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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IAIS publishes paper on reinsurance and financial stability
On 19 July 2012, the International Association of Insurance Supervisors (IAIS) published a policy paper entitled Reinsurance and Financial Stability, a sequel to the 2011 paper Insurance and Financial Stability, examining the relationship between reinsurance and financial stability. More specifically, the paper considers whether traditional reinsurance-related activities pose systemic risk. The paper addresses concerns relating to: market concentration rates; risks arising from accumulations and high value risks; the similarities of reinsurance risk portfolios; and issues associated with alternative risk transfer (ART) including activities such as the underwriting of credit default swaps (CDS).
The paper goes on to identify some non-reinsurance activities that carry potential for systemic risk. Such activities include: banking activities, for example, providing credit; CDS; collaterised debt obligations (CDO); and some forms of ART. The paper highlights CDS and CDO underwriting without appropriate provisioning as a specific example of an activity carrying potential for systemic risk. The paper points out that, in recent years, non-insurance entities, particularly those set up by investment banks have begun offering products with risk transfer features similar to those offered by insurers. In light of this, the IAIS is currently developing a methodology to determine whether an entity engaged in non-(re)insurance activities could be a systemically important institution.
IAIS concludes that, similarly to primary insurance, traditional reinsurance is unlikely to cause, or amplify, systemic risk. However, in respect of non-reinsurance activities undertaken by certain entities, the IAIS has found that systemic risk may exist. Peter Braumüller, Chair of the IAIS Executive Committee, has called for “continued monitoring of the reinsurance sector and strengthened macroprudential surveillance on national and global levels”.
For further information: Reinsurance and financial stability
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HM Treasury publishes response to consultation on the Test Achats judgment on gender-neutral pricing
On 17 July 2012, HM Treasury published the response to its consultation on amendments to UK legislation required to recognise the decision of the Court of Justice of the European Union (ECJ) in Association Belge des Consommateurs Test-Achats ASBL and others (Case C-236/09). Test Achats decided that Article 5(2) of the Gender Directive, allowing the use by insurers of gender as a risk factor resulting in different premium and benefits for men and women, was incompatible with the principles of equality in the European Treaties. The judgment of the ECJ is binding in UK law and therefore any conflicting national law must be amended to comply with the decision.
HM Treasury published a consultation on the government's legal interpretation of the Test-Achats judgment in December 2011. The response document summarises the main issues raised by respondents and outlines the government’s reaction to these. Among other things, the government confirms its intention to repeal the UK legislation that implements Article 5(2) of the Gender Directive (paragraph 22 of schedule 3 of the Equality Act 2010) with effect from 21 December 2012. Any new contracts concluded after this date will therefore be subject to gender-neutral pricing. The draft Equality Act 2010 (Amendment) Regulations 2012, which will repeal the relevant paragraph, is set out in Annex A. The government does not consider any of the other suggestions raised in the consultation either necessary or appropriate and, therefore, this will be the only legislative amendment.
Following considerable discussion in the market about how the ruling might apply to existing contracts, the consultation invited comments on the definition of a new contract of insurance. The response clearly states that, in the absence of a definition of a new contract within the Gender Directive, the government cannot provide clarity on the interpretation with any certainty. The government shares the European Commission’s concern that disparity in how Member States implement the Test Achats judgment could result in an unlevel playing field between European insurers. According to the Commission’s guidelines, contracts concluded for the first time from 21 December 2012 will be considered new contracts. Likewise an agreement between parties from 21 December 2012 to extend a contract concluded before this date will also fall within the definition of a new contract. In contrast to UK contract law, the Commission’s guidance indicates that an automatic extension of an existing contract is not considered a new contract. However, the government suggests that the UK law on automatic renewals would result in more consumers being subject to gender neutral pricing than under the Commission’s interpretation and, therefore, represents a more risk-adverse approach. Aside from this, UK contract law is broadly in line with the Commission’s guidance and as such the government does not consider discrepancies between the Commission’s guidelines and national law to be a significant problem.
Other issues considered in the response include: concerns in relation to indirect discrimination; the collection of data and use in assessing overall risk; group insurance schemes; and work based pension schemes. The government stresses that the response is not intended as legal advice and urges insurers to seek their own legal advice in order to amend practices to comply with the Test Achats judgment and the Gender Directive. Finally, the government states that it will continue to work closely with the insurance industry and engage with the European Commission during the transition to gender neutral pricing.
For further information: UK response to Test Achats judgment
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FSA working towards 1 January 2014 implementation of Solvency II
On 3 July 2012, the Directive amending the transposition and application dates for the Solvency II Directive was adopted by the European Parliament. The Council of the EU is expected to approve Parliament's position. Under the proposed timetable, Member States will be required to transpose the Solvency II regime into national law by 30 June 2013, with the new rules coming into force on 1 January 2014. The FSA has confirmed that it will continue to work with firms towards the implementation date of 1 January 2014 and will monitor developments in the coming months.
For further information: FSA Solvency II update
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FSA fines insurance broker for misappropriating insurance premiums
The FSA has fined and banned a former commercial insurance broker for misappropriating insurance premiums. On 24 July 2012, the FSA published a final notice issued to Stephen Goodwin. Mr Goodwin was a partner of Goodwin Best, an insurance broker partnership that ceased trading in November 2010. The FSA found that between November 2008 and November 2010 Goodwin, along with his business partner retained a number of premiums from clients instead of paying them to the relevant insurers and intermediaries. At least three clients suffered financial loss as a result, one client found they were uninsured and two others had to pay the same premium twice to ensure their policies remained in force.
Mr Goodwin was fined £471,846 for serious failings in respect of the required standards for approved persons. The fine is one of the largest ever handed down to an individual for insurance fraud. The FSA has also banned Mr Goodwin from working in regulated financial services.
For further information: Final Notice - Stephen Goodwin
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