UK: Insurance Market Update: The Deloitte View for Non-Life Insurers

Last Updated: 21 April 2010
Article by Deloitte Financial Services Group

Most Read Contributor in UK, August 2017

Welcome to the March 2010 edition of the Insurance Market Update in which we focus upon issues in the general insurance industry. In this issue we comment on regulatory governance challenges and provide an update on the latest developments in the cost of asbestos to the UK insurance industry.

In response to the recent financial crisis, we have seen the Walker review together with various FSA initiatives on governance. In particular, the FSA are moving away from "light touch" regulation to a more intensive, intrusive and proactive approach and insurers are definitely feeling the impact during their ARROW reviews. Clare Hague and Mark McIlquham comment on this and provide an insight on how insurers could respond.

Our second article provides a review, by Darren Michaels and David Hindley, of the recent report released by the Actuarial Profession's UK Asbestos Working Party which has doubled the expected future cost to the UK insurance industry of UK asbestos-related claims. Whilst this may not be news to many insurers, those with significant exposure to UK asbestos claims should make sure that they have fully assessed their exposure and considered the impact of the working party's findings on their business.

As always, we look forward to receiving your feedback; your views, comments and suggestions for future themes or topics are most welcome.

Kevin Elliott


By Mark McIlquham and Clare Hague

ARROW – Advanced Risk Response Operating FrameWork – is the FSA's process for assessing and dealing with risk. Over the last 12 to 18 months, firms experiencing ARROW visits have seen a new approach from the FSA including:

  • increased intensity and robustness of challenge from Supervisors;
  • more detailed and lengthy upfront planning by the supervisory team for visits;
  • use of specialist support to scrutinise a firm's business activities and risk management practices; and
  • more emphasis on risk rating and benchmarking firms.

Poor governance and risk management of some regulated firms has been one of the factors contributing to the recent financial crisis. The Walker review, and more recently, the FSA Consultation Paper CP10/3 on "Effective corporate governance (Significant influence controlled functions and the Walker review)", sets out further proposals.

In recent months the FSA has made many public statements about the increase in the intensity of its supervision and the degree of intrusiveness in areas of high risk and insurers are definitely feeling the impact as their ARROW visits are conducted. This is evidenced by Risk Mitigation Programmes (RMPs) becoming significantly longer and more Section 166 'Skilled Person Reports' being requested by the FSA.

Effective Governance and Risk Management

One of the key areas that the FSA is looking at is effective corporate governance and risk management. It expects Executive and Non Executive Directors (NEDs) to be able to articulate clearly how governance structures work across the organisation and how these structures are appropriate and effective.

Management should be able to evidence that key decisions, for example around the firm's strategy, are discussed in depth in Board meetings and challenged, rather than simply 'rubber stamped'. NEDs have a key role to play in the challenge process.

A firm's board and executive must take responsibility for setting and regularly reviewing risk appetite and be able to demonstrate that they have a clear understanding of how the strategy is aligned to risk appetite. Furthermore, the board should understand and assesses the key risks in the business and establish a robust control framework to manage them effectively. The board must take the lead in embedding risk management throughout the organisation, with regular risk analysis and reporting to the Board and/or Risk Board Committee.

Demonstrating Competencies and Capabilities for Specific Roles

CP10/3 sets out a new framework for the classification of controlled functions. Within some of the current functions the FSA is unable to track and vet individuals who may change roles within one of those functions, even though the competencies required for each role might be different. For example, an individual approved as a NED may, in addition to being a NED, take on the role of chair of a key board committee, for example, chairman of the audit committee or remuneration committee, without any further assessment from the FSA of the individual's competence and capability to perform that particular role. Chairman of the audit committee or remuneration committee are therefore examples of new key roles the FSA is proposing to identify separately from existing significant influence controlled functions, so a NED who chairs the audit committee should be approved as both a NED and for the 'specific function' role, chairman of the audit committee.

Although this is for the future, the FSA makes it clear that it will be assessing the individual's continuing capability to perform all of their specific roles as part of its normal supervisory activities. In an ARROW interview, a NED is expected to be able to demonstrate his/her capabilities as a NED and in addition, if the person is chair of the audit committee, the FSA expects him/her to demonstrate they are an authoritative individual, capable of effectively challenging the executive and co-ordinating the skills and contributions of the committee members.

Significant Influence Functions

The FSA also provides further detail to help firms understand its processes and expectations for approving and supervising Significant Influence Functions (SIFs). There is nothing new here; the FSA is clarifying the approach and the changes it made in October 2008 to the way it approves people performing SIFs.

It makes it clear that in the application process for approval of a candidate, it is the firm's responsibility to ensure that the candidate is 'fit and proper' for the role in question. The firm must complete sufficient due diligence on the candidate and gather appropriate information to support the application.

The criteria for 'fit and proper' remain the same ie honesty, competence and financial soundness. However the FSA is putting more focus on assessing the competence and capability criteria. The FSA has identified the competencies it believes are 'core' for SIFs, although it acknowledges these should be considered in proportion to the role in question.

