Keywords: corporate, insurance, regulatory,
ASIA
China: Tighter rules on insurance licensing and life insurance telesales
The China Insurance Regulatory Commission ("CIRC") has tightened rules on insurer licensing and the telesale of life insurance products as follows:
Licensing Of Insurance Companies
Under the new regulations, licences will be issued depending on the insurer's scope of business and ability to bear risk. The rules classify insurance businesses into 'basic' or 'extended' categories. New insurers can only apply to carry out 'basic business' and will be barred from 'extended business' until they qualify for all basic businesses.
Additionally, insurers who wish to conduct basic business are required to meet certain registered capital requirements, and insurers applying to handle extended business need to have strong financials and sound risk control and compliance management.
The products covered by the above categories include the following:
- Basic (non-life insurance): motor insurance, commercial or household property insurance, engineering insurance, liability insurance, ship and cargo insurance, health and accident insurance.
- Basic (life insurance): ordinary life insurance such as term, endowment and whole life; health insurance; accident insurance; participating life insurance and universal life insurance.
- Extended (non-life insurance): agriculture insurance, credit guarantee insurance, special risk insurance and investment risk insurance.
- Extended (life insurance): includes unit-linked insurance and variable annuity insurance.
Life Insurance Telesales
More than two-thirds of life insurance in China is sold over the phone. This process has created problems for consumers. CIRC received 617 consumer complaints about insurance telesales in 2012, up from only 16 in 2011, with more than half of the complaints relating to life insurance. Complaints include repeated calls, fraudulent information provided by salespeople and the disclosure of personal information.
Under the new regulations, insurance salespeople are prohibited from making cold calls between 9:00p.m. and 9:00a.m. Life insurance companies will be required to maintain a list of people who do not wish to be called, and any client who requests not to be called again should be added to the list for at least six months.
Hong Kong: Contracts (Rights of Third Parties) Bill
The Hong Kong government commenced a public consultation on a Contracts (Rights of Third Parties) Bill ("Bill"). The Bill seeks to reform the common law doctrine regarding privacy of contracts, which applies in Hong Kong. Currently, Hong Kong has no equivalent of the English Contract (Rights of Third Parties) Act 1999. Other common law jurisdictions, including England and Wales, Ireland, Singapore, New Zealand and certain states of Australia, have adopted similar reforms. The proposal is closely modelled on the English legislation.
The Bill allows third parties to enforce rights under a contract if the contract expressly allows for this, or if the third party can demonstrate that it was the intention of the contracting parties that the third party should have the right to do so.
Where a life insurance policy allows the insured party to direct payments to a nominated third party, such interests are currently unenforceable by the third party beneficiary (subject to certain statutory and common law exceptions, developed to redress potential unfairness). If the Bill passes, third party rights in insurance policies governed by Hong Kong law could be enforced directly without resorting to such exceptions.
Insurance policies are unique in that they impose a duty of utmost good faith on the insured party (and a consequential duty of material disclosure). The Bill, however, allows a third party to enforce its benefit under the policy even though it is not held to the same standard of disclosure. As a result, the insurer may be unjustly expected to confer benefits upon a third party who has not yet satisfied the standards required under insurance contracts for duty of disclosure.
The Bill seeks to address such concerns by allowing an insurer, in response to a third party action, to rely on any defences which would have been available to it if the insured had brought the action, such as proving that the insured party had breached its duty of disclosure or, indeed, any other contractual term under the policy.
Moreover, the Bill permits the inclusion of a term to exclude its effect. It is likely that, as in other jurisdictions, commercial contracts including insurance contracts, will start to exclude this legislation.
UK/EUROPE
UK: Government Announces Strategy to Promote the UK Insurance Industry
Greg Clark, financial secretary to the Treasury, recently spoke at an insurance conference where he expressed his respect for the UK insurance industry and announced the government's plan to put the industry at the heart of its focus in driving UK economic growth. The Association of British Insurers ("ABI") has welcomed the government's announcement as insurers are amongst the country's top exporters. The ABI highlighted the potential for the government's drive to enhance the industry's position as a leader in global business and strengthen its global competitiveness. A spokesperson on behalf of ABI remarked that the government is right to shine the spotlight on the insurance industry as the industry is uniquely positioned to tackle the UK's major challenges through its long-term investments.
In this surprise move to launch public policy in support of the insurance industry, Clark called for an open dialogue with the insurance sector in order to better understand the industry needs. Over the past few months, the government has been speaking to firms across the insurance sector to build a picture of the common views and ideas shared in the industry. Clark stated that the government will continue to invite comments on what the government can do to support the industry going forward.
