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Market spotlight

Trends and prospects

What are the current trends in and future prospects for the insurance and reinsurance markets in your jurisdiction?

Soft market conditions continue to place (re)insurers under increased pressure to win and retain new business. Consequently, prices are falling and terms are becoming more liberal. (Re)insurers are also subject to increased regulatory scrutiny (eg, in relation to conduct risk), meaning that there is a greater reluctance to contest claims than in the past. These factors have led to an increase in M&A activity, with the intention of saving operating costs and increasing reinsurance buying power.

In view of the impending exit of the United Kingdom from the European Union, one of the biggest concerns for the UK (re)insurance industry is whether the UK government will reach an agreement with the European Union in respect of ‘passporting’. As the United Kingdom is part of the European Economic Area (EEA), EEA insurers and brokers are authorised under one of the EU single market directives and are able to ‘passport’ into the United Kingdom on the basis of their home state authorisation. However, unless a passporting regime is retained in an agreement between the United Kingdom and the European Union, UK insurers could lose these rights.

Finally, the recent global rise in the number of cyber-attacks has underlined a huge potential for growth in the cyber insurance sector and the need for new products to deal with the complex nature of cyber risks. 

Regulatory framework

Legislation

What is the primary legislation governing the (re)insurance industry in your jurisdiction?

The Financial Services and Markets Act 2000 as amended by the Financial Services Act 2012 provides a structure for the regulation of (re)insurers and insurance intermediaries. There are also a number of applicable secondary pieces of legislation, such as the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544). 

Regulators

Which government bodies regulate the (re)insurance industry in your jurisdiction and what is the extent of their powers?

The regulation of (re)insurers is divided between two governmental authorities: the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). The PRA is responsible for the supervision of prudential matters and the FCA is responsible for the conduct of business regulation. Both the PRA and FCA have wide-ranging rule-making, investigatory, audit and enforcement powers.

Lloyd’s managing agents are regulated by the PRA and the FCA, but also by Lloyd’s itself. Lloyd’s brokers and members’ agents are regulated by the FCA and Lloyd’s. Intermediaries are only regulated by the FCA. Lloyd’s itself is also authorised and regulated by the PRA and FCA. 

Ownership and organisational requirements

Ownership of (re)insurers

Are there any restrictions on ownership of or investment in (re)insurers in your jurisdiction, including any limits on foreign ownership/investment?

There is no general prohibition on the overseas ownership of UK insurance companies. However, when a (re)insurer first applies for authorisation, it must supply information relating to its controllers (see below), which the Prudential Regulation Authority (PRA) assesses.

What regulations, procedures and eligibility criteria govern the transfer of control of/acquisition of a stake in a (re)insurer?

When a transaction will result in a change in control of a (re)insurer, the PRA must give prior approval. In certain instances, prior consent to a change in the level of control within the (re)insurer is also required.

A change in control takes place when a person acquires or holds 10% or more of the shares or voting rights in the (re)insurer or in its parent undertaking. The rules also extend to circumstances where a party is able to exercise significant influence over the insurer by virtue of the holding of shares or voting rights in the insurer or any of its parent undertakings.

When a person wishes to increase their level of control above the following thresholds:

  • 20% or more, but less than 30%;
  • 30% or more, but less than 50%; or
  • 50% or more, they must also seek approval.

Failure to obtain the required consent amounts to a criminal offence (see Part XII of Financial Services and Markets Act). A person increasing or decreasing their level of control within a particular bracket need not seek permission, but must still notify the PRA.

When considering whether to grant approval, the PRA focuses on whether the proposed change in control will have any adverse impact on the (re)insurer’s ability to meet its regulatory responsibilities.

A purchase of a book of business from an insurer also requires both regulatory and court consent under the Part VII process laid down by the Financial Services and Markets Act.

Organisational requirements

Must (re)insurers adopt a certain legal structure in order to operate? If no mandatory company organisation applies, what are the common structures used?

