Regulation

Regulatory agencies

Identify the regulatory agencies responsible for regulating insurance and reinsurance companies.

Under the Financial Services and Markets Act 2000 (as amended) (FSMA 2000), insurance and reinsurance companies in the United Kingdom are regulated by both the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), which are responsible, respectively, for prudential regulation and conduct supervision of authorised firms. The PRA and the FCA are under a statutory duty to cooperate and coordinate those activities. (Re)insurers are referred to as dual regulated firms – they are regulated by the PRA and FCA. Insurance intermediaries, such as brokers, are regulated by the FCA only. Lloyd’s of London (or the Society of Lloyd’s) is regulated by the PRA and the FCA. While Lloyd’s itself is not a statutory regulatory agency in the same sense as the PRA and FCA, it oversees and regulates the operation of the Lloyd’s market and those operating within it. Lloyd’s members underwrite through syndicates that are managed by Lloyd’s managing agents. Lloyd’s managing agents are dual regulated firms, in addition to being regulated and supervised by Lloyd’s. Members’ agents and Lloyd’s brokers are regulated by the FCA as well as Lloyd’s. The Bank of England and Financial Services Act 2016 made the PRA a part of the Bank of England.

Formation and licensing

What are the requirements for formation and licensing of new insurance and reinsurance companies?

A firm intending to conduct (re)insurance business in the United Kingdom must obtain a Part 4A FSMA 2000 permission (Part 4A permission) from the PRA unless it is exempt (eg, appointed representatives and persons exempt as a result of an exemption order) or was able to rely on the EU’s passporting regime. This passporting regime, however, ended on 31 December 2020 as far as the United Kingdom is concerned, when the Brexit transition period ended. In connection with the United Kingdom’s exit from the European Union (Brexit), the PRA and the FCA implemented a ‘temporary permissions regime’, which will permit non-UK European Economic Area (EEA) firms to continue to passport their services into the United Kingdom for a limited period following the end of the transition period. However, such firms will need to separately apply for a Part 4A permission as a third-country branch and are also subject now to some of the third-country branch rules.

The FCA must consent to the PRA’s grant of permissions for new (re)insurance companies. To obtain a Part 4A permission, an applicant must be able to satisfy the ‘threshold conditions’ on an ongoing basis. These conditions include:

  • demonstrating that a firm’s head office is in the United Kingdom or that it carries on business in the United Kingdom;
  • it is adequately capitalised to conduct the (re)insurance business in question; and
  • it has appropriate management systems and controls in place, as well as suitably qualified and fit and proper persons capable of performing the relevant ‘controlled functions’.
Other licences, authorisations and qualifications

What licences, authorisations or qualifications are required for insurance and reinsurance companies to conduct business?

Unless an exemption applies, prior regulatory approval must be obtained to carry on ‘regulated activities’ by way of business in the United Kingdom. ‘Regulated activities’ are defined in the Financial Services and Markets Act (Regulated Activities) Order 2001 (as amended) and include effecting and carrying out (re)insurance contracts. Insurance mediation activities (ie broking, distribution and other intermediary services) are regarded as separate regulated activities. Insurance intermediaries (who are not also (re)insurers) must apply to the FCA for permission to carry on intermediary activities in the United Kingdom. The relevant regulator (the PRA, the FCA, or both, as applicable) must approve each regulated activity individually. The regulator has the power to impose restrictions on the scope of a (re)insurer’s regulated activities.

Directive (EU) 2016/97 (Insurance Distribution Directive) (IDD) governs with the authorisation, passporting and general regulatory requirements for (re)insurance intermediaries or distributors. It also encompasses organisational and business requirements for (re)insurance undertakings.

Officers and directors

What are the minimum qualification requirements for officers and directors of insurance and reinsurance companies?

Officers, directors and persons who exercise senior management functions or ‘controlled functions’ under the FSMA (eg, the director function, chief executive function, actuary function, or systems and controls function) must be approved by the PRA or FCA, or both, as applicable, before performing such functions. Such individuals must be ‘fit and proper’ to perform these roles, which essentially means that they should be trustworthy individuals with the relevant experience or qualifications to perform their particular role.

