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15 March 2017

Insurance Regulatory Update, February 2017

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Arthur Cox

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Arthur Cox is one of Ireland’s leading law firms. For almost 100 years, we have been at the forefront of developments in the legal profession in Ireland. Our practice encompasses all aspects of corporate and business law. The firm has offices in Dublin, Belfast, London, New York and Silicon Valley.
On 7 February, the Central Bank published responses received by it to its 2016 Discussion Paper on the Payment of Commission to Intermediaries.
Ireland Insurance
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 FEBRUARY 2017 – THIS MONTH'S NEWS

  1. CENTRAL BANK PUBLISHES RESPONSES TO DISCUSSION PAPER ON THE PAYMENT OF COMMISSION TO INTERMEDIARIES
  2. CONSUMER INSURANCE CONTRACTS BILL 2017
  3. THE CENTRAL BANK OUTLINES ITS CONSUMER PROTECTION PRIORITIES
  4. CENTRAL BANK ISSUES LETTER TO HEADS OF ACTUARIAL FUNCTION ON KEY LIFE ASSUMPTIONS
  5. REVENUE BRIEFING ON TAX IMPLICATIONS FOR LIFE ASSURANCE COMPANIES - SOLVENCY II
  6. DEPARTMENT OF FINANCE PUBLISHES REPORT ON COST OF INSURANCE
  7. CENTRAL BANK PUBLISHES RESULTS OF THEMATIC INSPECTION ON CONSUMERS' EXPERIENCE OF MOTOR INSURANCE PROCESS CLAIMS
  8. EIOPA ADVISES ON THE IMPLEMENTATION OF THE INSURANCE DISTRIBUTION DIRECTIVE
  9. EIOPA PROPOSES A STANDARDISED INSURANCE PRODUCT NFORMATION DOCUMENT FOR ALL NON-LIFE INSURANCE PRODUCTS ACROSS THE EUROPEAN UNION
  10. INSURANCE BLOCK EXEMPTION REGULATIONS EXPIRES ON 31 MARCH 2017
  11. EIOPA CHAIRMAN GABRIEL BERNARDINO ADDRESSES THE EUROPEAN CONSUMER PROTECTION CONFERENCE
  12. ESAS WARNING ON MONEY LAUNDERING AND TERRORIST FINANCING RISKS AFFECTING THE EU'S FINANCIAL SECTOR

IN DOMESTIC NEWS...

CENTRAL BANK PUBLISHES RESPONSES TO DISCUSSION PAPER ON THE PAYMENT OF COMMISSION TO INTERMEDIARIES

On 7 February, the Central Bank published responses received by it to its 2016 Discussion Paper on the Payment of Commission to Intermediaries. The Central Bank stated that their examination of this topic arises against the background of an increasing focus internationally on how remuneration structures influence culture within firms and their treatment of customers. In the January edition of the Arthur Cox Insurance Regulatory Update, we reported on the speech given by the Director of Insurance Supervision at the Central Bank, Sylvia Cronin, on the role of culture in insurance supervision.

Based on its analysis of this area, the Central Bank is proposing the creation of additional measures to strengthen protections for consumers under the following headings:

  • the acceptance and retention of commissions by intermediaries
  • describing themselves as 'independent';
  • ways to mitigate product and producer bias where commission is paid; and where commission amounts are based on the volume of the product sold, including override commissions.

The Central Bank also stated in its press release that the responses to the Discussion Paper will inform the technical advice that it will give to the Government on the legislative framework and implementation of the Insurance Distribution Directive.

The Central Bank's press release can be accessed here.

The responses to the Discussion paper are available here.

The Discussion Paper is accessible here.

CONSUMER INSURANCE CONTRACTS BILL 2017

On 9 February, Minister for Financial Services Eoghan Murphy addressed the Dáil in relation to the Consumer Insurance Contracts Bill, which was introduced as a private members Bill that will now proceed to Committee Stage. The Bill incorporates many of the recommendations made by the Law Reform Commission in its 2015 Report on Consumer Insurance Contracts. While the Minister expressed his support in principle for the Bill, he noted that due to its complex and wide-ranging nature, an in-depth review would be necessary and that "the Government is likely to submit substantive amendments at Committee Stage". If enacted, the Bill would represent a major change to Irish insurance law.

