An extract from The Insurance and Reinsurance Law Review, 8th Edition
i The nature of the UK insurance and reinsurance market
The UK insurance and reinsurance industry is the largest in Europe and the fourth-largest in the world.
Commercial insurance business in the UK is dominated by the 'London Market', which today is the world's leading market for internationally traded insurance and reinsurance.
The London Market has two strands: the company market and the Lloyd's market. Traditionally it has been primarily a 'subscription market' in which the broker plays a crucial role in producing business and placing risks with a variety of insurers willing to accept a share.
As its name suggests, the company market is composed of corporate insurers and reinsurers. It is organised through a market body, the International Underwriting Association, and operates principally out of the London Underwriting Centre building and its environs.
From its beginnings in a coffee house in 1688, Lloyd's has grown to be the world's leading market for specialist insurance. It is not itself an insurance company but rather a society of members, largely corporate but still involving some individuals, that accept insurance business through their participation in competing 'syndicates'. Each syndicate is administered by a 'managing agent' and makes its own business decisions, but Lloyd's provides both a physical location in which to carry out this business and a regulatory framework of rules with which the syndicates must comply. Lloyd's also manages the unique regime that protects the security underlying the Lloyd's market. Lloyd's accepts business from over 200 countries and territories worldwide.
An important strength of the London Market lies in the number, diversity and expertise of the insurers and reinsurers writing business. Brokers can find the capacity and expertise required for the underwriting of virtually any type of risk. A key feature is the presence of highly skilled 'lead underwriters' whose judgements on the terms to be offered for different risks are followed by other insurers in London and overseas. Another important attribute is geographical concentration, with many insurers and intermediaries located in close proximity to the EC3 district, an insurance hub in the City of London. Thus, brokers have a personal relationship with the underwriters with whom they deal. Similarly, buyers of insurance can meet providers and market information is easily shared among participants.
ii The legal landscape for insurance and reinsurance disputes
It is common for insurance and reinsurance contracts placed in the London Market to be governed by English law and subject to the jurisdiction of the English courts, or heard in London arbitration, even where, as is often the case, not all the parties to those contracts are UK companies. There are a number of reasons why London is a premier venue for insurance and reinsurance dispute resolution.
Perhaps the most important factor is the specialist judiciary who are familiar with the practices of the London Market. Disputing parties may expect that the judges of the Commercial Court (a specialist court, part of the Business and Property Court of the High Court of Justice, handling complex national and international business disputes), and indeed the appellate courts, understand, for example, what a 'slip' is and what roles are played by all involved in the placement of business in the London Market.
Secondly, England and Wales have a highly developed body of insurance and reinsurance case law. Court judgments create binding precedent, such that they can be relied on to determine future disputes. This means that parties can expect a fair and rigorous judicial system and a reasonable degree of predictability.
Arbitration continues to be a popular alternative to court proceedings (particularly for reinsurance disputes), in part at least because of its confidential nature. The pool of arbitrators available to deal with insurance and reinsurance disputes benefits from many of the same attributes as the court system, and parties can be confident of a fair resolution of the issues by arbitrators who understand them.
The English courts encourage the use of alternative dispute resolution, and in particular mediation, to settle insurance and reinsurance disputes.
Year in review
The past 12 months have seen some interesting developments in the regulatory and legislative landscape, as well as a number of significant judgments.i RegulationSolvency II
While the Solvency II Directive has been integrated well since being implemented in the UK on 1 January 2016, it continues to be the subject of adjustment at EU and domestic level. The European Insurance and Occupational Pensions Authority (EIOPA) conducted a planned review of the regime and consulted on advice to the European Commission about changes to the Solvency II standard formula. On 9 November 2018, the Commission published for consultation a draft version of a Commission Delegated Regulation intended to amend the Solvency II Directive. This has since been published in the Official Journal of the EU and came into force on 8 July 2019. Among other things, it amends provisions relating to the capital requirement standard formula, and the alignment of the Solvency II standard formula with those rules that are applicable in the banking sector. The Solvency II Directive (as amended by Directive 2014/51/EU, known as the Omnibus II Directive) requires that the European Commission undertake a full of Solvency II before the end of 2020. The European Commission together with EIOPA will therefore continue to consider a number of areas to amend the Solvency II regime as part of its '2020 review'. While the future course of the UK regulatory regime after the Brexit transition period is not clear, the Solvency II 2020 review remains a fundamental development for UK firms and represents an important milestone in the future of the regulatory framework for insurers.The senior managers and certification regime
The SM&CR was extended to insurance intermediaries on 9 December 2019.Outsourcing by regulated firms
Outsourcing of functions by regulated firms continues to be on the UK regulators' radar. In December 2019, the PRA published a Consultation Paper (CP30/19) on outsourcing and third-party risk management, which sets out the PRA's expectation of PRA-regulated firms with respect to outsourcing arrangements with third parties (in particular cloud/technology providers). For example, it is noted that subject to the outcome of the consultation, insurers may be expected to maintain a register of all of their cloud outsourcing arrangements. The consultation closes on 3 April 2020.ii Dispute resolution
The year 2019 provided little guidance from the courts on the construction and operation of the Insurance Act 2015. In Ageas v. Stoodley (a case under the Consumer Insurance (Disclosure & Representations) Act 2012), however, the Court was prepared to accept evidence from the insurer's underwriting manager as proof of what the insurer would have done if a fair presentation of the risk had been made at placement – even in the absence of the underwriter who had accepted the risk and any supporting materials. This may provide some guidance as to how the courts will approach the same issue under IA15. In Young v. Royal & Sun Alliance Plc, the Court confirmed that the law of waiver is unchanged by IA15.