Once approved to perform such functions, the person in question becomes subject to the Senior Managers and Certification Regime (SM&CR) and accompanying conduct rules that impose several significant responsibilities, including a duty to comply with applicable regulatory requirements, general principles and expectations on an ongoing basis. The SM&CR, which was extended to cover all PRA and FCA regulated (re)insurance firms on 10 December 2018. The SM&CR was extended to cover all PRA and FCA regulated firms with effect from 9 December 2019. The primary objective of the SM&CR is to heighten individual accountability and ensure policyholder protection.

Individuals performing a designated Senior Management Function will need to be pre-approved by the relevant regulator before being appointed to their role and will be subject to annual fit and proper assessments by their firm. Individuals who are not senior managers but whose job can potentially cause significant harm to the firm or its customers will be certified annually by their firm to check that they are suitable to do their job. Further enhanced requirements apply to the largest and most complex firms, including having in place a responsibility map and handover procedures for all senior manager roles.

Capital and surplus requirements

What are the capital and surplus requirements for insurance and reinsurance companies?

UK capital requirements adopted, but also enhanced, the requirements established originally by the EU Insurance Directives. Capital requirements were then embodied in Directive 2009/138/EC (Solvency II) and are contained in the PRA Handbook with further details in the Commission Delegated Regulation (EU) 2015/35 (the Solvency II Delegated Act). Slightly different requirements apply to general and life insurers and pure reinsurers, with an overarching reserve power of the PRA to impose additional capital requirements (individual capital add-ons) if deemed necessary. Pillar 1 of Solvency II introduced new quantitative capital requirements at both the solo entity and at the group level. With the approval of the regulator, companies and particularly groups can develop their own internal risk-based capital models according to their economic capital needs relative to their risk profile. Pillar 1 capital requirements have two distinct levels:

  • a minimum capital requirement representing the minimum amount of capital that a (re)insurer needs to cover its risks (which goes beyond just underwriting risks); and
  • a solvency capital requirement (SCR), which is effectively the amount of capital a (re)insurer requires to operate as a going concern, assessed on value at risk measure.

 

As part of its interim review of the Solvency II Delegated Regulation in 2018, the European Commission reviewed the methods, assumptions and standard parameters used when calculating solvency capital requirements. However, certain issues, including interest-rate risk, were specifically deferred to the comprehensive review of Solvency II, which the European Commission was required to carry out before the end of 2020. Owing to the covid‑19 pandemic, this review was delayed and the European Insurance and Occupational Pensions Authority (EIOPA) provided the European Commission with its Opinion in December 2020. This Opinion contained several recommendations on areas including long-term guarantee measures, solvency capital requirements and the risk margin (among others) and is with the European Commission for its consideration.

The Solvency II Regulations Act and other EU rules were incorporated into UK law when the transition period for the United Kingdom leaving the European Union ended on 31 December 2020, and these provisions shall apply in the United Kingdom.

Reserves

What are the requirements with respect to reserves maintained by insurance and reinsurance companies?

Solvency II (adopted into the PRA Rulebook) introduced material changes to reserving and the calculation of reserves, or ‘technical provisions’. Articles 76–80 of Solvency II set out the basic requirements as to establishment and possession of technical provisions and as to their calculation. These are supplemented by the Solvency II Delegated Act, which, post Brexit, has been incorporated into UK law as ‘retained EU law’. Unsurprisingly, (re)insurers are required to establish technical provisions concerning all their (re)insurance obligations towards policyholders, and to calculate those provisions in a prudent, reliable and objective manner. A major challenge introduced in the reserving process by Solvency II, however, is that the technical provisions must not only represent a best estimate of the liabilities but also include a ‘risk margin’ to cover the cost of capital as prescribed. Also, when calculating technical provisions, (re)insurers must segment their (re)insurance obligations into homogenous risk groups and by lines of business as prescribed, hence raising specific allocation issues. The value of the technical provisions must correspond to the current amount the (re)insurer would have to pay if it were to transfer its (re)insurance obligations immediately to another (Solvency II‑regulated) (re)insurer.