(Re)insurers can take the form of:

  • a company limited by shares or guarantee or unlimited;
  • a society registered under the Industrial and Provident Societies Acts;
  • a society registered under the Friendly Societies Acts or by the association of underwriters known as Lloyd’s. 

Do any particular corporate governance requirements apply to (re)insurers, including any eligibility criteria for directors and officers?

The Solvency II Directive (2009/138/EC) as amended was implemented in the United Kingdom on January 1 2016. What is known as Pillar 2 of the Solvency II regime introduced a framework of rules requiring (re)insurers – among other requirements – to “have in place an effective system of governance which provides for sound and prudent management of the business” (Article 41). In particular, (re)insurers must have in place effective:

  • risk-management systems (Article 44);
  • internal controls (Article 46); and
  • internal audit functions (Article 47).

(Re)insurers must also ensure that all persons who ‘effectively run’ or ‘have other key functions’ within the firm are:

  • ‘fit’ – meaning that their professional qualifications, knowledge and experience are adequate to enable sound and prudent management; and
  • ‘proper’ – meaning that they are of good repute and integrity – under Article 42.

It is the (re)insurer’s responsibility to ensure such persons satisfy these requirements.

On March 7 2016, the Senior Insurance Managers Regime (SIMR) was also introduced, which replaced the application of the existing ‘approved persons regime’ to (re)insurers. The SIMR complements the Solvency II fit and proper provisions.

The SIMR determines that applicants for defined roles (known as ‘senior insurance management functions’) must be pre-approved by the PRA before taking up these positions; the Financial Conduct Authority must also give its consent. Examples of senior insurance management functions include chief executive and head of internal audit roles.

The application of these requirements is detailed within the PRA Rulebook with which (re)insurers must comply (see the following sections applicable to Solvency II firms: Conditions Governing Business; Insurance – Fitness and Propriety; and Insurance – Senior Insurance Management Functions). 

Operating requirements

Authorisation procedure

Which (re)insurers must obtain authorisation from the regulator before operating on the market and what is the procedure for doing so?

All firms effecting or carrying out contracts of insurance – a regulated activity as defined in Section 22 of the Financial Services and Markets Act and the Regulated Activities Order 2001 – must be authorised to do so pursuant to Part IVA of Financial Services and Markets Act, unless they fall within one of the limited exemptions.

The application for authorisation should be made to the Prudential Regulation Authority (PRA), which administers the application and is responsible for granting authorisation. The Financial Conduct Authority (FCA) also regulates the firm for conduct purposes and both the PRA and the FCA must be satisfied before a firm is authorised. The regulators encourage applicants to engage in a series of pre-application meetings before an application is submitted. The PRA and FCA make a decision within six months of receiving a completed application or within 12 months if an incomplete application is received.  

If a person operates without obtaining the appropriate authorisation, this is a criminal offence and they are liable to a fine or imprisonment on conviction (see Section 23 of the Financial Services and Markets Act). As a further deterrent, any agreement, including a contract of insurance, entered into in breach of the general prohibition in Section 19 of the Financial Services and Markets Act is unenforceable against the breaching party. 

Financial requirements

What are the minimum capital and solvency requirements for (re)insurers operating in your jurisdiction?

Pillar 1 of the Solvency II Directive (2009/138/EC) provides a detailed framework for the solvency and quantitative financial requirements applicable to (re)insurers.

This includes, among others, rules for calculating the following:

  • ‘technical provisions’ (or reserves) in respect of (re)insurance obligations to policyholders and beneficiaries (Articles 76 to 85);
  • the ‘solvency capital requirement’ (SCR) (Articles 100 to 127);
  • the ‘minimum capital requirement’ (MCR) (Articles 128 to 131); and
  • a firm’s ‘own funds’ (Articles 87 to 99).

The SCR is calculated using either the standard formula prescribed in Articles 103-110 or a bespoke model within the parameters of Articles 112 to 126. This is a comprehensive analysis and includes risks such as market and counterparty credit risk (Article 101(4)).

