UK: Global Regulatory Update: Developments In The Insurance Markets - February 2011

Last Updated: 16 February 2011
Article by David Coupe

FOREWORD

Developments in the global re/insurance markets

Talking to clients and contacts, there is no doubt that the next couple of years will be about the emerging markets. The comparatively low insurance penetration in countries such as China, India and Russia coupled with a growing consumer class, increased foreign direct investment, infrastructure development and an increased awareness of catastrophe exposure, present a huge opportunity for insurers to extend their reach into new territories.

Given the size of the potential market, it is probably not surprising that China is the territory in which the underwriting and broking community appear to be most interested. It is already the sixth largest insurance market in the world, with $133.5 billion in premium for the first half of 2010. When we talk to clients, they say that Latin America is almost as popular. Since the opening up of the Brazilian market two years ago, 70 reinsurers and 8 Lloyd's syndicates have entered the market. However, recent changes to the reserving requirements for reinsurers have removed some advantages, so competition issues are a key area of concern.

A guiding hand

Understanding this industry inside out is what makes the Clyde & Co's insurance and reinsurance practice a world leader. More than 70 partners work solely on insurance related matters and our depth of understanding covers all types of claims, corporate and regulatory advice. With clients all over the world involved in every sector of the industry, we have both a local knowledge and global experience of worldwide development and trends.

Following on from our successful Going Global Seminar last September, we have received requests for further regular updates for more information in relation to insurance-related matters. As a result, we have put together the attached bulletin highlighting some of the major issues that may impact clients in the conduct of their insurance business around the world.

David Coupe
Partner

CHINA

By Ik Wei Chong and Carrie Yang

In 2010, the Chinese insurance regulator - The China Insurance Regulatory Commission ('CIRC') - issued the following key regulations and rules:

Provisions for the Administration of the Qualifications of Directors and Senior Management Personnel of Insurance Companies

Issued on 8 January 2010 and coming into effect on 1 April 2010, these provisions were aimed at enhancing the CIRC's regulatory authority over the qualification and appointment of executives in insurance companies, increasing the standards for qualification, and improving the rules on constant supervision of executives after their appointment.

Measures for the Administration of the Insurance Terms and Insurance Premium Rates of Property Insurance Companies

Announced on 5 February 2010, effective as of 1 April 2010, these measures prohibit insurance companies from altering the duly filed insurance terms and premium rates, revise the supervisory mode for regional insurance products, and enhance the requirements relating to internal control systems and Legal Liability Persons of insurance companies.

Provisions on the Basic Services of Personal Insurance Business

Announced on 11 February 2010, effective as of 1 May 2010 these provisions set out standards and requirements in relation to the telephone services, client-visits and claims settlements by personal insurance companies, and demand that insurers set up adequate mechanisms to safeguard the privacy and confidential business information of these assureds.

Measures for the Administration of the Equities of Insurance Companies

Announced on 4 May 2010, effective as of 10 June 2010, these measures clarify and increase the entry requirements for shareholders of insurance companies, enhance the supervision on majority shareholders (i.e. whose shareholding exceeding 15%), elaborate on the filing and approval requirements in relation to share transfers or acquisitions of an insurance company, provide a certain degree of flexibility for the upper limit of the shareholding of one shareholder, as well as provide for the first time in the areas of horizontal competition, the listing of insurance companies, shareholder information disclosure and so on.

Measures for the Administration of the Information Disclosure by Insurance Companies

Announced on 12 May 2010, effective as of 12 June 2010, being the first-ever CIRC regulation on information disclosure, it provides specific requirements as to the scope, method and frequency of information disclosure.

Provisions for the Administration of the Reinsurance Business

Announced on 21 May 2010, effective as of 1 July 2010, these provisions abolish the restriction which requires a Chinese insurer to offer at least 50 per cent of the amount to be reinsured to licensed domestic reinsurers first. These provisions also clarify the rule regarding the reinsurance cap in each risk unit, make new provisions on the reinsurance brokers' conducts, impose stricter requirements on direct insurers to disclose information on reinsurance arrangements and especially on foreign-invested insurance companies' intra-group reinsurance transactions. These provisions put in place harsher punishments on the relevant managing personnel who fail to handle reinsurance business compliantly.

