Central Bank revises the Prudential Requirements for life, non-life and composite reinsurance undertakings

The CBI has issued updated requirements for life, non-life and composite reinsurance undertakings (Updated Requirements) which replace the previous sets of requirements published in July 2011. Among the key changes are (a) increases to the minimum guarantee fund for reinsurance undertakings from €3.2 million to €3.4 million (and from €1.1 million to €1.2 million for captive reinsurance undertakings) effective 31 December 2012; and (b) clarification regarding compliance statement requirements.

In addition, the Updated Requirements applicable to composite reinsurance undertakings now require that the board of directors must consider the solvency required under Solvency II in setting the appropriate strategic solvency target and that a brief summary is included in the annual return as to how the strategic solvency target compares to the requirements under Solvency II.

Central Bank reports on latest inspection into the sale of payment protection insurance

On 2 July 2012, the CBI released the findings of its latest inspection relating to the on-going investigation into the sale of payment protection insurance (PPI), in which it raised a number of concerns. The inspection involved an examination of PPI sales by seven firms since August 2007. The CBI confirmed that the principle concerns arising from the inspection include: (i) inadequate gathering of information in order to determine the suitability of the product sold to customers (ii) firms treating sales as ‘execution only’ and failing to comply with the Consumer Protection Code 2006 (iii) the timing of provision of key information to consumers (iv) a failure to bring key policy information to certain consumers’ attention and (v) poor record keeping.

Central Bank completes themed review of professional indemnity insurance

On 17 July 2012, the CBI published the results of a themed review of professional indemnity insurance conducted in respect of a number of insurance intermediaries registered under the European Communities (Insurance Mediation) Regulations 2005 (IMR). The IMR requires insurance intermediaries to take out professional indemnity insurance to certain minimum levels. The purpose of the requirement to have such cover is to ensure that consumers will be able to recover sums in the event they are found to have suffered a loss as a result of a firm’s professional negligence. Of 50 firms inspected, the CBI identified 18 that had failed, for a variety of reasons, to comply with this obligation.

2% Quinn Levy is here to stay…

It has been reported that the cost of the Quinn administration is likely to increase from the original estimate of €775 million to between €1.1 billion and €1.2 billion principally due to the weakening Euro. The increased estimated costs became clear when administrators for Quinn Insurance Limited provided the High Court with updated information regarding the cost of the administration. The Government levy of 2 per cent which has been in operation since January 1 this year is recouping money provided by the Exchequer to meet the costs of the administration. According to the report, on the basis of the inflated figures, it is likely that the 2% Government levy will remain in place for fifteen years or more.

European and International

European Commission unveils draft legislative package to bolster consumer protection in relation to the sale of insurance products 

The European Commission has presented a legislative package that aims to raise standards regarding the sale of insurance products to consumers. The legislative package includes (i) a revision of the Insurance Mediation Directive (2002/92/EC) (IMD) and (ii) proposed regulation providing for key information documents for packaged retail investments products (PRIPs).

The revised draft directive on insurance mediation (IMD2) proposes a number of significant changes to the regulation of sales of insurance products in the EU. These include (i) the same level of protection to be afforded to consumers irrespective of whether they acquire an insurance product directly from the insurance undertaking or via an intermediary (the IMD currently only applies to sales through registered intermediaries) (ii) advance provision of information regarding the professional status of persons selling insurance products (iii) the introduction of additional rules regarding potential conflicts of interest and specifically, remuneration transparency through the disclosure of the commission earned by the sellers of insurance products; and (iv) requirements around insurance product sales having to be made on the basis of professional and honest advice. IMD2 must be approved by the European Parliament and the Council before adoption into law during 2013, with transposition across the E.U. most likely in 2015.

The provisions regarding remuneration transparency have attracted attention and the Association of British Insurers (ABI) have said that consumers had little to gain from forcing sellers of home or car insurance to reveal their commission payments.

The proposed regulation relating to PRIPs (which include insurance-based investment products and other structured investment products) will have direct effect in all member states upon its finalisation. The draft regulation proposes that PRIPs which dominate the retail investment market, will have to be marketed alongside a key information document (KID). The draft regulation sets out the prescribed form and content of the KID. The draft regulation also proposes that where a manufacturer of a PRIP has produced a non-compliant KID upon which a retail investor has relied when making an investment decision, that retail investor may claim from that manufacturer damages for any loss caused to that retail investor through the use of the KID.