Possible industry suggestions may include:
- Greater clarity over the UK's position within the EU and the kind of role the UK intends to play;
- Assuming the UK's future is within the EU, a more streamlined law-making process at the EU level (particularly in light of the delay, uncertainty and cost concerning the implementation of the Solvency II regime); and
- A more straight forward tax regime. In particular, in light of the recent changes to the anti-avoidance tax rules, it would be useful for the government to provide greater clarity on the scope of these rules in order to aid insurance firms with their forward tax planning. Additionally, it would be desirable for the government to prioritise its ongoing project aligning UK tax laws to work alongside the Solvency II directive.
UK: Solvency II Update
As reported in last month's insurance bulletin, the chief executive of the Prudential Regulation Authority (PRA), Andrew Bailey voiced his concerns over the implementation of the Solvency II directive. Bailey warned the House of Commons Treasury Committee that the Solvency II directive had become overly detailed and extremely expensive.
In the letters addressed to the committee, Bailey stated that the costs of implementation would be "staggering" and that the EU had simply assumed that firms and regulators would spend large amounts of money preparing for the implementation of something that carried "no promise in terms of when or in what form it will be implemented". Bailey cast light on Germany in particular, which although supportive of the agreement, was requesting a lengthy transitional period to allow for its insurance firms to adjust. Despite the criticisms levelled by Bailey in his letters, he did break the good news that the total regulatory expense of implementing Solvency II is considered to be almost half of what the FSA initially predicted, currently estimated to be £88m compared with the £150m initial prediction. This news has been warmly welcomed by the Chairmen and CEOs of the major insurance firms. Bailey commented that the PRA had taken steps to mitigate the risk of such a high expense but he did highlight the 'root of the cause' being the convoluted EU process.
However, despite the concerns voiced in Bailey's letter about the implementation of Solvency II, recent reports suggest that the EU may, in fact, be nearing a deal on the long-delayed directive. A British member of the European Parliament, Peter Skinner, commented that the EU is close to finalisation with the suggestion that 'transition' periods will be the likely way forward for the regulator to roll out Solvency II. EIOPA's head of policy, Justin Wray, has also commented that the signs indicate that "we are much closer to reaching an agreement on Solvency II". The chief executive of the PRA himself still remains hopeful that the directive will be implemented in some form. Bailey stated that the EU could not operate long term without harmonised standards in the insurance sector and, therefore, it was more a question of what form the directive will take rather than a question of whether it will be implemented at all.
UK: Insurance 'Add-ons' Come Into the Line of Fire
The Financial Conduct Authority ("FCA") has recently upped its scrutiny of insurance add-ons. There has been heightened speculation in the market that regulators are starting to contact brokers in relation to this. The chief executive of the FCA, Martin Wheatley, has commented that firms must be seen to get their houses in order to avoid any regulatory action. The regulator became aware of the mis-selling of add-ons following the investigation into motorists' legal protection insurance. This probe has since taken off as its own separate study. A spokesperson for the FCA commented that the regulator does not support when customers are forced to opt-out of buying a product and is thus encouraging firms to switch to an 'opt-in' policy. The FCA has stated that brokers need to provide clear information and ensure that all customers are aware, at the point of sale, that the add-ons are optional and also available elsewhere. This level of scrutiny into the sale of add-ons reflects the 'consumer-interest' approach that the FCA has adopted.
The study into the market of general insurance products was initially launched by the FSA at the beginning of 2013. The scope of the review was wide, looking at products sold as add-ons to either an insurance policy or another financial services product or purchase, such as a car. The idea behind the review was to see whether there were common features of the add-on markets, which could weaken competition and lead to poor consumer outcomes.
Two months into the investigation, after the transition from the FSA to the PRA and FCA, the FCA stance on insurance add-ons casts light on the difference between the old and new regulators. Commentators believe that the FSA was often backward-looking in its approach to supervision, whereas the FCA, as more forward-looking, tries to think ahead to prevent problems which may occur down the road. The study into add-ons has certainly picked up speed since the FCA took over this line of the investigation. The regulator aims to complete the assessment by the third quarter of 2013 and publish the results shortly thereafter.
US/AMERICAS
US: 2013 NAIC International Insurance Forum
The National Association of Insurance Commissioners ("NAIC") held its 2013 International Insurance Forum on May 9-10, 2013 in Washington, DC. The attendees at the two-day forum included US state insurance regulators, other US and non-US regulators, trade group representatives and industry participants. The forum covered a broad range of topics regarding international regulatory developments for the insurance industry and included sessions on the impact of international supervisory developments for the US regulatory framework, effective group supervision, longevity risk solutions used in different jurisdictions, addressing financial stability in the insurance sector, and resolution regimes for insolvent insurance companies and the role of policy holder protection structures.