Tentative Measures for the Administration of the Use of Insurance Capital

Announced on 30 July 2010, effective as of 31 August 2010, these tentative measures expand the investment channels of insurance capital to include real property and equities, set out the prescribed ratio for each allowed channel, prohibit insurance companies from investing in certain areas such as real property development and venture capital investment, as well as prescribe corporate governance changes for insurance companies in order for them to monitor investments more effectively.

The following three regulations support the tentative meaures:

  • Circular on Issues Relevant to the Revision of the Investment Policies of Insurance Capital

    Announced on and effective as of 31 July 2010, this elaborates on the relevant ratio requirements for insurance companies to follow when investing in listed companies
  • Tentative Measures for Equity Investment with Insurance Capital

    Announced on and effective as of 3 September 2010, this permits investments to include both shares in unlisted Joint Stock Companies and equities of Limited Liability Companies, and details the ratio requirements which an insurance company should follow when making such investments.
  • Tentative Measures for Investment in Immovable Assets with Insurance Capital

    Announced on and effective as of 3 September 2010, allows insurance companies to make investments in fixed assets such as real property and infrastructure, and details the ratio requirements which an insurance company should follow when making such investments. However, these tentative measures prohibit insurance companies from investing in residential properties or real property development companies.

Measures for the Administration of the Liability Insurance of Travel Agencies

Announced on 25 November 2010, effective as of 1 February 2011, these provide that travel agencies are obliged to insure against the potential liabilities to tourists and tour guides in the travel activities organized by the travel agencies and prescribe other protective measures for the benefit of the assureds, such as limiting the circumstances under which the insurers can repudiate the insurance contract.

Guidelines on Pursuing Personal Liabilities by Insurance Institutions

Announced on 29 January 2010, effective as of 1 July 2010, these detail and clarify the personnel in an insurance company who shall be liable for irregularities and the respective penalties thereof, and require more extensive accountability from the senior management of the insurance company by holding them liable for such irregularities.

Circular on Clarifying the Administration of Branches of Insurance Companies

Announced on and effective as of 10 June 2010, this clarifies the supervision of the sales services departments of insurance companies' branches and specifies the conditions, the procedures and required documents for transforming insurance companies' branches.

Circular on Strengthening the Anti-money laundering work in the Insurance Industry

Announced on and effective as of 10 August 2010, this provides anti-money laundering checks on investments into insurance companies, transfers of shares in insurance companies and in the establishment and restructuring of insurance companies. The circular also enhances anti-money laundering requirements in respect of insurance intermediaries and company executives.

Basic Guidelines for Internal Controls of Insurance Companies

Announced on 10 August 2010, and effective as of 1 January 2011, these provide comprehensive internal control guidelines for insurance companies in four aspects – sales, operation, general management and funds management.

INDIA

By Sakate Khaitan

Introduction

2010 was an eventful year for the insurance sector. The insurance regulator and the Insurance Development and Regulatory Authority ("IRDA") introduced a range of new initiatives. The objective seems to be to extend the scope and reach of regulations so as to bring about hitherto unregulated activities within IRDA's supervisory compass. Some existing regulations were amended and some new regulations and guidelines were notified to meet this end. IRDA also adopted some tough posturing by reprimanding insurers and intermediaries with punitive orders and fines.

RDA (Sharing of Database for Distribution of Insurance Products) Regulations 2010 ("Database Regulation")

The Database Regulation effectively introduced a new category of regulated companies by the name of "referral companies" and attempted to bring within the regulatory ambit those entities that shared the database of their customers with insurance companies or agents. The Database Regulation has stipulated mandatory approval/registration of "referral companies" with the IRDA. It also lists the eligibility criterion for referral companies which inter alia includes minimum net worth, turnover and requirements, such as no direct or indirect linkage with the distribution/sale and transaction of insurance products, and the revenues from referral arrangements not accounting for over 10% of its total revenues.

The onus of getting the referral company registered and approved is on the insurer. All referral arrangements whereby third parties share database or other client information with insures will fall within the definition of "referral company". There is also a cap on the commission paid by the insurer to the "referral company" and restrictions on the nature of payments made. Further, any company which is directly or indirectly linked with the distribution or sale of insurance products cannot be licensed as referral companies.

