Hogan Lovells Corporate Insurance Newsletter May 2015 UK • FCA publishes TR15/6: Handling of insurance claims for small and medium-sized enterprises • FCA publishes TR15/5: Provision of premium finance to retail general insurance customers • FCA publishes statement on Plevin v Paragon Personal Finance Ltd • PRA publishes CP18/15: Corporate governance: board responsibilities • BIBA publishes code of conduct • Lloyd's publishes guidance on changes made to the Terrorism Act 2000 by the Counter-Terrorism and Security Act 2015 SOLVENCY II • PRA publishes directors' update May 2015 • Solvency II internal models: PRA publishes good practice paper • Lloyd's market bulletin on data reporting requirements for delegated underwriting business • EIOPA update on preparation • EIOPA publishes report on staffing and resources needed to accomplish tasks • EIOPA Q&As on guidelines on risk free interest rates and undertaking-specific parameters • ABI publishes position paper on its approach to principles of materiality and proportionality for Solvency II reporting UK FCA publishes TR15/6: Handling of insurance claims for small and medium-sized enterprises On 22 May 2015, the Financial Conduct Authority (FCA) published a report on the findings of its thematic review into the handling of insurance claims from small and medium-sized enterprises (SMEs). The FCA wanted to understand the extent to which claims from SMEs, who are less likely to be sophisticated customers and who often exhibit similar knowledge and experience to that of retail consumers, were handled promptly and fairly. It also wanted to understand the role that different firms played in the handling of claims, particularly given the prevalence of outsourcing of claims by insurers. - 2 - Hogan Lovells The review was limited to first party non-motor claims such as those arising from fire, flood, escape of water, theft and business interruption. The FCA did not consider third party claims such as employers' and public liability or professional indemnity claims. It concentrated on claims in excess of £5,000. The FCA's findings include: • there was a gap between SMEs' expectations and the claims service they received; • there was an overall poor perception by SMEs of the claims experience; • claims were not always managed effectively in the interests of SME customers. The most common cause of dissatisfaction was lack of clarity over who was responsible for driving the claims outcome; • there was often poor communication between the different parties handling the claim and the claimant about progress which led to delays in reaching a settlement; • a significant number of instances where the sums insured were inadequate to cover the loss incurred. The underlying reason for this was not always apparent but the FCA's review did highlight the material impact this could have on the claim. The FCA will engage with firms, senior figures in the industry, and relevant trade bodies to discuss the findings of the review, its expectations, and the changes that may be required to improve outcomes for SME customers. It will also provide feedback to the firms included in the review. FCA publishes TR15/5: Provision of premium finance to retail general insurance customers On 11 May 2015, the FCA published a report on the findings of its thematic review which looked into whether general insurance intermediaries and insurers provide timely and appropriate information to their customers, when arranging or providing premium finance. The FCA's thematic review focused on the online sale of home and car insurance and followed the customer journey up to the point where purchasers are required to input their payment details. The review included 13 insurers and 30 insurance intermediaries (including four price comparison websites). The FCA’s findings show that insurers and intermediaries do not always provide clear and easily understandable information about the overall cost of paying for insurance, meaning that consumers could struggle to compare the difference between paying upfront or in instalments. In some cases, people may not realise there is a price difference between the two. If a firm is providing regulated credit or is acting as a credit broker, it is required to provide a representative example setting out the interest rate, any fees or charges, a representative annual percentage rate (APR) and the total amount payable. However, FCA researchers found a number of cases where this was either not provided or the example did not include all of the required information, potentially limiting a customer’s ability to make an informed choice about how to pay. The FCA review also identified a wide range of APRs, highlighting the importance to customers of having appropriate information to be able to compare pricing and understand the impact that the cost of finance has on the overall cost of an insurance product. The FCA also found: • an adequate explanation of a proposed credit agreement was not always provided sufficiently early in the customer journey to enable customers to make informed decisions; • firms