The SCR is greater in value than the MCR and must be calculated by firms at least once a year (Article 102). The MCR should be calculated on a quarterly basis at a minimum (Article 129).

A firm’s own funds are classified as basic or ancillary and divided into tiers 1-3. Solvency II prescribes quantitative limits on the amount of each tier that can be used to satisfy the MCR and SCR (eligible own funds). The overall analysis is complex and subject to significant actuarial and accounting input. The minimum requirements also vary depending on the characteristic of the firm in question (eg, its size, structure and reserving methods adopted).

Lloyd’s syndicates are subject to Lloyd’s capital requirements and a review of their SCR by Lloyd’s.

Do any other financial requirements apply?

(Re)insurers are also subject to rules that require the currency matching of assets to liabilities and the localisation of assets maintained to cover liabilities arising in a particular territory. 

Personnel qualifications

Are personnel of (re)insurers subject to any professional qualification requirements?

The Solvency II Directive (2009/138/EC) as amended was implemented in the United Kingdom on January 1 2016. What is known as Pillar 2 of the Solvency II regime introduced a framework of rules requiring (re)insurers – among other requirements – to “have in place an effective system of governance which provides for sound and prudent management of the business” (Article 41). In particular, (re)insurers must have in place effective:

  • risk-management systems (Article 44);
  • internal controls (Article 46); and
  • internal audit functions (Article 47).

(Re)insurers must also ensure that all persons who ‘effectively run’ or ‘have other key functions’ within the firm are:

  • ‘fit’ – meaning that their professional qualifications, knowledge and experience are adequate to enable sound and prudent management; and
  • ‘proper’ – meaning that they are of good repute and integrity – under Article 42.

It is the (re)insurer’s responsibility to ensure such persons satisfy these requirements.

On March 7 2016, the Senior Insurance Managers Regime (SIMR) was also introduced, which replaced the application of the existing ‘approved persons regime’ to (re)insurers. The SIMR complements the Solvency II fit and proper provisions.

The SIMR determines that applicants for defined roles (known as ‘senior insurance management functions’) must be pre-approved by the PRA before taking up these positions; the Financial Conduct Authority must also give its consent. Examples of senior insurance management functions include chief executive and head of internal audit roles.

The application of these requirements is detailed within the PRA Rulebook with which (re)insurers must comply (see the following sections applicable to Solvency II firms: Conditions Governing Business; Insurance – Fitness and Propriety; and Insurance – Senior Insurance Management Functions). 

Business plan

What rules and requirements govern the business plans of (re)insurers?

When seeking authorisation, (re)insurers must submit a regulatory business plan to the PRA by providing answers to questions on:

  • the insurance activities they propose to conduct;
  • corporate governance;
  • non-financial resources;
  • risk management;
  • internal systems and controls; and
  • complex IT systems.

Firms are also required to provide a scheme of operations when seeking authorisation. The information required to be included in a scheme of operations is set out in Article 23 of the Solvency II Directive and includes the nature of the risks the (re)insurer proposes to cover and details of its reinsurance arrangements, as well as other information. Firms are also required to submit an own risk and solvency assessment (ORSA) with their application.

Lloyd’s managing agents are also required by the Lloyd’s minimum standards to prepare and submit each year a syndicate business plan and an appropriate strategy document relating to each syndicate managed or to be managed. This is an important document as it dictates matters such as the limits per risk and overall capacity of the syndicate. Managing agents are also required to ensure there is an ORSA for each managed syndicate. 

Risk management

What risk management systems and procedures must (re)insurers adopt?

(Re)insurers must have procedures in place to identify deteriorating financial conditions. Firms are also required to undertake their own ORSA, which must include at least an assessment of:

  • its overall solvency needs;
  • the extent to which the risk profile of the firm deviates from the assumptions underlying the SCR; and
  • its compliance with the SCR, MCR and technical requirements.