Outsourcing Guidelines

The Outsourcing Guidelines prohibit the outsourcing of Core Activities by insurance companies. They provided a list of core activities ("Core Activities") and non-core activities ("Non-Core Activities") undertaken by insurers. Core Activities inter alia include underwriting, product design, investment, premium collections, data storage, admitting/repudiating of claims, market conduct, AML/KYC compliance, appointment of surveyors and loss assessors and all other activities not included as Non-Core Activities. The Non-Core Activities on the other hand inter alia include facility management, provident fund trusts, website development, pay roll management, HR services, data entry, claim processing for overseas medical insurance. Non-Core Activities may be outsourced and reporting obligations upon the insurers have been stipulated in the Outsourcing Guidelines.

Other provisions of the Outsourcing Guidelines set out criterion for choosing the service provider, grievance redressal mechanisms, inter se relationship between the insurers and the service provider, onus of insurers in ensuring the compliance by outsourcers etc. Regulated activities of insurance intermediaries including agents and corporate agents that are regulated under separate IRDA regulations are apparently not covered by the Outsourcing Guidelines. Importantly, some aspects of the Outsourcing Guidelines are already covered in the existing regulations and circulars that may be applicable to the insurers and/or intermediaries.

Amendments to Insurance Laws Legislation

The biggest disappointment of the year 2010 was the status quo on the Insurance Laws (Amendment) Bill 2008("the Bill"). There was no further movement in the legislative process in respect of the Bill from last year. The report of the Standing Committee on Finance regarding its views upon the Bill, is still awaited. Several important changes such as the raising of the FDI ceiling to 49% from the current 26%, and permission for foreign re-insurers to open branches in India, therefore remain stuck in the legislative process.

LATIN AMERICA

By Stirling Leech

Brazil

On 6 December 2010, the SUSEP (the Brazilian regulator) made two amendments to local reinsurance regulations:

Cessions to local companies

Insurance Companies must cede at least 40% of all reinsurance cessions (facultative or treaty) to local reinsurers. Previously it had only been a requirement to offer local reinsurers a right of first refusal to this business. It is not clear what will happen if no local reinsurers wish to participate. It should be noted that where local reinsurers have the largest proportional share of the risk, then they may employ a claims control clause in the contract.

Restrictions on Transfers of Portfolios (Resolution 224)

Resolution 224 was due to come into effect on January 31, but speculation of a last-minute postponement was well founded and the resolution is not now due to come into force until March 31.

Resolution 224, which bans local carriers from transferring risks to companies belonging to the same financial group based abroad, was a means of stemming this premium flow out of the Brazilian market.

All of this is good news for local reinsurers, and not so good for external reinsurers. It will give local reinsurers a considerable competitive edge since they will only be competing between themselves for a share of the risk.

Mexico

Amendment of Rules for the Registration of Foreign Reinsurers

On 6 December 2010, the Ministry of Finance and Public Credit amended the rules on the registration of foreign reinsurers.

Under these amended rules, all non-Mexican reinsurers that reside in countries with which Mexico has a double tax treaty in force and that are registered within Mexico, will need to submit a residency certificate issued by their own tax authorities.

Foreign reinsurers that assume risks from Mexican cedents must be registered. The registration renewal filing must be submitted at the beginning of October each year. Failure to file on time can result in the cancellation of the registration with a potential for substantial increases in reserve and regulatory capital requirements of Mexican cedents.

VENEZUELA

By Aurelio Fernandez-Concheso

A new Insurance Activity Law imposing new rules to the insurance industry was passed by the National Assembly in August 2010.

The new law suggests that liability insurers and reinsurers may now be facing direct actions brought by third parties arising from underlying contracts.

Article 78 expressly prohibits and voids, with immediate effect, all contractual provisions limiting, impeding or preventing a direct relationship between the reinsured and the reinsurer or between the latter and the policy holder, the beneficiary or the insured, in the cases where the risks is located in Venezuela.

Failure to comply with this provision shall be penalised with a fine equivalent to 2.000 – 4.000 Fiscal Units (Approx. US$30.000 – US$60.000) in the cases where more than 50% of the risk has been assigned pursuant to article 155 of said law.

Furthermore, article 40(24) also prohibits insurance and reinsurance companies from –inter alia- refusing to receive third parties claims for losses covered by civil liability insurance policies.

Contravention of this article shall be penalised with a fine equivalent to 1.000 – 8.000 Fiscal Units (Approx. US$15.000 – US$120.000) pursuant to article 166 of the new law.

The new law abolished the Insurance and Reinsurance Companies Law which has been in force since 1994; consequently, it became one of the two principal legal instruments -along with the Insurance Contract Law - governing the insurance arena in Venezuela.