acting as a credit broker did not always disclose the name of the credit provider or details of their relationship with the firm; • in some cases it was not made clear that a fee would be charged. - 3 - Hogan Lovells The FCA expects all firms to consider the findings of the review and take action where necessary. It is also following up with individual firms where it found specific examples of failings and poor practice. FCA publishes statement on Plevin v Paragon Personal Finance Ltd On 30 January 2015, the FCA announced that it would be collecting evidence on current trends in complaints on payment protection insurance (PPI).The FCA will use this evidence to assess whether the current approach is continuing to meet its objectives of securing appropriate protection for consumers and enhancing the integrity of the UK’s financial system. The FCA expects to give its view on the evidence collected in the summer of 2015 and make clear any next steps. In November 2014, the Supreme Court ruled in Plevin v Paragon Personal Finance Ltd (Plevin) that a failure to disclose to a client a large commission payment on a single premium PPI policy made the relationship between a lender and the borrower unfair under section 140A of the Consumer Credit Act 1974. On 27 May 2015, the FCA issued a statement to say that as a result of the Plevin judgment, it is considering whether additional rules and/or guidance are required to deal with the impact of the Plevin decision on complaints about PPI. The FCA will be engaging with relevant stakeholders in the coming months in respect of this and it expects to announce its views on this, including next steps, at the same time as existing work. PRA publishes CP18/15: Corporate governance: board responsibilities On 21 May 2015, the Prudential Regulation Authority (PRA) published a consultation paper, CP18/15, containing proposals for a supervisory statement on corporate governance in relation to board responsibilities, The purpose of the draft supervisory statement is to identify for the boards of PRA-regulated firms those aspects of board governance to which the PRA attaches particular importance and to which the PRA may devote particular attention in the course of its supervision. The PRA says that it is not intended to provide a comprehensive guide for boards of what constitutes good or effective governance. There are more general guidelines for that purpose, for example the UK Corporate Governance Code, published by the Financial Reporting Council. The draft supervisory statement underscores the collective responsibilities shared by board members. As such it complements the individual accountabilities which the PRA is introducing through the senior managers and senior insurance managers regimes. The draft supervisory statement provides guidance on the PRA's expectations relating to: • setting strategy; • culture; • risk appetite and risk management; • board composition; • the respective roles of executive and non-executive directors; • knowledge and experience of non-executive directors; • board time and resources; • management information and transparency; • succession planning; • remuneration; • subsidiary boards; • board committees. Comments are requested by 14 September 2015. The PRA will consider the feedback received and publish the finalised supervisory statement at a later date. - 4 - Hogan Lovells BIBA publishes code of conduct On 13 May 2015, the British Insurance Brokers' Association (BIBA) announced the publication of a voluntary code of conduct for members. The voluntary code stems from BIBA’s 2011 strategic review which highlighted that BIBA should consider its role in the debate around raising standards. Members have extensively engaged with BIBA on this issue and the new voluntary code is a codification of existing rules and requirements that are enforced and policed by BIBA and the Chartered Insurance Institute. The press release also says that the FCA welcomes the launch of the code. Martin Wheatley, the FCA's Chief Executive, is quoted as saying that "The code echoes our Principles for Business and will be a useful tool in clarifying both our and BIBA's expectations of insurance intermediaries". The press release also says that BIBA has opened discussions with the Insurance Brokers' Standards Council to explore how the two bodies can join forces to create a single voluntary code of conduct and guidance for insurance brokers. A working party involving both organisations has been established to consider how best to achieve this and it is expected that matters will be finalised before BIBA's conference in 2016. Lloyd's publishes guidance on changes made to the Terrorism Act 2000 by the Counter-Terrorism and Security Act 2015 On 6 May 2015, the Society of Lloyd's published a market bulletin containing guidance for managing agents on the impact of amendments to the Terrorism Act 2000 (TACT) on kidnap and ransom (K&R) (re)insurance business. The purpose of the guidance is to inform managing agents of the change in legislation to clarify any impact on K&R (re)insurance