ORSAs should be performed regularly and following changes in a firm’s risk profile (see Article 45 of Solvency II and the Conditions Governing Business section of the PRA Rulebook applicable to Solvency II firms).

Solvency II also imposes strict rules on the outsourcing of material functions (such as claims handling) to which (re)insurers must adhere. For more information, see

  • the outsourcing chapter within the Conditions Governing Business Section of the PRA Rulebook; and
  • Senior Management Arrangements, Systems and Controls 13 and 14 of the FCA Handbook; and
  • Article 49 of Solvency II.

Reporting and disclosure

What ongoing regulatory reporting and disclosure requirements apply to (re)insurers?

Pillar 3 of Solvency II requires (re)insurers to provide the PRA with a minimum set of information to enable the PRA to review and supervise the (re)insurer (known as the supervisory review process) – see Articles 35 to 36 of Solvency II.

Included within this framework is the Solvency and Financial Condition Report, which sets out the solvency and financial position of insurers and is published annually (Article 51 of Solvency II). The SCR and MCR must also be reported to the PRA when calculated.

(Re)insurers must also notify matters such as changes to personnel under the Senior Insurance Managers Regime and any change in control. 

Other requirements

Do any other operating requirements apply in your jurisdiction?

(Re)insurers must comply with those rules in the FCA Handbook and PRA Rulebook that are applicable to their business.

Entities regulated by Lloyd’s will also be subject to its rules (eg, Lloyd’s minimum standards and bylaws).

Non-compliance

What are the consequences of non-compliance with the operating requirements applicable to (re)insurers?

By having two thresholds – the SCR and the MCR – supervising authorities such as the PRA become aware at a much earlier stage that a firm is in distress; if the SCR is breached, there is a chance that steps can be taken to prevent the distressed firm breaching the MCR. A breach of the MCR is considered to expose policyholders and beneficiaries to an unacceptable level of risk were the firm allowed to continue its operations (Article 129(1)(b) of Solvency II).

If a (re)insurer:

  • does not comply with technical provisions, the PRA can prevent it disposing its assets (Article 137 of Solvency II);
  • breaches the SCR, the PRA must be notified immediately and a recovery plan submitted to the PRA within two months (Article 138 of Solvency II);
  • breaches the MCR, the PRA must be notified immediately and a short-term realistic finance scheme to restore (within the next three months) eligible own funds to at least the level of the MCR be submitted within one month (Article 138 of Solvency II).

For more information on distressed firms, see section Undertakings in Difficulty in the PRA Rulebook applicable to Solvency II firms and Articles 136 to 144 of Solvency II.

A firm or an individual that breaches a rule or principle in the PRA Rulebook or the FCA Handbook can also be subjected to private or public censure, a ban or a fine.

Contracts

General

What general rules, requirements and procedures govern the conclusion of (re)insurance contracts in your jurisdiction?

The usual rules of English contract law apply to insurance contracts, meaning that for a valid contract to come into effect, there needs to be:

  • an offer;
  • acceptance of that offer;
  • valuable consideration; and
  • certainty as to the terms.

In addition, there is a requirement for an insurable interest.

Usually, the party seeking insurance completes a proposal form and provide this to the insurer, often through an intermediary (an insurance broker). The insurer decides whether it is willing to offer the insurance sought and on what terms. An offer is accepted by the insured showing agreement to those terms by paying the premium or some other act. In the insurance context, the consideration given by the insurer is the promise to pay the claim in the event of a loss and the consideration given by the insured is the promise to pay a premium. Finally, for a valid insurance contract to arise, there must be certainty as to its material terms (eg, the definition of the risk and the duration of the policy term).

There is no all-embracing definition of ‘insurable interest’. In practice, the requirement is generally taken to mean that the insured must have a legal or equitable relationship to the adventure or property at risk and would benefit from its safety or may be prejudiced by its loss.