US: New York Amends Insurance Holding Company Regulation
On June 23, 2013, the Third Amendment to New York Insurance Regulation 52 (11 NYCRR 80-1), the New York regulation on insurance holding companies, will go into effect. The amended regulation requires electronic filing of the Form HC 1 registration statement and amendments thereto, with an opportunity to seek an exemption from the electronic filing requirement based upon undue hardship, impracticability or good cause. The Form HC 1 registration statement will also need to include a statement that the insurer's board of directors, or a committee thereof, oversees corporate governance and internal controls and that the registrant's officers or senior management have approved or devised, implemented, and continue to maintain and monitor corporate governance and internal control procedures.
The amended regulation will modify the advance filing requirements for certain affiliate reinsurance agreements entered into by New York-domiciled property/ casualty insurers. Under the amended regulation, a domestic property/casualty insurer will only need to make an advance filing with the New York Department of Financial Services ("NYDFS") for reinsurance treaties or agreements that meet a certain threshold, unless otherwise requested by the NYDFS. Filing will be required if the reinsurance premium or a change in the New York-domiciled insurer's liabilities, or the projected reinsurance premium or a change in the New York-domiciled insurer's liabilities in any of the next three years, is less than 5% of policyholder surplus as of the prior year-end. This filing exemption will not be available to life insurers or accident and health insurers. The amended regulation will add the following types of agreements to the list of inter-affiliate agreements requiring an advance filing with the NYDFS: management agreements, service contracts, tax allocation agreements, guarantees and cost-sharing arrangements.
The amended regulation will add a new provision requiring that where a holding company seeks to divest its controlling interest in a New York-domiciled insurer in any manner, and the New York-domiciled insurer is aware of the proposed divestiture and anticipates that no person will have a controlling interest in it after the proposed divestiture, then the New York-domiciled insurer will be required to file with the NYDFS notice of the proposed divestiture upon the earlier of 30 days prior to the proposed cessation of control or within 10 days of becoming aware of the proposed divestiture. This new requirement is adapted from the 2010 amendments to the National Association of Commissioners Model Holding Company System Regulatory Act (the "NAIC Model Act"); but it imposes the filing obligation on the New York-domiciled insurer rather than on the controlling person seeking to divest control.
Furthermore, the NYDFS stated in response to industry comments that other provisions of the NAIC Model Act, such as the requirement of an annual enterprise risk report and the establishment of supervisory colleges, will be the subject of future regulatory or legislative activity. The NYDFS addressed concerns about the confidentiality of submitted documents by reviewing the existing policies of New York law that provide for the confidentiality of such documents. NYDFS officials agree that any other confidentiality provisions would need to be added to the Insurance Law by legislation.
The full text of the regulatory amendments is available here.
US: New York Inquires into Cyber Threats at Insurance Companies
At the direction of New York Governor Andrew Cuomo, the New York Department of Financial Services ("NYDFS") is conducting an investigation on how insurers are protecting customers and companies from cyber threats. On May 28, 2013, the NYDFS exercised its authority under Section 308 of the New York Insurance Law to request special reports from the largest insurance companies that the NYDFS regulates, including Aetna, AIG, MetLife and Progressive. Recipients of the Section 308 letters are required to respond to the NYDFS with information on the policies and procedures they have implemented to protect against cyber attacks.
In response to the inquiry, Insurers must disclose any information on cyber attacks that the company has been subject to in the past three years and the amount of funds and other resources that the company dedicates to cyber security. The NYDFS and the Cyber Security Advisory Board, established by Governor Cuomo in January 2013 will use the information received to ensure that documents submitted to insurers such as health, personal and financial records will be safeguarded from cyber attacks. Governor Cuomo has already taken measures to prevent cyber attacks in banks, but has now turned his attention to insurance companies in order to keep "one eye on the lookout for the next big threat."
US: Congress Introduces Two Bills to Increase Taxation of Foreign Insurers
Two members of Congress have introduced bills aimed at closing alleged loopholes in the U.S. tax structure that they say favor foreign reinsurers. Representative Richard Neal (D-MA) and Senator Robert Menendez (D-NJ) filed legislation in both the House (H.R. 2054) and the Senate (S. 991) aimed at preventing non-U.S.-based insurers, operating primarily in the U.S., from reducing their U.S. tax bill by using affiliates as reinsurers. As it stands, foreign property and casualty insurers are allowed a deduction for premiums paid for reinsurance if the reinsurer is an affiliate not based in the United States. Said Congressman Neal of the current law, "ending this unintended tax subsidy for foreign insurance companies will stop the capital flight at the expense of American taxpayers and restore competitive balance for domestic companies."