The key point to note here is that for people already in SIF roles, their performance and competence is being reviewed as part of the current ARROW process. This means that SIFs are expected to continue to demonstrate their 'competence and capability' for the specific roles they are carrying out. If not, then the FSA will take action against the firm and/or the approved person concerned. This is something we have seen in practice in some insurers in recent months, where post ARROW follow up has included the FSA inviting people in SIF roles to re-interview for their roles following a poor performance in ARROW interviews. It almost goes without saying that 'failing' these interviews is very embarrassing and damaging for the firms and individuals involved.

Effective Risk, Compliance and Internal Audit Functions

During ARROW visits, the FSA is looking for firms to demonstrate effective and well established functions as the second and third lines of defence.


If risk management is not yet fully embedded in the organisation, then the FSA expects to see plans in place (e.g. as part of insurers' Solvency II projects) to fully embed risk management. Every business unit should understand their key risks and mitigating controls and should assess the impact on overall risk of key business decisions.

Firms should also be proactive in identifying new and emerging risks and assessing their potential impact. The role and purpose of central risk functions should be clearly understood across the business. The central risk function should work closely with the business units to help them embed risk management.


An effective compliance function should also work closely with the business, providing up to date information and guidance on key compliance issues and a robust monitoring plan. The FSA expects current 'hot topics' to have been picked up by firms. Examples include data security, financial crime, sanctions and corruption. The FSA has issued high profile papers, enforcement notices and 'Dear CEO' letters on 'hot topics' and accordingly expects these issues to have been debated in the Board and for firms to have addressed the issues and challenges presented in these areas. The compliance function should take the administrative lead on these issues, but the whole business should be involved.

Internal Audit

The internal audit function should be able to demonstrate that it has sufficient and competent resources and that it is delivering an appropriate annual audit plan. It must also be able to demonstrate its independence from the business as the third line of defence and that it has the capacity to report directly to the Audit Committee.

Management Information

As part of the ARROW process, the FSA is looking for firms to demonstrate that the appropriate quantity and quality of management information (MI) is going to the Board and Board Committees. This is crucial to evidence effective decision-making, monitoring and the right judgements being made. This is a challenge for most insurers who, due to old legacy systems, are not able to extract the level of granularity and quality of information that they would like. Many still have long standing data warehouse projects in flow and the FSA's tolerance to delays in these projects is significantly reducing. There is also a demand for an increasing amount of information to go to the Board to ensure that everything has been covered. In practice, some Board packs are becoming voluminous, running into several hundred pages. Arguably the quality and quantity of information is still not appropriate with too many numbers and not enough explanation and analysis or vice versa.

This makes it difficult for directors to digest all of the information or pick out the key issues. The quality and quantity of MI therefore remains a focus area for the FSA and an area in which they are keen to see improvements being made.

The FSA's Focus for ARROW Visits

Over the past 18 months, the quality of governance and risk management in individual firms, including insurers, has been a topic on which the FSA has frequently requested Section 166 'Skilled Person Reports'. The FSA expects this emphasis to continue and we have certainly seen an increase in the number of requests on insurers.

Section 166 reports are reports that the individual firms have to pay for so one of the implications is that ARROW visits could prove extremely costly if firms are not suitably prepared and do not have their 'house in order' when it comes to effective governance and risk management.

In CP10/3 the FSA goes on to say that its in-depth review of governance and risk management will involve more intensive work on a continuing basis through the ARROW regime. In addition to holding ARROW meetings with board members and key senior executives below board level, the FSA will increase its focus on NEDs, particularly the senior independent director in firms and the chairs of key board committees.

The FSA acknowledges that the level of intensity of its review will vary according to the size, scale and impact of the firm, but all firms will find the ARROW approach more intensive overall.

The FSA will also be reviewing the governance and risk management aspects of its ARROW risk framework in light of its evolving approach, which it acknowledges may lead to some minor modifications to its published ARROW material in due course.

How Should Firms Respond?

So, how should insurers respond if they have an ARROW visit coming up? Preparation is key. Firms should take care in gathering the documentation requested by the FSA for review ahead of the visit. They should ensure what is provided is accurate, up to date and complete and has been signed off by an appropriate internal process.

Preparation for the visit itself is important for every person involved. A firm should make sure members of the board, key management and anyone else the FSA requests to see are prepared for their meetings and fully prepared to talk about the topics that the FSA will want to cover. It is helpful to provide evidence and examples to demonstrate how governance and risk management works in the organisation and to demonstrate how key decisions have been made. Finally and more importantly it will be key to demonstrate that areas of weakness have been considered and action plans are in place to implement the improvements that the FSA will be looking for. Most firms are preparing in a robust way for ARROW. It is fundamental that all organisations do this so that they get the 'regulatory dividend' their risk, compliance and control framework really warrants.


By Darren Michaels and David Hindley

A recent report released at the end of January 2010 by The Actuarial Profession's UK Asbestos Working Party has doubled the expected future cost to the UK insurance industry of UK asbestos-related claims. The report predicts that the cost of UK asbestos-related claims to the UK insurance industry could be £11 billion over the period from 2009 to 2050, of which in excess of 90% is in respect of Mesothelioma claims. Over £9bn of the estimated cost relates to the period from 2009 to 2040, which is around twice the working party's previous (2004) estimate of £4.7bn for the same period.