It will be interesting to see how this new tendency is adopted and resolved by the local courts now that the Insurance Activity Law has introduced a new element in favour of the admission of these type of actions.

THE MIDDLE EAST

By Wayne Jones

The key regulatory updates in 2010, in the following jurisdictions, are as follows:

Kingdom of Saudi Arabia

The Saudi Arabian Monetary Authority ("SAMA") issued the following regulations:

  • Draft Outsourcing Regulation - outlines the required safeguards that must be in place before outsourcing and aims to ensure that policyholders will be offered the same level of protection. The Regulation in final form has not yet been issued; although the market anticipates that it will be largely similar to the draft
  • Regulation on Reinsurance Activities - provides general 'principles and standards' applicable to reinsurance in the KSA. Also regulates the relationship between brokers, insurers and reinsurers, with an emphasis on internal controls

United Arab Emirates

The Insurance Authority issued the following regulations:

  • Executive Regulations for Federal Law No. 6 of 2007 (the Insurance Law) - issued in January 2010, these are the longawaited operating regulations for the 2007 Insurance Law, which include details on the licensing process for local and foreign insurers
  • Code of Conduct and Business Ethics for Insurance Companies - sets out the minimum guidelines of good practice that all insurance companies operating in the UAE should adhere to
  • Takaful Regulation - organises takaful insurance in the UAE and prohibits 'conventional' insurance companies from providing takaful insurance through an 'Islamic window'
  • Anticipated Loss Adjusters Regulation - although the Insurance Authority stated that this regulation would be issued by the end of November 2010, at the end of 2010 it has not yet been issued. The Insurance Authority signalled that the regulation will organise the business of loss adjustment and provide more protection for policyholders and insurance companies

Oman

The Capital Markets Authority issued the following decision:

  • Decision regulating the Marketing of Insurance Products through Banks - includes the minimum required provisions a marketing contract between an insurance company and a bank must contain

Qatar Financial Centre

The Qatar Financial Centre Regulatory Authority issued the following draft proposal:

  • Draft Proposal on Short-Term life insurance - a general insurer that wants to offer short-term life policies would still be required to establish a life subsidiary in order to do so, but the draft proposal waives and modifies certain requirements that would normally apply to life insurers

Algeria

The Ministry of Finance issued the following decree:

  • Decree on Compulsory Reinsurance Cession - Insurers will be obliged to cede 50% of their reinsurance business to the state-owned reinsurer, Compagnie Centrale de Reassurance (CCR) from January 2011

RUSSIA

By Andrew Tobin

New law will increase insurers' minimum Charter capital requirements

In July, the Russian Federation passed a new law which quadruples the minimum charter capital requirements for insurers by increasing the minimum charter capital of an insurer from RUR30 million to RUR 120 million (approximately USD3,750,000 at the exchange rate of RUR32 per USD1). For a reinsurer the minimum requirement will reach RUR480M (appx US15M).

The law will come into force in January 2012. There are currently more than 600 licensed insurance companies in Russia. The new minimum capital requirements are designed to weed out many small and poorly capitalised insurers.

Analysts believe only about 50% of insurers will be able to meet the new requirements.

Insurers who provide only medical insurance (whether voluntary or compulsory) will keep the current level of minimum charter capital, which is RUR30 million.

Regulator's Powers Streamlined

The regulator's powers to revoke or suspend licences have been enhanced. Additionally the regulator is empowered to appoint temporary administrators in certain circumstances (for example failure to maintain capital ratios). The powers are akin to those of a bankruptcy administrator and will be temporary in the first instance.

Russia requires owners of hazardous facilities to buy insurance

In July, a new law was passed which obliges the owner of a hazardous facility to have their civil liability insured for any harm caused to the injured parties. This was in response partly to the Sayano-Shushenskaya hydro electric disaster of 2009 which exposed chronic underinsurance in Russia generally and as regards large industrial risks in particular. A list of 'hazardous facilities' is included in the legislation, including dams, pumping stations, metal smelters, mines and others. The level of cover needed can vary depending upon the scale of the operation.

Additionally the law proscribes the amount of payments due under mandatory covers in respect of death. RUR 2M for death and less then RUR 2M in the event of injury (USD62,500). These low limits of liability reflect the continued absence of a liability culture in Russia.

