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.
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EIOPA final report on draft guidelines on the ORSA
On 12 July 2012, the European Insurance and Occupational Pensions Authority (EIOPA) published its final report on draft guidelines for the own risk and solvency assessment (ORSA) under the Solvency II Directive. The report sets out the outcome of, and provides feedback on, EIOPA's November 2011 consultation on the draft guidelines. In addition to underlining the purpose of the ORSA, the report provides details on how the ORSA is to be interpreted and sets out EIOPA’s expectations regarding the implementation of the ORSA by insurance undertakings. EIOPA has strongly encouraged the industry to use the current report in their early implementation of the ORSA. Among other things, the report raises the following issues:
- Insurers are expected to have the necessary competence and expertise to find “fit-for-purpose solutions” for the practical challenges of the ORSA.
- EIOPA points out that proportionality is a key feature of the ORSA and insurers should develop tailored processes to fit their own organisational structure and risk management systems.
- The undertaking’s administrative, management and supervisory body (AMSB) needs to take an active role in the ORSA, particularly in relation to steering how the assessment is to be performed and challenging the results.
- Undertakings are required to submit a forward-looking assessment of their overall solvency needs to national supervisory authorities, indicating multi-year tendencies and developments. Overall solvency needs should be expressed in quantitative and qualitative terms and quantification complemented by qualitative description of the risks.
EIOPA explains in the report how it has amended and clarified the content of guidelines and the accompanying explanatory text in light of the feedback. Responses to the consultation have been published on EIOPA’s website.
For further information: EIOPA final report on ORSA
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EIOPA hosts meeting of the EU-US insurance dialogue
On 11 July 2012, EIOPA hosted the fourth steering committee meeting of the EU and US insurance dialogue project. Attendees included representatives of the US Federal Insurance Office (FIO), the US National Association of Insurance Commissioners (NAIC), the European Commission and the Financial Services Authority (FSA).
EIOPA explains in a press release published on 13 July 2012, that the EU and the US have recently started a dialogue to increase mutual understanding and co-operation, and promote greater consistency and alignment in insurance regulation. The meeting focused on the progress in the analysis of the EU and US regulatory and supervisory systems in the following key areas:
- Professional secrecy
- Group supervision
- Solvency & capital requirements
- Reinsurance and collateral requirements
- Supervisory reporting, data collection & analysis and transparency to the market
- Supervisory peer reviews
- Independent third party review and supervisory on/site exams/inspections.
The next project meeting is scheduled for October 2012 in Washington.
For further information: EIOPA hosts meeting of the EU-US insurance dialogue
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FSA publishes second consultation on Solvency II transposition
On 11 July 2012, the FSA published CP12/13 Transposition of Solvency II Part 2; its second consultation on rules to transpose the Solvency II Directive into the UK Handbook. The consultation paper includes proposed rules and guidance on areas that were not covered, or were only partially covered, in the first consultation which was published in November 2011. In particular, the consultation focuses on: application of the rules to the Lloyd’s insurance market; FSA policy for separate disclosure of capital add-ons; and proposed changes to rules governing with-profits and unit linked business. The consultation paper is set out in four sections covering:
- Section 1 - Consultation process. This section discusses the European process and alignment with regulatory reform in the UK.
- Section 2 - This section includes feedback on the first consultation paper: CP11/22 Transposition of Solvency II - Part 1. The FSA received responses from 23 firms and organisations and summarises the key points raised in relation to the following issues: the FSA’s general approach to transposition; the solvency capital requirement; the minimum capital requirement; composites; conditions governing business; groups; and chapter 10 of the Supervision Sourcebook (SUP).
- Section 3 - The prudential sourcebook for insurers (SOLPRU). In this section the FSA sets out its approach to the Lloyd’s market and capital add-ons and undertaking specific parameters (USPs). The FSA comments that, due to its unique structure and multiple participants, Lloyd’s poses specific challenges in implementing Solvency II. For the most part, the FSA has sought to apply the SOLPRU rules and guidance set out in CP11/22 to the Lloyd’s market. Additional provisions have been developed where required and supplemented by a new application chapter, SOLPRU 14. The FSA’s approach to Lloyd’s is based on two fundamental principles: Lloyd’s policyholders should benefit from the same threshold level of protection as other Solvency II policyholders; and the Directive requirements should, in general, be applied at the level where risk is managed.
In relation to capital add-ons and USPs, the FSA intends to exercise its option of non-separate disclosure by providing firms with a two year transitional period from the date of implementation. During this time, firms would not need to separately disclose, in their solvency and financial condition report, any capital add-ons or USPs required by a supervisor. It should be noted, however, that this proposal only relates to prudential reporting requirements.
- Section 4 - Proposed amendments to the parts of the Handbook covering with-profits and linked long-term insurance business are detailed in this section. The FSA has stated that it is not making any material changes to its underlying policy on conduct regulation for with-profits funds. For consistency with the Solvency II Directive, the FSA has proposed consequential and largely technical changes to the current rules. The proposals do not conflict with recent changes to the Conduct of Business Sourcebook (COBS) as part of the ‘With-Profits Regime Review’. In relation to linked long-term insurance business, this consultation deals with issues related to derivatives, stock lending, and governance that were not covered in CP11/23 Solvency II and linked long-term insurance business.