business and to reiterate the need for K&R (re)insurance to be subject to vigorous risk mitigation and due diligence controls. Part 6 of the Counter-Terrorism and Security Act 2015 Act amends TACT by introducing a new section 17A, which explicitly states that an insurer commits an offence if they make a payment under an insurance contract for money or property handed over in response to a demand made wholly or partly for the purposes of terrorism, when the insurer knows or has reasonable cause to suspect that the money has been handed over for that purpose. The offence relates to any reimbursement made in respect of ransoms paid for the purposes of terrorism. As stated in the Home Office’s Explanatory Notes on the Act, the offence will apply in respect of insurance contracts entered into prior to Royal Assent (12 February 2015) in respect of ransoms that have been paid from 27 November 2014, when the intention to legislate was publicly announced. The provisions have extra-territorial application in that arrangements made to conduct financial transactions outside the UK by UK persons/entities are also captured. Therefore, reimbursements made in response to terrorist demands both inside and outside of the UK are prohibited. Both companies and individuals may be held liable for this offence, where knowledge or suspicion is attributable either to the directing minds of the body corporate or to the person who authorised the payment. An individual may also be liable if they “aid and abet” another party to commit an offence, or a senior officer consents to or connives in the offence, or their neglect leads to the offence occurring. The amendment does not prohibit reimbursement payments in respect of non-terrorism related criminality and such cases will fall outside the scope of the offence. The amendments to TACT do not affect reimbursement payments where there is no reasonable cause to suspect terrorist activity at the time the reimbursement payment is made. - 5 - Hogan Lovells SOLVENCY II PRA publishes directors' update May 2015 On 22 May 2015, the PRA published a Solvency II directors' update from Andrew Bulley, PRA Director of Life Insurance, and Chris Moulder, PRA Director of General Insurance. The letter includes information on the following: • the balance sheet review; • standard formula; • internal model: commitment panels (see annex A to the update for feedback); • internal model: model change policy; • regulatory reporting: the Bank of England Electronic Data Submission portal; • regulatory reporting: reporting currency; • Solvency II approvals; • the 2015 general insurance stress test; • the PRA’s timetable of activity from May 2015 to the second quarter of 2015; • PRA Solvency II web updates since the last directors’ update. Solvency II internal models: PRA publishes good practice paper On 7 May 2015, the PRA updated its webpage on internal models under the Solvency II Directive to include a section on internal model change policy. The PRA says that all internal model firms are required to have a model change policy. The policy needs to be developed as part of the internal model approval process. Following approval, the model change policy is expected to play a key role in the wider governance of a firm's internal model. It is important that the model change policy is of a good standard, however, to date, the PRA has seen a wide variation in the quality. As a result, it has published a paper on good practice in a number of key aspects of model change policy. The PRA says that this is not an exhaustive list and firms should consider all the relevant Solvency II requirements and guidelines when developing their model change policy. The paper considers good practice on: • scope of the model change policy; • identification of model changes; • classification of major changes; • combination of minor model changes; • governance; • reporting of model changes to the PRA; review of the model change policy. Lloyd's market bulletin on data reporting requirements for delegated underwriting business From 1 January 2016, Lloyd's managing agents will be required to collect additional data from coverholders and third party administrators. On 12 May 2015, the Society of Lloyd's published a market bulletin which explains what is required from 1 January 2016 and sets out the role of managing agents, coverholders and brokers in collecting the data. The bulletin consolidates previous advice. It contains no new data collection requirements. - 6 - Hogan Lovells EIOPA update on preparation On 6 May 2015, the European Insurance and Occupational Pensions Authority (EIOPA) announced that it had updated its webpage on the Solvency II Directive. EIOPA says that the webpage provides easily accessible links to the regulatory framework at all levels, including the first six implementing technical standards (ITS), which were recently adopted by the European Commission. These ITS cover all of the supervisory approval procedures that are crucial for the Solvency II phasing-in period that started on 1 April 2015. Among other things: • EIOPA is