Russia permits agreements between insurance companies in the same market

In July, the Russian Federation specified the circumstances in which insurers operating in the same market are allowed to enter into agreements with each other for conducting joint insurance or reinsurance operations. Previously, the letter of Russian competition laws was seemed inconsistent with the operation of a coinsurance market. The new law creates an exception to the rules.

New Bill to impose stricter liability on corporate management

In June, the Russian Federation published a Bill which imposes liability on members of corporate management bodies for losses caused by their unreasonable and/or bad faith acts or omissions made while exercising their rights and responsibilities as corporate officers or directors. The burden is on the corporate manager to prove that there was no unreasonable/bad faith behaviour on his or her part. The Bill lists specific indicators which help determine whether a corporate manager acted unreasonably and/or in bad faith. The Bill also lists the events which constitute grounds for bringing corporate managers to responsibility, and establishes that the managers are liable both to the company and its shareholders for acts and omissions. If implemented, an increase in demand for Director's and Officer's Insurance might be expected.

UNITED KINGDOM

By David Coupe

New Broker Regulation for 2011

The European Commission have announced a revision of many parts of the Insurance Mediation Directive which will affect all intermediaries in the EU. These will result in a change of current broker and managing agent regulation in the UK, but it is unclear at present the extent that these changes will affect the existing UK laws. We await the new EU Directive and UK amending legislation with interest.

Payment Protection Insurance

There has been considerable debate regarding the misselling of PPI polices, and much litigation has now been commenced relating to the sale of these policies and also in relation to breaches of UK legislation. The position currently remains unclear, but the FSA (the UK Regulator) has issued much clarification of what it thinks are the main issues surrounding such misselling. These are posted on its website www.fsa.gov.uk.

Life Insurance

The FSA has been particularly active in the life market publishing much information about Solvency II, and also asking insurers to contact them earliest if they are planning Part VII transfers (ie transfers of books of insurance business) as part of their Solvency II planning. We, at Clydes, are currently seeing much activity in this area, as life insurers seek to consolidate books of business and regulatory capital (both on the life and non-life sides).

Bribery Act

The new Bribery Act is due to come into force in April 2011. However, the UK Government has in mid January announced a review of this legislation to determine if extra-territorial effect should be more limited. At the time of writing, the position is unclear. Even so, many insurers, Lloyd's syndicates and brokers are still reviewing their compliance policies in order to meet the new requirements as if they will become fully effective in April.

However, it is not entirely clear at present how the Act may be interpreted, and many grey areas remain. For instance, how is client/contact entertainment to be approved and conducted going forward? At present, many are simply undertaking a review of their activities relating to the payment of commissions and other fees, and business development. Our view is that there is no "onestop" policy to be provided here since each will operate in different markets with different counterparties. We urge all involved in the insurance market to consider such a review as soon as possible in 2011.

UNITED STATES

By Doug Maag

New Federal Insurance Office is Steadily Moving Forward

Deliberations are underway for regulatory implementation and rule-making for the new US Federal Insurance Office (FIO), established by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. The Act, hailed as "the most sweeping change to financial regulation in the United States since the Great Depression," establishes a host of new bureaus and agencies, including the FIO. While the Act does not abolish state-based regulation, the FIO is given significant authority, as it is charged with insurance industry data collection and analysis, systemic risk monitoring, management of the US Terrorism Risk Program, advising on insurance policy issues and coordinating the development of federal policy on international insurance issues.

In future, increased federal regulation of insurance seems likely, but prospects for an optional federal charter for insurance and reinsurance companies, which might relieve them of the burden of complying with multiple state regulatory regimes, remain uncertain.

Litigation over Mortgage-Backed Securities is Increasing

A number of lawsuits have been recently filed by US insurers against banks in connection with troubled mortgage-backed securities (MBS). Insurer plaintiffs fall into two groups: (1) those with MBSs in their investment portfolios; and (2) those that guaranteed mortgage payments. Insurers contend they were misled about the quality of the underlying mortgages, and seek relief based on claims of fraud, misrepresentation, nondisclosure and breaches of warranties.

Will the New US Healthcare Bill be Repealed?

Led by the newly-elected Republican majority, the US House of Representatives voted to repeal the landmark US Patient Protection and Affordable Care Act. Repeal of the Act, passed just this past March to expand significantly healthcare availability in the US, remains doubtful however, in the face of a Democratic majority in the US Senate and the Presidential veto power.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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