agreed with the FSA that the requirement to separately disclose premiums for each insurance policy under ICOBS 6.1.13R is not helpful to consumers. The FSA believes it is unlikely that a breakdown of premiums will affect a consumer’s decision when choosing a packaged account and therefore proposes switching off ICOBS 6.1.13R with effect from 1 January 2013, subject to consultation responses.

An uncertain future for bundled accounts?

Finally, CP12/17 notes that ‘tying’ is banned in the proposed changes to the Insurance Mediation Directive.  Tied products would be those which could not be bought separately.  In the consultation the FSA states that: “The effect of these proposals is not yet clear, but it is possible that the current packaged bank account design where the customer chooses a fixed package for a single price might not be permitted”. Given the uncertainty of the final provisions for revised mediation rules and a likely implementation date of 2015, the FSA plans to continue trying to improve transparency in the current market.

What next?

The FSA invites responses by 29 October 2012 and expects to issues a policy statement in December 2012 containing final rules. In the meantime, the FSA will continue to monitor the packaged products market particularly in relation to transparency and will begin by looking at the effect of financial promotions on consumers’ understanding of this area.

For further information: CP12/17 Packaged bank accounts

On 25 July 2012, the FSA published a consultation paper setting out proposals to help former employees who have work-related illnesses to trace their employers’ liability (EL) insurer. The FSA has found that where many years have passed since individuals left the employment where the illness was contracted, tracing the insurer to make a claim for compensation can be difficult. The FSA notes that these individuals are spending significant amounts of time and money trying to trace their insurer. Failure to do so often results in consumers receiving little or no compensation. Tracing insurers can be problematic due to the lapse in time from exposure to manifestation of the illness, for example, consumers may not hold all the relevant details required for making a claim or firms may not have kept records dating back several decades. To better protect these consumers the FSA proposes the following requirements:

• Firms with actual or potential EL insurance claims must take reasonable steps to conduct effective searches of their records for historical EL policies when they receive a request from a consumer or other third party.
• Firms must put in place and operate a tracing policy setting out details of where records are held and how searches will be conducted.
• Firms must respond to search requests within one month setting out the results of the search.

The deadline for comments on the proposals is 17 October 2012. The FSA intends to publish its final rules in January 2013. Firms will be expected to have in place an effective search process of their historical EL policies within six months of the FSA making its rules.

Finally, in an appendix to the paper, the FSA states that any provisions in the Insurance Conduct of Business Sourcebook (ICOBS) that will be created or amended following the consultation will be “designated” to the Financial Conduct Authority (FCA) Handbook.

For further information: Tracing employers' liability insurers

The FSA has published a letter from Julian Adams, FSA Director of Insurance Supervision, to firms involved in the internal model approval process (IMAP) under Solvency II. The letter is intended to provide an overall update on Solvency II and offers further feedback to IMAP firms.

A great deal of uncertainty continues to shroud Solvency II, both in terms of the timing of implementation and the detail of some requirements. Adams warns that the timetable of the new regime remains "extremely tight", and awaits the European Parliament’s October vote on the Omnibus II Directive and the finalised Level 2 measures to provide some much needed clarity. Adams acknowledges that further delays in agreeing the text in Europe may result in changes to the current timetable, however, the FSA feels it has no other option than to work towards an implementation date of 1 January 2014. Adams reiterates the FSA's commitment to identifying ways in which firms may be able to use their Solvency II work to meet the current Individual Capital Adequacy Standards (ICAS) requirements.

With regard to IMAP, Adams confirms that the FSA is now receiving submissions from firms in pre-application and is seeing some good quality work. The FSA expects to form a preliminary view within six months. Adams urges firms to adhere to the submission schedule and supply the FSA with the agreed information. The FSA intends to provide more detail on the timing and steps for IMAP in the fourth quarter of 2012. In addition to the issues covered in Adams' letter dated 14 May 2012 (for further information please refer to Insurance updater 16 May 2012), two additional areas of feedback have been identified: expert judgement; and data risk. Specific feedback is set out in Annex A of the letter.

Adams also invites suggestions for indicators to monitor the ongoing appropriateness of internal models after approval. Firms should make their submissions by 17 August 2012. In addition, the FSA is planning a data collection exercise to inform its assessment of firms' internal model calibrations. Life insurers and general insurers should have received a request for data in July 2012. General insurance firms will receive the FSA's general insurance stress testing (GIST) exercise in September 2012. Responses will be requested within two months of the data request.

Finally, Adams states that the FSA remains committed to keeping firms up-to-date on Solvency II developments. A timetable setting out key dates in the implementation process is included in Annex B of the letter.  

For further information: Solvency II update for IMAP firms

The European Insurance and Occupational Pensions Authority (EIOPA) has published a report on the role of Insurance Guarantee Schemes (IGSs) in the winding-up procedures of insolvent insurance undertakings in the EU and EEA. The report was prepared from the findings of a questionnaire sent to EU and EEA members as part of EIOPA’s input into the European Commission's policy-making on IGSs.

An IGS is a body that provides last-resort protection to consumers when insurance undertakings are unable to fulfil their contractual commitments (for example, the UK’s Financial Services Compensation Scheme). The report addresses the following areas: types of IGSs in the EU and EEA; role of the IGS prior to insolvency and in the insolvency process; role and interaction of other bodies with the IGS; role of the court in winding-up proceedings; and role of the IGS in the claims process. EIOPA summarises the findings of the report, highlighting the diversity of regimes across Member States. The report concludes that there is a lack of harmonisation in areas including:

• The identity of the authority responsible for deciding when to intervene if an insurance undertaking becomes insolvent.
• The ability to provide for portfolio transfer.
• The presence of "pre-warning systems" when an insurance undertaking is in difficulty.
• The role of the supervisory authority when an insurance undertaking becomes insolvent.