The working party highlight that their projections are highly uncertain and that alternative scenarios produce an estimated cost of around £5bn or over £20bn for the period from 2009 to 2050. The projections do not include any costs that will fall on the Government or that relate to periods of self-employment or self-insurance, where companies chose not to purchase insurance prior to the introduction of compulsory Employers' Liability insurance in the UK in 1972.

The main reason for the increase in the working party's projections is that the proportion of Mesothelioma sufferers that are making a claim for compensation has doubled from just over one-third in 2004 to nearer two-thirds more recently. At the time of the working party's previous projections there was a close correspondence between the number of people dying from Mesothelioma and the number of Mesothelioma-related insurance claims, as shown in the graph below. This was because around 40% of people dying from Mesothelioma were claiming for compensation and each claimant was making around 2.5 claims each. Claimants typically make more than one claim as they often worked for more than one employer (that may have been insured by different insurance companies) during their working life where they were exposed to asbestos, or even where they only worked for a single employer, the employer may have switched insurance companies during the claimant's period of employment with the company.

Back in 2004 the correlation between the number of Mesothelioma deaths and insurance claims had been fairly stable and the working party assumed that this relationship would continue going forward. As can be seen from the graph, this has not turned out to be the case, driven by the near doubling of the proportion of sufferers claiming for compensation.

The working party have identified the following key factors that are likely to be behind this increase:

  • increased publicity: there have been a number of legal developments with respect to asbestos claims over the past few years (such as Fairchild, Barker, the Compensation Act, and the Pleural Plaques litigation) which have frequently put asbestos in the news headlines and will likely have increased public awareness regarding the possibility of claiming compensation;
  • the NHS National Mesothelioma Framework, published in February 2007 has improved the access for sufferers to specialist advice, diagnosis and support. This is believed to have contributed to an increase in the pre-death diagnosis rate for Mesothelioma which in turn increases the likelihood of a successful claim being made due to the ability to obtain a witness statement from the claimant; and
  • the use of the internet has continued to expand, which will have increased the information available to sufferers regarding the possibility of claiming compensation.

In their updated projections, the working party acknowledge that predicting the future proportion of sufferers that will seek compensation is fraught with difficulty, but in order to demonstrate the uncertainty surrounding this assumption and hence their projections, they have presented estimates on five different scenarios ranging from no change in the proportion claiming at each age going forward, to the ratio reaching its theoretical maximum within each age-band in the next five years.

The working party have made a number of other refinements to their previous projections including incorporating the updated (2009) projections by the Health and Safety Executive's statisticians of the projected future number of people dying from Mesothelioma in Great Britain.

Pleural Plaques

The working party's projections do not incorporate any amounts in respect of pleural plaques. On 17 October 2007, the House of Lords ruled that asymptomatic pleural plaques were not compensable. In response to the ruling, the Scottish Parliament passed an Act in March 2009 so that pleural plaques remained compensable north of the border. However, a number of insurers launched a judicial review to challenge the lawfulness of that Act. The Court of Session rejected this bid in January, although the ruling has since been appealed by the insurers involved. This means that pleural plaques claims in Scotland remain essentially stayed pending the outcome of the appeal.

In the meantime in England and Wales, the Lord Chancellor and Secretary of State for Justice, Jack Straw, recently announced the Government's long awaited decision following the Ministry of Justice's consultation on pleural plaques which was originally launched back in July 2008. The Government have decided that, "based on the medical evidence received during the review, they are unable to conclude that the Law Lords' decision should be overturned at this time or that an open-ended no fault compensation scheme should be set up". The stated reason for the Government's decision is that the increased risk which a person suffering from pleural plaques has of contracting a more serious asbestos-related disease, arises due to the person's exposure to asbestos and not from the pleural plaques themselves.

The Government did however introduce a number of other measures to help those people suffering from asbestos-related diseases, including awarding £5,000 compensation to each person that was in the process of pursuing a claim for pleural plaques at the time of the House of Lords ruling in October 2007. So for the time being at least, it looks like there is little chance of pleural plaques claims becoming compensable once more in England and Wales.

Impact on Insurers ... and Beyond

Although the working party has doubled its expected future cost of UK asbestos claims, this will not be news to the UK insurance industry. The majority of the participants in the UK Employers' Liability market are represented on the working party itself and other insurers will have seen the emerging experience over the past few years and are expected to have reacted to it accordingly. Nevertheless, any insurance company with significant exposure to UK asbestos claims should make sure that they have fully assessed their exposure and considered the impact of the working party's findings on their business.

In addition, even though the working party did not consider the impact of asbestos-related claims outside of the insurance industry, a significant proportion of claims will also fall on the Government and on industry, particularly prior to the introduction of compulsory Employers' Liability insurance. Again, any organisation involved in industries that used or came into contact with asbestos, should ensure that it has a good understanding of its potential underlying exposures.

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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