The following are ten essential features of the life assurance market in the UK and provide a quick overview of how life insurance contracts are treated under the regulatory regime.
1. What is Life Assurance Business?
In the UK market the term 'life' business is often used as short hand to mean all 'long term' insurance business. Long term insurance business is defined as contracts of insurance falling within Part II of Schedule 1 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the RAO). The RAO sets out types of long term insurance by 'Class'. Class 1 is life and annuity business which covers most traditional life cover contracts.
2. Linked contracts
In practice, most contracts linked to the duration of human life, which are not Class 1 contracts, are Class 3 'linked contracts' because the benefits payable are 'linked' to a unit-linked fund, specified assets or an index. Unit-linked funds are notional funds operated by insurers which invest in accordance with a stated investment objective. Such unit-linked funds are similar to collective investment schemes but do not constitute collective investments for FSA purposes because they are contracts of insurance. The holder of a linked investment contract usually bears both the investment and the expense risk on the product. For this reason the FSA regulates the type of assets a unit-linked fund can be invested in. The FSA also prescribes the assets and indices which a contract could instead have a direct link to. These rules are set out in Chapter 21 of the FSA's Conduct of Business Sourcebook (COBS) and are known as the 'permitted links' rules.
3. Permanent Health Insurance (PHI)
The other main class of life business sold in the UK is Class 4 business. This covers sickness and incapacity benefits written for a term of at least 5 years, until retirement, or for an unspecified duration, provided that in each case the insurer does not have the right to cancel the contract or, such right to cancel, is limited to specified circumstances. Non-life sickness contracts are often distinguished from life contracts because they contain a general power to cancel.
Although less commonly written as new business now, one of the other large and very complex parts of the UK life sector is the with-profits market. There are significant amounts of historic with-profits business. With-profits contracts effectively provide policyholders with a guaranteed amount normally payable on maturity or death together with the potential to increase that amount by sharing in the investment profits and in some cases the business risk of the insurer. The FSA has produced a separate set of 'Treating Customers Fairly' requirements for with-profits business and these are to be found in COBS 20. With-profits insurers are required to have an additional actuarial resource in the form of a with-profits actuary and to publish and comply with a Principles and Practices of Financial Management (PPFM) document.
5. Pensions Business
Pensions contracts are often sold as life business on the basis that they effectively provide for an annuity on the insurer's current terms at retirement, or in individual cases because there is a death benefit payable on death. An annuity is an amount payable during the lifetime of the annuitant(s) or for a shorter specified term.
6. Investment and pure protection conduct of business
For regulatory purposes life business is also broadly divided between investment (known as 'qualifying insurance') contracts and non-investment (known as 'pure protection') contracts. A qualifying insurance contract is a long term contract which is neither a pure protection contract nor a reinsurance contract. A pure protection contract is one which only provides insurance cover in the event of death or incapacity due to illness, sickness or infirmity with any surrender value capped at the amount of premiums paid. Different FSA conduct of business rules apply to each such category. For investment business which also includes long term care insurance contacts, the FSA's Conduct of Business Sourcebook (COBS) applies, whereas for non-investment business (unless the firm elects to use COBS) the Insurance Conduct of Business Sourcebook (ICOBS) applies.
7. Product disclosure and charges
The regulatory requirements for life contracts sold to individuals include prescribed pre-contractual information about products, features, charges and in most cases a right to cancel the contract within 30 days of inception. From January 2013 it will no longer be possible for life insurers to pay commission in connection with advised sales of investment (i.e. qualifying insurance) contracts sold to retail customers (broadly consumers and small to medium sized businesses).
8. The life or non-life divide
Direct insurers are only normally authorised to carry on life or non-life business. Companies who for historic reasons are authorised to carry on both life and non-life business are required by the FSA's prudential rules (INSPRU 1.5) to segregate those businesses. The rules in INSPRU 1.5 also require firms to operate as if their linked business were ring fenced. This means that firms need to be careful when dealing with long term or linked assets to ensure that they are not made available to other policyholders or to cover other liabilities.
9. Not indemnity contracts
Unlike non-life contracts (contracts of general insurance), life contracts are not contracts of indemnity and insurable interest is only required at the outset of the contract.
10. Compensation scheme
The UK compensation scheme can provide up to 90 per cent of the amount due under a long term insurance contract issued by a UK or EEA Insurer to a UK resident policyholder - even where the policyholder is not a retail customer, provided the contract of insurance is not a reinsurance contract.