Product regulation

What are the regulatory requirements with respect to insurance products offered for sale? Are some products regulated by multiple agencies?

No prior regulatory approval or registration of insurance products is required in the United Kingdom. Instead, the FCA, in the exercise of its statutory objective of consumer protection and its ‘outcomes focused’ approach to regulatory supervision, imposes on insurers requirements as to their conduct of business and as to the suitability of insurance products sold to consumers, and regulates the selling and administration of insurance contracts, providing detailed rules including on categorisation of customers, communications with and financial promotions to customers, conflicts of interest, record-keeping, disclosures required to be made to customers, and product information. Insurers must also comply with the FCA’s General Principles for Business and in this context insurers (particularly those selling retail products) must be mindful of the need to ‘pay due regard to the interests of customers and treat them fairly’ and ‘to the information needs of clients and communicate information to them in a way that is clear, fair and not misleading’. The FCA has statutory powers of product intervention that would allow it to restrict the use of certain insurance product features, require that a product not be marketed or sold to certain categories of customer, or even ban the marketing or sale of a product.

Recent changes to consumer protection laws in the United Kingdom (eg, the Consumer Insurance (Disclosure and Representations) Act 2012, the Consumer Rights Act 2015 and the Insurance Act 2015) provide enhanced protection for consumers buying insurance products and regulate the permitted content of policies, including concerning the use of unfair contract terms, a prohibition on insurers asking consumers to contract out of statutory rights and, in the case of non-life insurance, specific disclosures of product information that has to be provided to the buyer before the insurance contract is formed.

Regulatory examinations

What are the frequency, types and scope of financial, market conduct or other periodic examinations of insurance and reinsurance companies?

US-style examinations of (re)insurers do not occur in the United Kingdom, and there is no public hearing process provided for in the usual conduct of regulatory affairs by the FCA or the PRA. Instead, the UK regulatory approach is to provide regulatory oversight through a combination of reporting, self-reporting, regulatory visits (the frequency of which depends on the size and type of (re)insurer) and regulatory intervention, if required. Regulatory oversight is exercised by the FCA (as to conduct) and the PRA (as to prudential matters) working together under a memorandum of understanding between those regulators. Underpinning the oversight function are the duties imposed on (re)insurers under the FCA’s Principles for Businesses and the PRA’s Fundamental Rules.

Both the FCA and the PRA conduct visits and in-person interviews with (re)insurers regularly and also perform regular market studies or reviews of a particular aspect of UK (re)insurers businesses. Governance and reserving are examples of recent industry reviews by the PRA.

Investments

What are the rules on the kinds and amounts of investments that insurance and reinsurance companies may make?

Insurers are required to hold assets to cover their technical provisions and to maintain an adequate available amount of capital on top of the technical provisions. Solvency II has introduced a less prescriptive regime as to the nature and identity of eligible assets to cover the technical provisions and capital requirements, introducing instead the ‘prudent investor’ concept. Most of the previous restrictions as to asset admissibility, percentage holding of assets and counterparty exposure limits have been removed, giving insurers greater freedom to invest in assets that are appropriate to their business and their individual solvency capital requirement. The prudent-investor concept essentially requires insurers to invest in assets that match their liabilities in terms of duration and liquidity and are of sufficient quality to ensure they will be available when needed. Investments in unlisted securities and alternative riskier assets should be kept to a minimum, and capital requirements for market risk have been introduced on the asset side of the balance sheet. Hence insurers may invest in riskier assets but will need to hold capital against the risk of these assets falling in value, whether due to equity risk, spread risk, interest-rate risk, concentration risk, counterparty or credit risk. Relevant stress tests for the different types of market risk are set out in the Solvency II Delegated Act.

Change of control

What are the regulatory requirements on a change of control of insurance and reinsurance companies? Are officers, directors and controlling persons of the acquirer subject to background investigations?