Changes proposed by the Bill include:

  • The introduction of a definition of 'consumer' that will include both natural persons and SMEs with an annual turnover of €3million or less.
  • Where a consumer in a contract of indemnity is required to have an interest in the subject matter of the contract, if they can show a factual expectation of an economic benefit arising from the preservation of the insured subject matter or of an economic loss on its destruction, then they will have the requisite interest to enforce the contract.
  • Consumers will no longer have a duty to make voluntary general disclosures. The pre-contractual duty of disclosure of a consumer will be confined to responding to specific questions posed by the insurer.
  • Insurers will not be permitted to avoid a contract of insurance where a consumer makes an innocent misrepresentation. The remedy available to an insurer for negligent misrepresentation will be proportionate to the materiality of the misrepresentation.
  • Basis of contract clauses are prohibited.
  • Where an insurer unreasonably withholds payment of a valid claim or unreasonably delays making a payment, the consumer may seek damages for any consequential loss suffered as a result.
  • An insurer will not be able to avoid claims liability solely on the basis that a consumer has not complied with the specified notice periods for informing an insurer that an insured event has occurred.
  • Injured third parties intended to benefit under an insurance contract will be permitted to make direct claims against the insurer, where the policyholder (who may be a corporate entity) has died, become insolvent or cannot be found.
  • An insurer's right to subrogation will not be exercisable against an employee of an insured employer, unless the employee caused the loss intentionally or against an uninsured person with whom the insured has a personal connection, unless the loss was the result wilful misconduct on the part of that person.

The Minister's speech can be accessed here.

A link to the Consumer Insurance Contracts Bill 2017 is here.

CENTRAL BANK OUTLINES ITS CONSUMER PROTECTION PRIORITIES

On 15 February, the Central Bank published its Consumer Protection Outlook Report, which sets out its consumer priorities for the year ahead. The Report aims to highlight a number of consumer risks that boards need to consider and the Central Bank emphasises the need for product providers to look at their consumer relationships through the lens of the consumer.

From an insurance perspective, the report confirms the Central Bank's plans to conduct thematic inspections in the following areas:

  • the sale of niche/add-on insurance;
  • insurance brokers' compliance with minimum standards; and
  • the role of insurance brokers acting as managerial agents on behalf of insurance companies.

The priorities that the Central Bank highlights include:

  • creating a consumer focused culture, where firms engage constructively with consumer queries and complaints;
  • ensuring that accurate product/ service information is provided and that key information is brought to the attention of consumers such as, the level of cover provided and the identity of the insurer where products are sold through an intermediary;
  • rigorous product testing, oversight and governance to ensure that products/ services are suitable and appropriate to consumers' risk appetite;
  • product oversight and governance processes as firms move towards providing advice online and ensuring that the needs of vulnerable consumers are being met if firms are using fintech delivery channels.
  • cyber security risks in the context of data protection;
  • maintaining customer service standards, notwithstanding the Following the pilot of the Consumer Protection Risk Assessment (CPRA) Model in 2016, the Central Bank will conduct a range of CPRAs in firms over the coming year and will publish details of CPRA Model by the end of March 2017.

A link to the Central Banks Consumer Protection Outlook Report is here.

CENTRAL BANK ISSUES LETTER TO HEADS OF ACTUARIAL FUNCTION ON KEY LIFE ASSUMPTIONS

On 7 February, the Central Bank issued a letter to the boards of insurers.

The letter outlines that in June 2016, the Central Bank initiated a review of key life insurance pricing and reserving assumptions (the Review). The Review found that generally boards are not fulfilling their role in relation to oversight and governance of the assumptions.

The Central Bank notes that the board is ultimately responsible for oversight of the assumptions and ensuring compliance with the regulations in accordance with Regulations 43 and 44 of the European Union (Insurance and Reinsurance) Regulations 2015 (S.I. No. 458 of 2015) and that it is not possible for the responsibility for the assumptions to be delegated to the Heads of Actuarial Function (HoAF).

The Central Bank expects boards to have visibility of the key judgements made in the assumption setting process so that they can be understood and robustly challenged. Boards should challenge the consistency of assumptions between reserving, the ORSA and business plans. In order to facilitate the Board having oversight of the key assumptions and monetary strategy an appendix to the letter sets out certain actions that HoAFs should undertake when carrying out experience analysis, communicating options and recommending assumptions to the board.

A link to the letter is here.

REVENUE BRIEFING ON TAX IMPLICATIONS FOR LIFE ASSURANCE COMPANIES - SOLVENCY II

The implementation of the EU (Insurance and Reinsurance) Regulations 2015 (S.I. No. 458 of 2015), (for reporting periods commencing on or after 1 January 2016), have led to certain changes in how life insurers report surplus transfer to shareholders, which is the starting point for the NCI computation.

As Form 28 will no longer be prepared by life assurance companies subject to Solvency II, Revenue have confirmed that the surplus transfer to shareholders can be identified in the Actuarial Report on Technical Provisions (ARTP).

