Revolution in company law will promote Insurance Linked Securities
We will soon see the launch of the first UK-domiciled Insurance Linked Securities (ILS) deal, most likely a collateralised reinsurance structure.
HM Treasury is consulting the market on new legislation, which it expects to be in place by the end of autumn 2016. This will enable the creation of protected cell companies in the UK and shows the government’s keen appetite to stimulate ILS business in the London Market. The revolution in English company law to allow UK protected cell companies will be limited to insurance and reinsurance business.
Bermuda is already a mature market for ILS catastrophe risks and the UK should be wary of simply trying to replicate it. London’s entrepreneurial approach to underwriting will find a creative outlet in ILS solutions not yet established in other parts of the world. It is also possible that the new UK structure could give a new spin to alternative investments and fixed income securities. Our prediction is that credit risk and life assurance businesses have the greatest UK ILS potential.
The General Data Protection Regulation may not bring expected harmonisation
One of the key aims of the General Data Protection Regulation (GDPR) is to harmonise data protection law across member states, moving from a Directive to a Regulation. It was praised as an opportunity to rid Europe of its web of national data protection laws. However, eagle-eyed readers of the final text have counted a total of 61 Articles that allow member states flexibility to adapt the GDPR. Several of these are in areas of concern for insurers such as the right not to be subject to profiling.
We know from experience that national data protection regulators range in approach from the very strict (eg, Germany) to the more pragmatic (eg, the UK). If used by member states, this flexibility could mean that businesses still need to obtain specialist data protection advice in different jurisdictions. We predict that the vision of a fully harmonised data protection regime across the EU may not be quite as clear as first thought.
From a UK perspective, it should be noted that the GDPR will come into force on 25 May 2018, roughly six months before the earliest expected date on which Brexit might occur. Even post-Brexit, there will be compelling practical reasons why UK data protection law should continue to mirror closely, if not exactly, EU law in this area, so UK organisations should not see Brexit as a reason to delay their GDPR implementation plans.
Risk of complacency over preparation for Insurance Distribution Directive
The European Commission’s claim that implementation of the Insurance Distribution Directive (IDD) will result in a modest average annual cost of €730 per firm, together with the UK’s earlier ‘gold-plating’ of the 2002 Insurance Mediation Directive, may have lulled some UK firms into assuming that the preparation required to meet compliance with the IDD will be limited. We expect several new IDD provisions, in particular the information disclosure and the product oversight and governance requirements, to require insurance distributors to update their sales processes and for there to be a direct impact on the cost of sales as a consequence. Given the lead time required to effect such changes, insurance distributors need to be turning their minds to how such changes will be implemented very soon.
The IDD must be transposed into national law by 23 February 2018. The Financial Conduct Authority issued a statement following the UK referendum saying that firms must continue with implementation plans for EU legislation that is still to come into effect.
Competition Act enforcement actions against regulated firms anticipated
The Financial Conduct Authority (FCA) will start taking Competition Act enforcement actions against regulated firms. The FCA’s powers now extend to ensuring that the financial markets it regulates work effectively. An example of how this translates into policy comes in the FCA’s pilot project to publish ‘scorecards’ tracking how often consumers are likely to claim on a product, how likely those claims are to be accepted and the average claim payout.
The FCA announced in March 2016 that it was at the early stages of a Competition Act investigation and cited particular concerns arising out of its recent Retirement Income Market Study. Insurers and brokers would be well advised to remind themselves of their duties under competition law and consider whether their existing controls are sufficient.
FinTech and InsurTech will gain real traction in the insurance market
Identifying winners is always difficult, but the wave of FinTech developments disrupting the UK banking sector will increasingly wash over into insurance. This will change the way individuals and businesses buy insurance and the way insurers handle claims. It will also have a wider impact in terms of the risks that insurers are covering and the range of risk mitigation tools available to insureds.
The key characteristics of FinTech that the insurance sector should have in mind are that disruption often comes from outside the sector – think of Apple Pay or Google self-driving cars – and that individual developments may be small but the cumulative effect can be huge. It is essential to keep close to developments to avoid being left behind or blindsided by them.
Key developments in 2015/16