Under Part XII of FSMA 2000, a person must not acquire or increase control in a UK‑regulated (re)insurance company without the prior approval of the PRA (it is a criminal offence to do so without such prior approval). ‘Control’ is defined as the acquisition of 10 per cent or more of the shares or voting power of the regulated entity or its parent entity with an overarching (and ill-defined) concept of the ability to exercise significant influence over the management of the regulated entity by virtue of any amount of shareholding or voting power in the regulated entity or its parent. Prior regulatory approval will also be required where an existing controller proposes to increase its shareholding or entitlement to exercise voting power in the (re)insurer or its parent to 20, 30 or 50 per cent or more. The PRA must consult with the FCA, and the FCA may request the PRA to reject the application or impose conditions on the approval of the change in control.

Applications for a change in control in respect of insurance intermediaries are made to the FCA, but the same general rules apply.

Directors and officers of the proposed acquirer will be subject to questions as to their suitability (reputation, integrity and employment history in the regulated sector if relevant). Some may wish to be appointed to the board or to become senior managers of the regulated entity, in which case they will need to apply for approval to exercise senior management functions in the regulated target entity, and will be subject to background investigations.

Financing of an acquisition

What are the requirements and restrictions regarding financing of the acquisition of an insurance or reinsurance company?

There are no specific requirements or restrictions in respect of the financing of the acquisition of a (re)insurance company. Where the acquirer is itself a (re)insurance company, any debt or equity raised to fund the acquisition may affect the acquirer’s own regulatory capital position and overall availability of resources and so may need prior disclosure to and consent from regulators. It will also need to be considered whether any acquisition financing or debt push down to the target(s) would either come within the financial assistance regime under Part 18, Chapter 2 of the Companies Act 2006, or would otherwise impact the regulatory capital position of the acquirer or the target. It may also affect the group solvency position post-acquisition. There are no specific UK rules mandating or prohibiting any particular acquisition financing method but the PRA will look at acquisition financing when considering a change of control application. Also, dividends are not restricted generally from insurance companies to their parents to pay interest amounts, subject to meeting regulatory capital requirements. However, the PRA should be notified of, and can challenge, dividends that may materially change the capital position of the paying insurance company or insurance group.

Minority interest

What are the regulatory requirements and restrictions on investors acquiring a minority interest in an insurance or reinsurance company?

At less than 10 per cent of voting rights or share ownership, there should be no restrictions unless the acquirer of the minority interest can exercise significant influence over the management of the insurer or reinsurer, which could trigger a requirement for change in control approval.

Foreign ownership

What are the regulatory requirements and restrictions concerning the investment in an insurance or reinsurance company by foreign citizens, companies or governments?

There are no specific restrictions or prohibitions on investment in a (re)insurance company by foreign citizens, companies or governments, although the National Security and Investment Bill proposes a comprehensive overhaul of the United Kingdom’s foreign investment regime, including mandatory notifications for mergers and acquisitions in sensitive sectors, which may apply to certain insurance transactions.

Group supervision and capital requirements

What is the supervisory framework for groups of companies containing an insurer or reinsurer in a holding company system? What are the enterprise risk assessment and reporting requirements for an insurer or reinsurer and its holding company? What holding company or group capital requirements exist in addition to individual legal entity capital requirements for insurers and reinsurers?

Solvency II introduced new provisions concerning group supervision and brought the entire group within the Solvency II framework, requiring groups subject to Solvency II to comply with Solvency II requirements under each of the three Pillars (quantitative, supervisory and disclosure) at both the level of the authorised (re)insurance entities and on a group-wide basis. Groups have to establish an own-risk and solvency assessment process for the group as a whole, as well as adequate and consistent risk management and governance procedures throughout the group, and satisfy regulatory supervisors as to the adequacy of these measures. Groups will also have to comply with all Pillar 3 regulatory and public disclosure requirements for groups.

The group supervisor under Solvency II will usually be the supervisor in the country where the ultimate parent of the group has its headquarters, but groups may be supervised at more than one level and may have more than one group or individual supervisor, working as a college. Reporting and disclosure under Solvency II are required at the group and solo-entity level, although a group may apply for approval to report as a single combined entity.

Primary disclosures are made through annual solvency and financial condition reports (SFCR), as well as through public disclosure of the group SCR. In addition to the annual SFCR, a regular supervisory report will need to be submitted on an annual basis (but need not be publicly disclosed), and quantitative reporting templates will need to be submitted on both a quarterly and an annual basis.