The FSA continues to take a largely “intelligent copy-out” approach to transposition and has followed the Level 1 text as closely as possible. Comments are invited on policy decisions where Solvency II requires or permits Member State discretion and where Handbook rules are necessary to address UK specificities. The consultation reflects the mainly maximum harmonising nature of the Directive and, therefore, does not reopen discussions on policy that has been agreed in Europe. The FSA has opted to consult at this stage because it considers it has sufficient certainty with regard to the Level 1 text that must be transposed, and any amendments expected to be introduced by Omnibus II is unlikely to affect the core principles of the Solvency II framework. In line with its aim to provide firms with the earliest possible certainty on UK implementation of Solvency II, the FSA believes it is the appropriate time to consult.
Issues not covered in the consultation are: national specific reporting templates; external audit; amendments to the Fit and Proper Test for Approved Persons Sourcebook (FIT) and SUP reflecting change in controlled functions; grandfathering existing Insurance Special Purposed Vehicles; and cost comparisons of using internal models versus standard formula for calculating firms’ solvency capital requirement. The FSA has indicated that it will communicate further on these issues as and when appropriate.
The deadline for comments on the proposals is 11 October 2012. The FSA intends to collate the feedback from both consultations, together with the conduct elements contained in CP11/23, and publish a policy statement. The FSA advises that this timeframe is dependent on the European Commission adopting the Omnibus II Directive and final Solvency II Level 2 measures and, in addition, the legislative timetable for UK regulatory reform and FSA Handbook designation. The FSA has indicated that further consultations may be required once Omnibus II is adopted and the Level 2 text is finalised. Details will be provided when the policy statement is published later this year or in early 2013.
For further information: CP12/13 Transposition of Solvency II Part 2
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FSA finalised guidance on PPI customer contact letters
On 13 July 2012, the FSA published finalised guidance on payment protection insurance (PPI) customer contact letters (CCLs) along with a summary of the feedback received. The FSA issued a guidance consultation in March 2012 as firms began to contact customers who had not made a PPI complaint (for further information, please refer to Insurance updater 7 March 2012). The finalised guidance sets out the FSA's views on:
- The contents of a CCL and how it should be presented so that it is clear, fair and not misleading.
- How the rules on complaints handling in the Dispute Resolution: Complaints sourcebook (DISP) and the time limits on a consumer making a complaint are relevant to PPI CCLs.
- Other relevant obligations, such as record keeping and sending reminder letters to customers who have not responded.
The FSA has highlighted the most significant issues raised by respondents in the summary of feedback and made some amendments to the guidance accordingly. In response to concerns about the effectiveness, practicality and cost of including point of sale documentation with PPI CCLs, the FSA has recognised that the inclusion of this documentation may not be appropriate for all firms. As long as firms provide sufficient and appropriate information to enable customers to make an informed decision, point of sale documentation need not be included. Additionally, in response to firms’ queries as to whether a PPI questionnaire should be included in CCLs, the FSA has indicated that it is generally preferable that firms do not include a questionnaire to avoid overwhelming the recipient or discouraging them from reading and responding to the CCL.
For further information:
Finalised guidance: PPI customer contact letters
Summary of feedback
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Germany: Court of Appeal rules on risk increase in D&O cover due to change of control
This was a claim against an insurer for payment under a claims raised Directors and Officers (D&O) policy. A company had taken out D&O cover for its directors and supervisory board members. A third party buyer acquired a majority of shares in the company. Shortly afterwards, the new majority shareholder brought claims against several supervisory board members. The D&O insurer refused to cover the claims on the grounds that the change of control amounted to an increase of the insured risk, and the insured had failed to notify the insurer about the change of control. The Frankfurt Court of Appeal held:
- In order to determine whether the acquisition of a majority share in a company constitutes an “increase of risk” the court does not have to consider whether this increases the risk that the insured directors cause damage to the company. The D&O policy conditions describe the insured risk as the “risk that claims are brought against the insured directors for alleged violation of duties”. It is likely that this risk is increased due to a change of control as the new majority shareholder may well disapprove of management actions, even if the previous shareholder majority did not have any objections.
- As there was an increase of risk, the insured had an obligation under section 27 of the Insurance Contract Act to notify the insurance company. The insured failed to do so for more than 3 months, therefore, the insurer was entitled to refuse cover and terminate the policy with immediate effect. An insurer may terminate a policy due to an increase in risk within one month of being notified of the increase, commencing only when the insured has submitted an appropriate notice.
For further information please contact Dirk Otto in Frankfurt.
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Germany: Court of Appeal rules on “prominent notice” requirement in termination right for non-payment of insurance premiums
This case concerned a claim by an insurer against an insured under a motor insurance policy, for compensation for damages paid to a third party on the grounds that the insured failed to pay its premiums. The insured claimed that he was not properly advised about the insurers’ right to terminate the policy for non-payment of premiums. The policy only contained advice regarding the right to terminate on page 3 in regular print. The Naumburg Court of Appeal held:
- Although an insurer is generally entitled to terminate a policy for non-payment of premiums under section 37 of the Insurance Contract Act, the insurer cannot claim back amounts paid to an injured third party if the insurer failed to adequately notify the insured about termination and claw-back rights. Section 37(2) of the Insurance Contract Act requires the insurer to either notify the insured about these rights and the corresponding risks in a separate document, or by way of a prominently placed and highlighted section in the policy. The notice serves as a warning to the insured about the severe risks. A “prominent notice” must either be printed on the cover page of the policy or, if contained on other pages, in bold letters, highlighted and separated from other parts so that it immediately attracts attention.
- If the insurer has failed to notify the insured of its termination and claw-back rights, the insurer cannot recover damages paid to a third party from the insured.
For further information please contact Dirk Otto in Frankfurt.
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