Under English law there is no general requirement as to the form which an insurance contract must take, although they are usually evidenced by a written policy and Section 22 of the Marine Insurance Act 1906 and Section 2 of the Life Assurance Act 1774 require the policy to be in written form. 

Mandatory/prohibited provisions

Are (re)insurance contracts subject to any mandatory/prohibited provisions?

English law upholds the doctrine of freedom of contract, which means that commercial parties may, as a general rule, contract on whatever terms they agree. There are some exceptions to this, for example, basis of the contract clauses – whereby all the answers in the proposal form are accorded the status of warranties – are prohibited. More protection is afforded to consumer insureds. 

Implied terms

Can any terms by implied into (re)insurance contracts (eg, a duty of good faith)?

(Re)insurance contracts are subject to the same general principles as other commercial contracts. As a general rule, terms may be implied into contracts:

  • by statute – under the Marine Insurance Act certain warranties are implied into contracts of marine insurance and the Enterprise Act 2016 introduces an implied term into every (re)insurance contract agreed on or after May 4 2017 that the (re)insurer must pay claims within a ‘reasonable time’;
  • by the courts, where the term would be necessary to give business efficacy to the contract;
  • from previous dealings between the parties; and
  • by industry custom. 

Standard/common terms

What standard or common contractual terms are in use?

The following clauses are commonly found in insurance contracts:

  • Insuring clause – this is the operative clause that specifies the perils insured against.
  • Period clause – this sets out the term of the contract.
  • Premium clause – this sets out the amount of the premium due and when it is to be paid.
  • Exclusion clauses – these specify which perils are excluded from cover.
  • Conditions – these clauses govern the mechanics of the insurance policy.
  • Conditions precedent – these clauses must be complied with by the insured and must be satisfied either in order for the contract to come into being or for the claim to be paid.
  • Warranties – these are promissory terms of the contract, whereby the insured promises the insurer that, for example, the insured has or has not acted in a stated way.
  • Law and jurisdiction clauses – which specify the law applicable to the contract and the jurisdiction in which any dispute will be heard.

The following clauses are commonly found in facultative reinsurance contracts:

  • ‘Follow the fortunes’ or ‘follow the settlements’ clauses – these either prevent or limit the reinsurer’s ability to dispute the validity of the underlying claim against the cedant.
  • ‘Claims co-operation’ or ‘claims control’ clauses – these give the reinsurer varying degrees of control over the underlying claim against the cedant.
  • Incorporation clauses – these may permit the incorporation of the terms of:
  • the original, direct insurance policy; or
  • the reinsurance policy immediately below the relevant contract.

The following clauses are commonly found in treaty reinsurance contracts:

  • Inspection clauses: these allow the reinsurer to inspect the cedant’s records.

Reinsurance contracts also often contain aggregation clauses. These govern the way in which cedants may combine various claims for presentation as a single claim – for the purpose of the deductible and applicable limit. 

‘Smart’ contracts

What is the state of development in your jurisdiction with regard to the use of ‘smart’ contracts (ie, blockchain based) for (re)insurance purposes? Are any other types of financial technology commonly used in the conclusion of (re)insurance contracts?

There is currently no legal framework specifically designed for blockchain or smart contracts. However, market consortia are starting to be formed to explore the opportunities such contracts provide and the Financial Conduct Authority (FCA), in its discussion paper on distributed ledger technology of April 2017, stated that it was committed to fostering innovation in this area. The stated purpose of the discussion paper was to “start a dialogue on the potential for future development of DLT [distributed ledger technology]” in the markets regulated by the FCA. 

Breach

What rules and procedures govern breach of contract (for both (re)insurer and insured)?