Group solvency, which includes the holding company and all subsidiaries, must be calculated at least annually. The group SCR covers the capital requirements of all the entities in the group calculated on a consolidated balance sheet. Group solvency must be calculated under the accounting consolidation method as the default method, or the deduction and aggregation method or a combination of both methods with supervisory approval. All group solvency calculations are to be carried out at the ultimate parent insurance entity or insurance holding company level. In the context of global groups, where subgroups exist at the EU level, supervisory authorities may decide to apply the group solvency calculation at the EU sub-group level.

The implementation and effectiveness of the SCR standard formula under the Solvency II framework was reviewed by EIOPA, with the findings being delivered to the European Commission in 2018. The Solvency II regime as a whole will be reviewed during 2021.

The United Kingdom officially left the European Union on 31 January 2020, subject to a transition period that ended on 31 December 2020. A Treasury Select Committee was established in September 2016 to look into EU insurance regulation. The Chairman of the Treasury Committee said: ‘the Treasury Committee will now take a look at the Brexit inheritance on insurance to see what improvements can be made in the interests of the consumer.’ Discussions are currently ongoing nationally and with the EU Commission about the ‘equivalence’ post-Brexit status of the United Kingdom in terms of the requirements of Solvency II. The Treasury unilaterally granted the European Union equivalence in November 2020. Despite the United Kingdom having fully implemented the requirements of Solvency II and, therefore, being objectively equivalent at the time of leaving the European Union, third-country ‘equivalence’ decisions are a matter for the EU Commission, which must formally grant equivalence to a third country if it is to apply.

Reinsurance agreements

What are the regulatory requirements with respect to reinsurance agreements between insurance and reinsurance companies domiciled in your jurisdiction?

The various rules attached to the content of consumer insurance contracts generally do not apply to reinsurance contracts, and there is no specific UK regulatory regime prescribing the content, scope or application of reinsurance contracts governed by English law. In the United Kingdom, reinsurance is generally regulated in the same way as primary insurance, and English law on insurance contracts generally applies likewise to reinsurance contracts.

The Insurance Act 2015 applies to non-consumer insurance contracts and also applies to reinsurance contracts. The Insurance Act 2015 abolished some of the draconian consequences of a breach of the duty of utmost good faith or breach of warranties in insurance contracts and instead laid down more proportionate remedies for such breaches, including premium adjustments for certain misrepresentations.

Ceded reinsurance and retention of risk

What requirements and restrictions govern the amount of ceded reinsurance and retention of risk by insurers?

Cedents need consider several factors when judging the size of any cession or retention, the starting point being the basic requirement that a cedent may take credit for reinsurance only if, and to the extent that, there has been an effective transfer of risk from the cedent to a third party. A reinsurer that is authorised as an insurance special purpose vehicle (ISPV) will have to fully fund its exposures to risks it assumes through the proceeds of a debt issuance or some other financing mechanism. Both cedent and reinsurer, if regulated in the United Kingdom, will also have to be mindful of the provisions in the PRA Rulebook regarding prudential requirements and risk assessment monitoring and control. While there is no specific rule limiting reinsurance to a certain percentage of the risk, most regulators in Europe prefer some risk retention to align interests, maintain some control and prevent overexposure to one counterparty. The generally accepted minimum retention is 10 per cent unless some other amount can be objectively justified. Also, taxation considerations, including UK-diverted profits taxes, need to be considered and may mandate a higher net retention. Solvency II requires insurers to establish and maintain adequate technical provisions concerning all of their (re)insurance obligations towards policyholders. To the extent that an insurer has entered into risk mitigation techniques (eg, reinsurance), then Solvency II and the PRA Rulebook provide detailed requirements as to how the amounts recoverable under reinsurance contracts and ISPVs are to be calculated.

Collateral

What are the collateral requirements for reinsurers in a reinsurance transaction?