Some opponents of the proposed bills argue that passage of such legislation will do damage to the U.S. property and casualty insurance markets by increasing costs and limiting the ability of reinsurers to diversify and spread risks. "It would tend to concentrate US risks within the United States, rather than allowing the global reinsurance system to spread them throughout the globe," noted RJ Lehmann, a fellow at the R Street Institute, a non-profit policy research organization. Lehmann added that such legislation may be in violation of the General Agreement on Trade in Services, of which the U.S. is a signatory, under which countries agreed not to subject companies to more punitive or burdensome taxation based solely on where the company is based.
Brazil: Establishment of the Brazilian Fund and Guarantee Management Agency
On April 29, 2013, Brazil's National Council for Private Insurance ("CNSP") issued Resolution No. 286, which sets forth complementary rules for the establishment of the Brazilian Fund and Guarantee Management Agency ("ABGF"), recently created by article 37 of Law No. 12.712/2012.
Law No. 12.712 was passed by the Brazilian National Congress on August 30, 2012. Among other provisions, the law allows the Federal Government to establish a new state-owned company with the purpose of operating in the insurance and reinsurance sectors, buying out other market participants and providing coverage for risks related to the implementation of large infrastructure projects, especially those related to the Growth Acceleration Program – PAC, the FIFA World Cup in 2014 and the 2016 Olympic Games.
The establishment of a new state-owned company is being criticized by the local market as reflecting a protectionist and statist policy that is likely to interfere with the operation of the private insurance and reinsurance market. The new Resolution is also thought to undermine the positive effects expected from the privatization of the state-owned reinsurer, IRB-Brasil Re, which is likely to take place some time at the start of the second half of 2013.
Brazilian insurance and reinsurance market stakeholders are also concerned with the provisions of Articles 55 and 56 of Law no. 12.712/2012, which permits the regulatory agency ("SUSEP") to allow for greater flexibility in the requirements to be met by ABGF with regards to incorporation and functioning. This provision could authorize public entities to dispense with public bidding procedures when purchasing insurance cover from ABGF, thus creating an undue competitive advantage for the state-owned company over other players in the private market.
However, it should be noted that the issuance of the new Resolution does not necessarily mean that the ABGF will be created or will function in the way announced by the Federal Government, since a strong opposition thereto from the internal market is still expected.
Brazil: SUSEP Streamlines Procedures for the Incorporation of Local Insurance and Reinsurance Companies.
The National Superintendence of Private Insurance ("SUSEP") intends to make the procedures for the incorporation of insurance companies, local reinsurers, capitalization and pension funds entities faster. The local regulatory authority approved, ad referendum of the CNSP - National Council of Private Insurance, a change in item II of Article 5 of the Annex to Resolution 166 of 2007, which deals with the minimum capital required for companies to work in these sectors. This measure is yet to be examined by the CNSP's board members.
The intention of the regulatory authority is to make these procedures less bureaucratic, reducing the number of required documents and rendering technical analysis thereof more precise and objective.
The rule still in force provides that the actuarial technical note is a mandatory document for applications for the incorporation of companies. This note contains the financial estimates applicable to the portfolios that the company intends to operate, these data being used to calculate the minimum capital required for a company to be incorporated and to operate.
In the amended version of the Regulation, which has not been approved yet, this note will not be necessary for attaining SUSEP's prior approval, given that Resolution CNSP 282, which was published in the beginning of this year, establishes that the minimum capital required must be the greatest among the capital base, the risk capital and the solvency margin, and, since for a company to be incorporated the capital base will always overcome the others, SUSEP has come to the conclusion that it would be unnecessary to calculate the risk capital.
Therefore, the actuarial technical note will only be required after the prior approval has been given to operate by SUSEP and prior to the beginning of activities.
Have you seen our Year in Review?
Earlier this year, we published our Global Insurance Industry 2012 Year in Review, which discusses some of the more noteworthy developments and trends in insurance industry transactions in 2012 in the US, Europe, Asia and Latin America, with particular focus on mergers and acquisitions, corporate finance, and the insurance-linked securities and convergence markets. A request for the 2012 Year in Review can be made here.
Originally published 4 June 2013
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