The (re)insurer’s remedy for the (re)insured’s breach of a contractual term varies according to the status of the term that is breached. For example:

  • Condition – the breach entitles the (re)insurer to recover damages for any losses it suffers as a result of the breach.
  • Condition precedent to the contract – the breach means that the contract never comes into being. There is no requirement for the (re)insurer to prove that it has suffered prejudice before it can rely on a breach of the term.
  • Condition precedent to liability – historically a breach allowed the insurer to avoid liability for a claim regardless of whether it suffered a detriment as a result of the breach. The effect of condition precedent clauses to liability has been altered by Section 11 of the Insurance Act 2015, which applies to all contracts of (re)insurance agreed on or after August 12 2016. Under the act, if the condition precedent is – on its proper construction – one that would tend to reduce the risk of loss of a particular kind, at a particular location or at a particular time, the insurer cannot rely on the insured’s breach of the condition precedent to deny a claim if the insured can show that its breach could not have increased the risk of the loss that actually happened in the circumstances in which it occurred. Terms which define the risk as a whole are exceptions.
  • Warranties – under the Marine Insurance Act, the breach of a warranty – however trivial and irrelevant to the risk or the loss – automatically discharges the insurer from all liability under the policy from the date of the breach and cannot be remedied. Under the Insurance Act, the discharge of the insurer’s liability has been made temporary, for the period of the breach, and liability is restored on remedy of the breach. Section 11 of the Insurance Act applies to warranties in the same way as to the conditions precedent.
  • Pursuant to Section 13A of the Insurance Act, in relation to all contracts agreed on or after May 4 2017, policyholders have the opportunity to claim damages for breach of contract if a (re)insurer’s unreasonable delay causes additional loss.

For contracts subject to the Marine Insurance Act, if the insured breaches the duty of good faith, the insurer is entitled to avoid the contract ab initio. For contracts subject to the Insurance Act, the insurer’s remedy depends on what it would have done had a fair presentation been made. The remedies include avoidance, the insertion of terms into the contract from inception and the reduction of claim payment under the contract by the same proportion as the actual premium charged bears to the premium that would have been charged if there had been a fair presentation. 

Consumer protection

Regulation

What consumer protection regulations are in place to safeguard the rights of purchasers of insurance products and services?

The Consumer Insurance (Disclosure and Representations) Act 2012 abolished the duty of utmost good faith in consumer insurance contracts. Instead, consumers are under a duty to take reasonable care not to make any misrepresentations in providing information to the insurer. Insurers must also ask consumers clear and specific questions relevant to a risk. If they fail to do so – and accordingly do not receive relevant information – this is not held against the consumer.

The Financial Conduct Authority’s Insurance Conduct of Business Sourcebook also imposes a number of requirements on (re)insurers to treat customers fairly. The Financial Ombudsman Service also provides a free dispute resolution service whereby consumers can make complaints or claims against a (re)insurer.

The Insurance Act 2015 gives additional protection to consumers by limiting the situations in which insurers can contract out of parts of that act. Contracts of insurance are also subject to the Consumer Rights Act 2015 which, broadly speaking, imposes certain requirements of fairness on contractual terms (see Part 2 of the act).

Consumers also have the benefit of potentially being eligible for compensation under the Financial Services Compensation Scheme in the event an insurer cannot pay a claim.

Claims

General

What general rules, requirements and procedures govern the filing of insurance claims?

The (re)insurance contract usually specifies the procedure for making a claim under the policy. Most contracts contain notification clauses which set out the time frame for and mechanics of notification. Some notification clauses have the status of conditions precedent to liability, meaning that the insurer is not liable to pay the claim if the insured fails to comply with the stated requirements.

If the insurer declines the claim, the insured may commence court or arbitration proceedings – depending on the dispute resolution process identified in the contract. The English courts have rules and requirements for the management of claims, as set out in the Civil Procedure Rules.

Disputes relating to claims by consumers or micro-enterprises may be referred to the Financial Ombudsman Service for resolution. 

Time bar

What is the time bar for filing claims?