currently considering responses to its consultation on the second set of Solvency II ITS and guidelines and intends to publish feedback early in the third quarter of 2015, after its approval by EIOPA’s Board of Supervisors; • on 30 June 2015, EIOPA will send to the European Commission for endorsement the final set (that is, set 2) of the ITS, in particular those related to the harmonised regular reporting requirements under Solvency II; • the set 2 guidelines will be published in all EU languages in the third quarter of 2015, followed by a comply-or-explain exercise by Member States; • the XBRL taxonomy based on the set 2 ITS will be released in the third quarter of 2015; • the updated XBRL tool for undertakings for the application of the “full” Solvency II taxonomy will be published in the third quarter of 2015; • EIOPA acknowledges that later in 2015 firms will need to allocate efforts between preparatory reporting of the third quarter of 2015 and the reporting under Solvency II in 2016. EIOPA urges firms to focus their efforts both on the annual reporting, as a real test for the Solvency II application, and on the preparatory reporting of the third quarter of 2015, as a very important step for testing their processes and systems. EIOPA publishes report on staffing and resources needed to accomplish tasks On 7 May 2015, EIOPA published a report on staffing and resources needed to accomplish tasks, in accordance with Article 310a of the Solvency II Directive. The purpose of the report is to provide EU institutions with an assessment of EIOPA's staffing and financial resource needs for taking up its new powers and duties in insurance regulation and supervision allocated by Solvency II. The document includes an overview of all duties and powers as well as proposals on the staffing and resources needed to adequately fulfil these tasks. The main emphasis in the report is on those duties and powers that have been introduced by the Omnibus II Directive, as they bring new requirements on EIOPA that are not covered by the original budget and establishment plan of the European Commission. Based on a robust analysis of priorities, efficiencies, structural demands, and the potential impacts of non-delivery and staff reallocations, EIOPA concludes that there is a shortfall in its budget and human resources in 2015 of ten staff members and over EUR2 million. EIOPA calls for urgent action from European institutions to provide it with such resources, in particular considering the impact and potential disruptions to the insurance sector if EIOPA is not a position to deliver. EIOPA says that if the necessary resources are not allocated to it, the areas to be affected include the following: inability to declare the existence of exceptional adverse situations, which is a pre-condition to extend the recovery period for undertakings to restore their financial situation, delays in the review of the Solvency II standard formula calibrations, and EIOPA will not be in a position to deal with equivalence assessments requested by market participants beyond the ones foreseen as at March 2015 by the Commission. - 7 - Hogan Lovells EIOPA Q&As on guidelines on risk free interest rates and undertaking-specific parameters On 29 April 2015, EIOPA published questions and answers (Q&As) relating to its Solvency II guidelines on risk-free interest rates and undertaking-specific parameters: • risk-free interest rates: general Q&As and extrapolation Q&As; • undertaking-specific parameters: Q&As. ABI publishes position paper on its approach to principles of materiality and proportionality for Solvency II reporting On 21 May 2015, the Investment & Life Assurance Group published on its website an Association of British Insurers (ABI) position paper on the approach to the principles of materiality and proportionality for regulatory reporting under the Solvency II Directive. The ABI prepared the paper, which is dated 1 May 2015, following the meeting on 26 January 2015 of the PRA Solvency II regulatory reporting industry working group, at which the PRA requested ABI input into the development of its approach to materiality and proportionality in the context of Solvency II reporting. The paper contains a summary of the discussion at the working group meeting, which is followed by industry views which have been developed in response. ww.hoganlovells.com Hogan Lovells has offices in: Alicante Amsterdam Baltimore Beijing Brussels Budapest* Caracas Colorado Springs Denver Dubai Dusseldorf Frankfurt Hamburg Hanoi Ho Chi Minh City Hong Kong Houston Jakarta* Jeddah* Johannesburg London Los Angeles Luxembourg Madrid Mexico City Miami Milan Moscow Munich New York Northern Virginia Paris Philadelphia Prague Rio de Janeiro Riyadh* Rome San Francisco São Paulo Shanghai Silicon Valley Singapore Tokyo Ulaanbaatar Warsaw Washington DC Zagreb* - 8 - Hogan Lovells "Hogan Lovells" or the "firm" is an international legal practice that includes Hogan Lovells International LLP, Hogan Lovells US LLP and their affiliated businesses. 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