In addition, the report illustrates the disparity in Member States’ implementation of the Directive on the reorganisation and winding-up of insurance undertakings. EIOPA suggests that any future Insurance Guarantee Schemes Directive (IGSD) would need to be sufficiently flexible so that Member States can adapt the requirements to fit with national legislation.

In terms of diversity of IGSs, EIOPA found that two respondent countries (Iceland and Sweden) have no IGS at all, seven have a life insurance IGS, five have a non-life insurance IGS, and a further five have IGSs covering both sectors. EIOPA concludes that, whilst nearly all Member States provide some type of coverage, comprehensive protection is scarce. The report also reveals that cover is often limited to motor insurance, with nine respondents stating that the only IGS in their country is one covering motor insurance.

The report goes on to address the role of the IGS both prior to and during insolvency. Only one Member State reported the existence of a legal provision between the supervisors and the IGS, however, a number of others suggested an informal system of insolvency pre-warning. With eight respondents reporting that no such system exists, EIOPA highlights the importance of pre-warning an IGS that a firm will soon be subjected to liquidation proceedings. Member States reported a variety of answers when asked which authority decides to intervene when an undertaking becomes insolvent. Most reported that it is the supervisory authority’s responsibility, with various others stating that responsibility lies with either the court, the IGS or the insurance undertaking itself. Further disparity was reported when considering whether IGSs provide for continuance of insurance cover once winding-up begins. The UK was amongst four Member States that reported having criteria for transferring portfolios of business. For some respondents, portfolio transfer falls outside the scope of their IGS.

The majority of respondents indicated that the supervisory authority plays a pivotal role when an undertaking becomes insolvent. Nearly all respondents stated that the liquidation procedure is judicial and governed by the courts, however, four Member States stated that there are cases where the procedure is administrative. In such cases, the supervisory authority will decide the timing, nominate a liquidator and monitor the merit and legality of proceedings. EIOPA notes that this diversity of regimes indicates that any future IGSD should leave the role of the supervisory authority to be decided by individual Member States. However, EIOPA states that cross-border communication between authorities should be addressed in EU legislation on IGSs.

The European Commission intends to harmonise IGSs across the EU and is expected to publish a legislative proposal for the IGSD in 2013.   

For further information: EIOPA report on the role of IGSs in winding-up procedures of insolvent insurers

On 6 July 2012, following a set of urgent measures enacted to reduce public expenditure, the Italian Government created IVARP: a new supervisory authority for both the insurance and private, non-compulsory pension markets.

IVARP will take over the functions currently exercised by two authorities: Italy’s insurance and pension funds regulators, ISVAP and COVIP respectively. An additional body will be set up to manage the register of insurance intermediaries, and certain supervisory powers over public pensions recently granted to COVIP will be transferred to the Italian Ministry for Labour and Social Welfare.

The new authority will be run by a Chairman (Presidente) and a Board of Directors (Consiglio), as well as a Supplemented Governing Board (Direttorio integrato) in charge of defining IVARP’s strategic tasks and issuing any regulations and orders. The role of Chairman will be performed by the General Director (Direttore generale) of the Bank of Italy (BoI). The Chairman and two additional directors (Consiglieri), recommended by the BoI and appointed by the government, will form the Board of Directors. The Supplemented Governing Board is the Governing Board of the BoI, which is composed of the Governor, the General Director, and Deputy General Directors and the two additional Directors.

The new supervisory structure is expected to be in place by November 2012. Whether the creation of IVARP achieves greater consistency in the regulation of banks, insurance companies and pension funds, however, remains to be seen.

For further information please contact Nicolò Juvara

The following case summary has been written by Professor Rob Merkin who is a consultant to the insurance and reinsurance and international arbitration teams.

Links have been provided to copies of the judgments on Bailii wherever possible.

Hawksford Trustees Jersey Ltd v Stella Global UK Ltd [2012] EWCA Civ 987

After-the-event insurance

A dispute arose between the parties. The matter went to court and judgment was given for Hawksford. Stella Global, were ordered to pay interim costs of £200,000. Hawksford had tried but failed to obtain After the Event (ATE) insurance to cover a potential adverse costs order at the trial. Stella Global then appealed. On the day before the appeal hearing was scheduled to take place, Hawksford procured an ATE policy for a premium of £394,638, an amount greatly in excess of the other costs of the parties. The ATE policy provided cover to Hawksford, in the event of the appeal being allowed, against having to pay Stella Global’s costs of the action and the costs of the appeal. It was common ground that, had the appeal been allowed then the Court of Appeal would have ordered Hawksford to pay both the costs of the action and the costs of the appeal, so that the cover would have been necessary. In the event the appeal was dismissed and Hawksford sought to recover £331,038, the cost of the ATE premium discounted by a sum representing the premium charged for Hawksford’s potential liability to repay the interim costs ordered by the judge.

The Court of Appeal held, by a majority (Rix and Etherton LJJ, Patten LJ dissenting), that section 29 of the Access to Justice Act 1999 – which provided that: “Where in any proceedings a costs order is made in favour of any party who has taken out an insurance policy against the risk of incurring a liability in those proceedings, the costs payable to him may, subject in the case of court proceedings to rules of court, include costs in respect of the premium of the policy” – was to be construed as drawing a distinction between the trial and the appeal. They were to be regarded as separate proceedings, so that it was not open to the Court of Appeal to award by way of costs the amount of an ATE premium which related to the trial.

For further information: Hawksford Trustees Jersey Ltd v Stella Global UK Ltd [2012] EWCA Civ 987