There have been a number of other significant court decisions across all sectors of insurance. Some examples are outlined below.
One decision that has the potential to make a profound impact on a number of classes of business, including cyber, property and all risks cover, was the High Court's ruling in AA v. Persons Unknown and others. The facts of the case are complex and concerned a subrogated claim by an insurance company to recover a US$950,000 ransom which it had paid in bitcoin to hackers who had locked the insured out of its own IT network. The case turned on the issue of whether or not bitcoin or other cryptocurrencies are 'property' such that they can be subject to proprietary remedies such as injunctions. In ruling that cryptocurrencies are indeed property, the Court sought to reflect modern life rather than adhere to concepts of property which are now many years old. The case should, however, prompt both insurers and insureds to review the definitions, insuring clauses and exclusions in policy wordings.
In the liability sector, the Court of Appeal addressed the often complex issue of notification in Euro Pools v. Royal & Sun Alliance Plc. The case concerned the nature of the link required between a notified 'circumstance' and a subsequent claim such that the claim is taken to have been made when the circumstance was notified for the purpose of coverage under a 'claims made' policy. The case turned on its particular facts but the Court set out some general principles of interest. In particular, it confirmed that it is permissible to notify a problem in general terms (or a 'hornets' nest') as a circumstance without fully appreciating its cause or potential consequences. What is required is some causal connection which is more than merely coincidental between the notified circumstance and subsequent claim.
The property market saw a number of important judgments in 2019. Perhaps one of the most interesting was Sartex v. Endurance Corporate Capital. This case concerned the issue of whether insurers were required to pay the reinstatement value or market value of industrial premises destroyed in a fire. The insured claimed the cost of reinstating the site, which was considerably more than its market value. Insurers argued that if an insured is to recover on a reinstatement basis it must have had the intention to reinstate the property at the time that the loss occurred and continued to have that intention until the commencement of proceedings. In this case, however, the insured had taken no steps towards reinstating the site eight years after the loss and, indeed had been considering alternative sites. In rejecting this argument, the Court held that when deciding the appropriate basis of indemnity, it is necessary to consider the nature of the loss suffered by the insured, the measure of indemnity which fairly and fully indemnifies the insured for that loss, and whether subsequent events show that such measures may over indemnify the insured.
Outlook and conclusions
i Insurance contract law reform
The first substantive court decisions on the interpretation of IA15 have yet to be published and it is to be hoped that in 2020 the courts will give guidance on, for example, the application of the new proportionate remedies for breach of the duty of fair presentation and the operation of Sections 10 and 11 IA15, which deal with the operation of warranties.
ii Impact of Brexit on insurance regulation
Until the end of the Brexit transition period, the legal and regulatory framework will continue as normal. As such, the UK will remain subject to existing EU legislation and any new EU laws coming into force prior to the effective date of Brexit.
The UK government and the insurance and reinsurance regulators have, since the Brexit vote in June 2016, been establishing rules and regulations to safeguard the regulatory framework so that it continues to effectively operate after the Brexit transition period.
The European Union (Withdrawal) Act 2018 (EUWA), as amended, will bring applicable direct EU legislation (that is, primarily EU regulations) into domestic UK law at the end of the transition period. EUWA also gives the government the power to make secondary legislation to amend UK and domesticated EU legislation to ensure that it is legally operative following the end of the Brexit transition period. The UK government is currently undertaking the mammoth task of onshoring (also known as domestication), which involves replicating EU law in UK legislation and regulation and revising it so that it is effective following the end of the Brexit transition period. This is challenging in the area of insurance and reinsurance, given that so much of the UK's regulatory regime executes or uses EU law. This process of onshoring is expected to continue until the end of the Brexit transition period. The government has also provided the FCA and the PRA (and the Bank of England and the Payment Systems Regulator) with the authority (through the Financial Regulators' Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018 (SI 2018/1115)) to make amendments to domesticated EU technical standards and their own rules to reflect the UK's position after leaving the EU.