There are no prescribed requirements for collateral to be put up by reinsurers under English law or UK regulation. The ceding insurer and the reinsurer are at liberty to agree to whatever form of collateral (if, indeed, any) they choose. Solvency II prohibits member states from requiring EEA reinsurers (but not non-EEA reinsurers unless judged equivalent) to pledge assets to cover their part of the cedent’s technical provisions. Insofar as reinsurance arrangements are collateralised to protect against counterparty risk, they can be structured under English law to qualify as ‘financial collateral arrangements’ under Directive 2002/47/EC (Financial Collateral Directive), which facilitates the enforcement of security over financial collateral within the European Union. Under Solvency II, EU member states are no longer able to impose on reinsurers from an ‘equivalent’ jurisdiction (or another EU member state) collateral requirements that require the pledging of assets to cover unearned premiums and outstanding claims provisions. However, if collateral is provided, it will need to satisfy the requirements for collateral set out in Solvency II to receive regulatory credit. Since the United Kingdom has not, as of the date of writing, been deemed equivalent by the European Union for Solvency II purposes, EEA insurers may require UK reinsurers to pledge assets to cover unearned premiums and outstanding claims provisions.

In 2017, the European Union and the United States announced that they had successfully concluded the negotiation of a bilateral agreement between the European Union and the United States on prudential measures regarding insurance and reinsurance (the Covered Agreement). The Covered Agreement addresses three areas of prudential insurance regulation important to internationally active (re)insurers:

  • reinsurance;
  • group supervision; and
  • the exchange of information between insurance supervisors.

 

The key aspects of the Covered Agreement are intended to provide EU-based (re)insurers with relief from US collateral requirements, to provide US-based (re)insurers with relief from EU local-presence requirements, and to free US insurance groups operating in the European Union from EU worldwide group supervision, capital, solvency, reporting and governance requirements under Solvency II-applicable implementing legislation. Similarly, in 2018, the United States and the United Kingdom announced that they had also signed a bilateral agreement (the UK–US Covered Agreement), which addresses:

  • the elimination of local presence requirements imposed by one party on an assuming reinsurer that is domiciled in the other party;
  • the elimination of collateral requirements imposed by a party on an assuming reinsurer that is domiciled in the other party; and
  • the role of the host and home supervisory authorities concerning prudential group supervision of a (re)insurance group whose worldwide parent undertaking is in the home party.
Credit for reinsurance

What are the regulatory requirements for cedents to obtain credit for reinsurance on their financial statements?

The extent to which a ceding insurance company can take credit for reinsurance, including by treating the reinsurer’s share of technical provisions as an eligible asset of the ceding company or by reducing the ceding company’s solvency requirements or valuing cash flows for reserves, will depend on whether and, if so, to the extent that the contract of reinsurance effectively transfers risk from the ceding company to the reinsurer. The Prudential Sourcebook for Insurers (INSPRU) 1.1.19 used to set out the basic risk transfer requirement for all reinsurance contracts (including those with an ISPV) and for analogous non-reinsurance financing agreements for which a ceding company might likewise wish to take credit (eg, contingent loans and securitisations) but is not included in the PRA Rulebook. The requirements of INSPRU 1.1.19 have become industry standards (also looked to by auditors and actuaries when considering the valuation of reinsurance coverage programmes) and so the current provisions of the PRA Rulebook on Technical Provisions on the valuation of recoverables from reinsurance contracts and ISPVs should be read with that in mind. Reference should also be made to the Solvency II Delegated Act, which sets out rules relating to technical provisions and the requirements for a reinsurance contract to be eligible as a risk mitigant under Solvency II.

Insolvent and financially troubled companies

What laws govern insolvent or financially troubled insurance and reinsurance companies?

Under Part XXIV of FSMA 2000, the UK regulators (PRA and FCA) are given the right to be involved in insolvency proceedings against insurers. The insolvency proceedings available in the United Kingdom against insurers include liquidation, administration, a company voluntary arrangement and the appointment of a provisional liquidator. Insolvent insurance companies can also use a scheme of arrangement under Part XXVI of the Companies Act 2006. Relevant UK legislation includes:

  • the Insurers (Reorganisation and Winding Up) Regulations 2004 (2004 Regulations);
  • the Insolvency Act 1986;
  • Part XXIV of FSMA 2000; and
  • the Insurers (Winding Up) Rules 2001.