(Re)insurance contracts typically include a notification clause requiring the (re)insured to give the (re)insurer notice of claims or losses or of circumstances which may give rise to a claim or loss, in a particular manner (usually in writing) and within a particular period (eg, as soon as reasonably practicable). A (re)insured may lose the right to an indemnity for failure to comply with a notification clause where compliance is a condition precedent to the bringing of a claim. 

In order to bring a claim in the courts, an insured must be within the limitation period under the Limitation Act 1980 for causes of action founded on breach of contract (ie, six years from the date on which the cause of action accrues). 

Denial of claim

On what grounds can the (re)insurer deny coverage?

A (re)insurer may deny coverage on the following grounds, among others:

  • the policy was not in force when the event giving rise to a claim took place;
  • the loss was suffered during a period not covered by the policy;
  • the type of loss suffered is not covered or is excluded under the terms of the policy;
  • the (re)insured failed to pay the premium, where payment of the premium is a condition precedent to the validity of the policy or right to make a claim;
  • before the inception of the contract, the (re)insured failed to disclose to the (re)insurer all material circumstances which it knew or ought to know;
  • the (re)insured breached one or more terms of the policy;
  • the (re)insured acted fraudulently in the presentation of its claim; and
  • the claim is time-barred.

What rules and procedures govern the insured’s challenge of the denial of a claim?

If the insurer denies a claim, the insured can commence court or arbitral proceedings, depending on the terms of any dispute resolution clause in the policy. The English courts have rules and procedures for the management of litigation, as set out in the Civil Procedure Rules. Many arbitration institutes have their own procedural rules and, if the arbitration is ad hoc, the tribunal will set down directions for the management of the case. 

Third-party actions

On what grounds can a third party file a claim directly with the (re)insurer?

In certain circumstances third parties have direct rights of action under the Contracts (Rights of Third Parties) Act 1999. Under this act a third party can recover under a contract where the contract either expressly enables it to do so or purports to confer a benefit on it. However, many insurance contracts exclude the operation of the act.

If an insured is insolvent – provided that it satisfies the statutory criteria – a third party can make a claim against the insured’s liability insurers under the Third Parties (Rights Against Insurers) Act 1930. A replacement piece of legislation, the Third Parties (Rights Against Insurers) Act 2010, came into force in October 2015.

Finally, an insured may assign its rights under an insurance contract to a third party.

Punitive damages

Are punitive damages insurable?

Cases of punitive damages are relatively rare under English law, but such damages are insurable and may be reinsured.

As a matter of public policy the courts will not enforce a contract of any kind if it is tainted by illegality. Therefore, an insured cannot recover his liability for punitive damages under a policy where the liability arises as a result of illegal conduct.

Subrogation

What regime governs (re)insurers’ subrogation rights?

(Re)insurers’ subrogation rights are covered by the English common law doctrine of subrogation, which is codified by Section 79 of the Marine Insurance Act. 

Intermediaries

Regulation

How are the services of insurance intermediaries regulated in your jurisdiction?

Insurance intermediaries such as brokers are required to be authorised when they perform regulated activities. Brokers are required to meet more limited regulatory capital requirements than (re)insurers, but must have professional indemnity insurance in place.

Lloyd’s brokers are regulated by the Financial Conduct Authority (FCA) and Lloyd’s. Non-Lloyd’s brokers are regulated by the FCA.

Tax

Tax liability

What tax liabilities arise in the conduct of (re)insurance business?

Companies writing general insurance and reinsurance business and trading in the United Kingdom are subject to the normal rules governing the taxation of companies in the United Kingdom (ie, corporation tax). Life insurers are subject to a different taxation regime.

Insurance premiums for general insurance are also subject to insurance premium tax (IPT) where the risk is located in the United Kingdom. This also applies to overseas insurers covering a risk located in the United Kingdom. The standard rate of IPT rose to 12% on June 1 2017. A higher rate of 20% applies to travel insurance and some vehicle and domestic or electrical appliance covers. Life insurance, reinsurance, insurance for commercial ships and aircraft and insurance for commercial goods in international transit are exempt from IPT.