At the time of writing, the approach to be adopted for 'passporting' remains uncertain. However, it is clear that unless the passporting regime is retained in an agreement between the UK and the EU, UK insurers will lose their passporting rights either if the UK exits the EU with no deal or at the end of the Brexit transition period if a deal is agreed. The passporting rights of EU insurers into the UK will be similarly impacted. If passporting rights fall away, the UK, as a third country (being a country that has left the EU) would not be able to continue its activities in the EEA on the basis of its UK authorisation. The appropriate licences and authorisations would have to be sought in the relevant Member States unless the UK and the EU are able to agree market access during the Brexit transition period. Certain EU financial services legislation permits specific financial institutions based in third countries to access the EEA markets. This is known as the third country equivalence regime, which allows non-EEA firms to provide services into the EEA if their home country regulatory regime is 'equivalent' to EU standards. The UK and the EU have agreed that they will assess the equivalence of each other's regulatory and supervisory regimes as soon as possible after Exit Day, with aim of concluding these equivalence assessments before the end of June 2020. The UK and the EU have also agreed to keep their respective equivalence frameworks under review. However, even if the equivalence assessments are concluded within the proposed timescales, they are no replacement for passporting. The Solvency II Directive and the IDD do not include equivalence regimes relating to market access. As such, any equivalence assessments will need to address these gaps.
Given the uncertainty around the outcome for passporting, and the recognition that 'equivalence' is unlikely to fully plug the gap, many insurers and reinsurers have taken the time since the Brexit vote to restructure their business and prepare contingency plans by relocating or opening new branches of the business in EU member locations to ensure that they can continue to operate within the EU following the end of the Brexit transition period. Many have seen this as the only sure-fire way to avoid lost revenue and huge business disruption. Insurers are also introducing 'contract continuity clauses' into their policy wording, which allows risks currently underwritten by a UK entity to be transferred to an EEA licensed insurer at the end of the Brexit transition period.
Lloyd's of London has established a subsidiary, Lloyd's Insurance Company S.A (Lloyd's Europe), in Brussels with a policy that 'all new non-life EEA direct insurance policies are written by Lloyd's Europe and all renewing EEA non-life direct insurance policies are transferred to Lloyd's Europe on their renewal'. To ensure contract continuity of policies that could be affected by the loss of passporting rights, Lloyd's of London has also initiated a Part VII transfer (see Section II.xi, above) of affected policies to Lloyd's Europe; this is expected to be finalised before the end of 2020.
With the continued uncertainty around market access the UK has put in place a temporary permissions regime (TPR). The TPR will give EEA insurers and reinsurers currently operating in the UK on a passporting basis (and hoping to continue to maintain their UK business) a limited transitional period following the end of the Brexit transition period for their branches to carry on operating in the UK while they establish separately authorised UK branches. Insurers and reinsurers can take advantage of the TPR through a simple notification process. While the window for TPR notification closed on 30 January 2020 the FCA have indicated that they are considering reopening this later in the year to allow for additional notifications to be made before the end of the Brexit transitional period.
Alongside the TPR, the UK has also set up the financial services contracts regime (FSCR), to ensure that those insurers and reinsurers that do not enter into the TPR, or those that do enter the TPR but fail to obtain authorisation, have a period of time during which they can wind down their UK business appropriately after the Brexit transition period.
While the insurance regulatory regime in the UK is expected to remain exactly the same during the Brexit transition period only time will tell how it may evolve over the transition period.
Insurtech refers to the use of technology innovations designed to increase efficiency in the insurance market. Over the past couple of years, innovations such as automation have brought improvements around risk and quality. There is likely to be real momentum in 2019 in terms of the development and implementation of blockchain technology, virtual reality, robotics, artificial intelligence and the internet of things.
The insurance industry in England has undergone some of the most significant regulatory and legal reforms to affect it for many years. These changes have provided both challenges and opportunities for the London Market, whose strength historically has been built, inter alia, on its ability to adapt to change. The London Market appears to have embraced the rapidly changing landscape and many within it have begun setting their sights on growth.
The most interesting development will of course be the changes affecting insurance and reinsurance regulation following the end of the Brexit transition period. At the time of writing, the future regulatory regime remains uncertain and the London Market is still having to consider its contingency arrangements.