 

The 2004 Regulations set out a governing framework to determine issues arising in insurance insolvencies within the European Union, and provide for mutual recognition of member states’ insurance insolvency and winding-up measures. The 2004 Regulations also establish the priority of payment of insurance and other claims in an insurance insolvency.

The Insolvency Act 1986 provides the basic law and framework for insolvency, administration and voluntary and involuntary liquidation in the United Kingdom and applies to insurers, as it applies to other corporate entities, procedures for the appointment of administrators and liquidators and the winding up of insurers by court order. The Insurers (Winding Up) Rules 2001 provide detailed rules as to the conduct of an insurance liquidation and the procedures to be followed by the liquidator, and for the separation of life or long-term business assets in a liquidation from other assets. Lloyd’s has its own procedures in the event of a syndicate or member being in financial difficulties, including a cash call on syndicate members to pay losses, the syndicate year of account being unable to close at 36 months and being left open in an effective run-off until closure is possible, and the liabilities being settled in whole or in part by (and at the discretion of) the Lloyd’s Central Fund. The Risk Transformation Regulations 2017 provides for the introduction into UK law of the protected cell company (PCC) to accommodate the demand for a suitable vehicle for insurance-linked securities and alternative risk transfer, akin to structures that have been available in the Channel Islands, Bermuda and other offshore centres for some years. PCCs have their own procedure for dissolution and winding up under the Risk Transformation Regulations 2017.

Claim priority in insolvency

What is the priority of claims (insurance and otherwise) against an insurance or reinsurance company in an insolvency proceeding?

The Insurers (Reorganisation and Winding-Up) Regulations 2004 provide, inter alia, that preferred creditors (being those with preferential debts, such as monies due to HMRC, social security and pension scheme contributions, and employee remuneration) will rank first in order of priority and that (subject to the claims of preferred creditors) direct insurance claims (eg, monies owed to an insurer’s own policyholders) will have priority over the claims of all other unsecured creditors (except for preferred creditors), including reinsurance creditors, on a winding up by the court or a creditor’s voluntary winding up of the insurance company. In the case of insurers carrying on both insurance and reinsurance business, sums due to direct policyholders are given priority over sums due to cedents. Instead of making a winding-up order, a UK court may, under section 377 of FSMA 2000, reduce the amount of one or more of the insurance company’s contracts on terms and subject to conditions (if any) that the court considers fit. In the case of preferential debts and in the case of insurance debts, the debts of each class respectively rank equally among themselves and must be paid in full or, if assets are insufficient to meet them, the debts are abated in equal proportions. For a composite insurer authorised to carry on both life and non-life business, the life and non-life debts must be determined separately, and life claims settled from only the life assets and non-life claims settled only from non-life assets.

Intermediaries

What are the licensing requirements for intermediaries representing insurance and reinsurance companies?

The IDD applies to and requires authorisation both of independent intermediaries (eg, insurance brokers) and of (re)insurers insofar as they conduct (re)insurance mediation activities. All those intermediaries involved in selling and underwriting a (re)insurance contract will require a licence unless they can benefit from an exemption. Third-party administrators will not necessarily require a licence depending on the specific activities they perform. Claims-management companies are subject to licensing by the FCA.

The IDD also provides for ‘passporting’ by intermediaries covered by that directive throughout the European Union and for organisational and business requirements. The regulatory requirements applicable to intermediaries mirror, to a considerable extent, many of the requirements applicable to (re)insurers, including principles for business and conduct of business, and the approved-persons regime. The IDD also enables intermediaries to operate throughout the European Union using freedom of services or establishment. Insurance intermediaries require authorisation from the FCA primarily, but if the intermediary is part of a group that includes a firm authorised by the PRA, then the FCA will also have to consult with the PRA before granting any Part 4A FSMA 2000 permission for insurance mediation. The IDD includes several exclusions and exemptions from the need for intermediaries to be authorised and the United Kingdom retains the system whereby an intermediary can itself be an ‘appointed representative’ of another authorised person and thereby obviate the need for individual authorisation of the intermediary, although all intermediaries, including appointed representatives, must be registered on the Financial Services Register.

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