UK Law Commissions publish joint consultation paper on the law of insurance contracts

On 26 June 2012, the Law Commission and Scottish Law Commission published their third Consultation Paper on the law of insurance contracts. This paper covers the business policyholder’s duty to give pre-contract information to an insurer. Among other things, the paper proposes a more onerous duty on the insurer to make enquiries and that a range of remedies for non-disclosure / misrepresentation other than the insurer being permitted not to provide any cover at all. It further proposes that basis of contract clauses no longer be used and allowing the insured to cure breaches of warranty, so that the insurer’s liability to provide cover under the contract can be recommenced thereafter.

FSA provide feedback on Solvency II and linked long term insurance business

The Financial Services Authority (FSA) has published its feedback on linked long-term insurance business under Solvency II. The feedback considers the changes to rules currently contained in section 21 of the Conduct of Business Sourcebook. The consultation paper, published in November 2011, set out the FSA’s proposed amendments in respect of unit-linked and index-linked insurance policies. In its feedback statement, the FSA commented that it was surprised to have only received 20 responses to the consultation, given the significance of linked long term business in the UK life insurance sector. The FSA intends to publish a policy statement “in the near future” which will include all the FSA Handbook changes in respect of which there has been consultation as part of the Solvency II transposition.

Solvency II equivalence arrangements and timetable spark dissent at ABI seminar

The timetable and arrangements for Solvency II equivalence have been criticised at a seminar organised by Sidley Austin and the ABI. Jonathan De Beer, policy adviser, Solvency II, ABI, said that the five-plus-one-year period set by the European Commission for temporary equivalence was far too short. In addition, concerns were also expressed that third countries without European operation had not been provided with sufficient reasons to apply for equivalence.

FSA announces intention to extend and deepen its focus on large insurers

On July 4 2012, the FSA announced at its annual public meeting that it was reviewing its approach to wholesale markets including insurance, as well as increasing its focus on large insurers. It was stated that this was due to the negative effects suffered by the retail investors in insurance companies from poor practices that cause unreasonable shifts in income to the industry away from some retail consumers. It confirmed that the implementation of the new regulatory regime and the costs of the FSA’s work programme for insurers were the principal drivers of the significant fee increases affecting some firms.

EIOPA publishes outcome of the public consultation of Solvency II reporting and disclosure requirements for insurers

On 10 July 2012 the European Insurance and Occupational Pensions Authority (EIOPA) published its final report on reporting and disclosure requirements for insurance undertakings and insurance groups. EIOPA has sought to weigh potential costs as against potential benefits in setting out its proposed requirements. It has proposed reporting templates which it hopes “will improve the efficiency of the risk- based Supervisory Review Process and thus, will enhance the protection of policyholders”. EIOPA also expresses the view that despite potential changes regarding the implementation of Solvency II related to finalisation of the Omnibus II Directive, the industry should use this final report as a basis to commence implementation.

Flight cancellation insurance in Europe must be “opt-in” – Court of First Instance

On 19 July 2012, the Court of First Instance (CFI) held that sellers of airline tickets cannot include flight cancellation insurance as a default setting when selling tickets. The decision followed a reference from the Higher Regional Court of Cologne. The reference to the CFI concerned an action against Deutschland. It was held that flight cancellation insurance was an “optional price supplement” under Regulation 1008/2008 which must be offered on an opt-in basis, even if the service is not provided by the party selling air travel. The CFI considered that to hold otherwise would be at odds with Regulation 1008/2008’s objective of protecting consumers.

International Association of Insurance Supervisors publishes paper on reinsurance and financial Stability

On 19 July 2012, the International Association of Insurance Supervisors (IAIS) published a paper on reinsurance and financial stability. The paper concludes that the flow of risk involved in traditional reinsurance activity tends to be confined to the insurance market and is unlikely to spill over into the broader financial market. It notes that when reinsurers have failed in the past, primary insurers have been in a position to sustain the impact. The paper does point that where reinsurers engage in alternative risk transfer and other non-reinsurance activities (for example, underwriting of credit default swaps and collateralised debt obligations) there are potential systemic risk implications.

EIOPA publishes report on insurance guarantee schemes

EIOPA published a report (IGS Report) on 24 July 2012 on Insurance Guarantee Schemes (IGSs) in relation to the winding up of insolvent insurance undertakings in the EU/EEA. EIOPA has stated that the IGS Report highlights that harmonisation is lacking in areas such as (i) which authority takes the decision to intervene when an insurance undertaking becomes insolvent (ii) the ability to provide for a portfolio transfer (iii) pre-warning systems when an insurance undertaking is in difficulty and (iv) the role of the supervisory authority when an insurance undertaking becomes insolvent. Gabriel Bernardino, Chairman of EIOPA has written that the IGS Report illustrates that while limited coverage is generally available in all jurisdictions, the provision of comprehensive coverage is not widespread and is generally only applied in relation to motor insurance.