Insurance premiums are exempt from UK value added tax, as are commission payments to brokers and insurance agents. The analysis is slightly more complex in relation to payments between entities in the insurance supply chain, such as introducers. 

Insolvency

Regulation

What regime governs the insolvency of (re)insurers?

The framework governing the insolvency of (re)insurers is contained in a range of legislative provisions, including the Financial Services and Markets Act 2000, the Insolvency Act 1986, the Insurers (Reorganisation and Winding Up) Regulations 2004 (Reorganisation Regulations) and the Insurers (Winding-Up) Rules 2001.

Within the Financial Services and Markets Act regulatory framework, significant modifications to the standard insolvency processes are introduced to ensure the adequate protection of policyholders.

The Financial Conduct Authority and Prudential Regulation Authority also have extensive powers to initiate and become involved in insolvency proceedings and can apply to the court for a winding-up order (Section 367 of Financial Services and Markets Act).

Lloyd’s also has its own framework of rules. 

Effect on insureds

How does a (re)insurer’s insolvency affect insureds and the (re)insurer’s obligations to insureds?

If the court does decide to wind up an insurer, the Reorganisation Regulations apply. These provide that direct insurance debts – monies owed to policyholders – are to be paid in priority to all other unsecured debts, except staff remuneration and pension contributions. For insurers carrying on both insurance and reinsurance business, sums due to direct policyholders are given priority over those due to a cedant.

Special provisions are made in the Winding-Up Rules for the valuation of the claims of policyholders against an insurer in liquidation, depending upon the type of policy. 

The Third Parties (Rights Against Insurers) Act 2010, which came into force on August 1 2016, also allows thirds parties who have a liability claim against an insolvent insured to claim directly against the insured’s insurer. 

Dispute resolution

Litigation

Are there any compulsory or preferred venues for insurance litigation in your jurisdiction?

There are no compulsory venues for insurance litigation. The Commercial Court division of the High Court usually hears commercial insurance or reinsurance disputes, where the English court has jurisdiction. 

How are insurance disputes with a cross-border element handled in your jurisdiction?

The English courts are used to determining disputes with a cross-border angle. The Civil Procedure Rules contains provisions in relation to, for example, the obtaining of evidence from witnesses based in other jurisdictions for use in English proceedings.

What issues are commonly the subject of insurance litigation?

Issues commonly encountered include:

  • causation – in particular, whether an event covered or an event excluded under the terms of the policy was the proximate cause of the loss;
  • whether the insured was in breach of the duty of good faith or the duty to make a fair presentation;
  • whether the insured has complied with the claims conditions set out in the policy (eg, an obligation to notify the insurer of a claim or circumstances likely to give rise to a claim within the specified period);
  • whether the insured was in breach of warranty entitling the insurer to reject the claim; and
  • whether the insured acted fraudulently in the presentation of a claim.

In the reinsurance context, disputes may arise as to:

  • whether a reinsurer is obliged to pay in accordance with settlements made by the reinsured under the original policy; and
  • whether a reinsured can aggregate more than one original loss for the purposes of presenting a claim to its reinsurers.

What is the typical timeframe for insurance litigation?

There is no typical timeframe; the length of the litigation will depend on the size and complexity of the claim.

Arbitration

What regime governs the arbitrability of insurance disputes?

The Arbitration Act 1996 codified English arbitration law. Unless the parties have determined different rules to apply by reference to a particular institution, the Arbitration Act governs the terms of an arbitration. The International Chamber of Commerce and the London Court of Arbitration are examples of commonly used international arbitral institutions with their own independent rules to govern the proceedings. However, most insurance and reinsurance arbitrations are ad hoc.

While many London arbitrators follow Commercial Court procedure, particularly in relation to evidence, it is open to the tribunal to adopt different rules.

Some contracts require the parties to attempt mediation. Mediation is also encouraged by the courts and parties have to inform the court whether they have been advised on the possibility of mediation.