The annual actuarial investigation of the long term business fund to support the identification of the surplus transfer is still required post Solvency II, in accordance with the Insurance Act 1989. The Head of Actuarial Function (HoAF) is expected to make a recommendation to the board in relation to the amount of the surplus to be transferred to shareholders. The board will then consider this recommendation for its approval. The HoAF will provide the ARTP to the board on an annual basis, which is a requirement for all insurance undertakings under Solvency II. The ARTP is the report on the year end valuation and this will be available prior to the submission of the corporation tax return.

As part of their tax computations, life assurance companies should submit the following information to the Revenue:

  • a formal statement of amount of the surplus transferred to shareholders;
  • the recommendation of the amount of the surplus transfer to shareholders by the HoAF; and
  • full details of any alterations, amendment and departures (if any) from the surplus transfer figure as initially recommended by the HoAF.

The Revenue may also request a copy of the ARTP.

A link to the Revenue's eBriefing is here.

DEPARTMENT OF FINANCE PUBLISHES REPORT ON COST OF INSURANCE

On 15 February, the Department of Finance (DOF) published a press release providing an overview of the Cost of Insurance Working Group's report on motor insurance. Recommendations contained in the report include:

  • the establishment of a Personal Injuries Commission to examine how personal injuries claims are calculated;
  • the creation of a National Claims Database by mid-2018 to identify cost drivers in this area;
  • the creation of a database that would enable the Gardaí to identify uninsured drivers using Automatic Number Plate Recognition;
  • introducing more granularity to the book of quantum; and
  • improving data sharing to identify patterns of suspected fraud through the creation of an industry funded database with independent oversight.

The DOF also set out its plans to investigate the cost of employer liability and public liability insurance in the next phase of its work to address increasing insurance costs in Ireland. This report will focus on personal injury data and information, the effects of litigation processes on insurance costs, current claims compensation arrangements and the impact of unlawful activity on insurance sector.

A link to the Report on the Cost of Motor Insurance is here.

The DOF's press release can be accessed here.

CENTRAL BANK PUBLISHES RESULTS OF THEMATIC INSPECTION ON CONSUMERS' EXPERIENCE OF THE MOTOR INSURANCE CLAIMS PROCESS

On 28 February, the Central Bank published the results of its thematic inspection into consumer experience and satisfaction with the motor insurance claims process. The Central Bank has identified the following areas where it believes improvements could be made:

  • Follow-up efficiency in deciding on claims and in making payments - claims were not always paid within ten business days.
  • Providing claimants with key information such as the effect of a claim on a consumer's no claims bonus, the value of claims, settlement payments to third parties and relevant contact details.
  • Reducing the number of claims handlers dealing with a single claim.
  • Giving claimants the opportunity to use the insurer's complaints procedure.
  • Informing claimants of their right to appoint their own loss assessor and providing claimants with a scope of works.

The Central Bank also published a letter to CEOs identifying the areas where insurers should improve their claims handling process. The letter notes that firms are required to consider the findings of the inspection and the issues identified in the letter and take remedial action where necessary. The Central Bank also expects firms to discuss the letter and minute this discussion at their next board meeting.

A link to the letter is available here.

A link to the Central Bank's research is here.

The Central Bank's press release can be accessed here.

IN EUROPEAN AND INTERNATIONAL NEWS...

EIOPA ADVISES ON THE IMPLEMENTATION OF THE INSURANCE DISTRIBUTION DIRECTIVE

On 1 February 2017, EIOPA published its Technical Advice on possible delegated acts concerning the Insurance Distribution Directive. The Insurance Distribution Directive must be implemented by Member States by 23 February 2018 and sets out new rules on distribution of insurance products.

The technical advice sets out policy proposals in four areas. Firstly, in relation to product oversight and governance, the technical advice sets out the criteria for insurance intermediaries acting as manufacturers and the level of detail expected from manufacturers in defining the target market. Secondly, potential situations in which conflicts of interest may arise are defined in relation to the distribution of insurance-based investment products (IBIPs). Thirdly, EIOPA sets out criteria for assessing if inducements/commissions are designed in such a way as to have a detrimental impact on the quality of services to customers. Finally, other than in respect of non-complex IBIPs, insurance intermediaries should gather the appropriate information from their customers to conduct appropriateness or suitability assessments of IBIPs.

A link to the technical advice is here.

EIOPA PROPOSES A STANDARDISED INSURANCE PRODUCT INFORMATION DOCUMENT FOR ALL NON-LIFE INSURANCE PRODUCTS ACROSS THE EUROPEAN UNION

On 7 February, EIOPA as part of its work on the detailed rules for the Insurance Distribution Directive, published its draft implementing technical standards on the Insurance Product Information Document (IPID).

Under the proposed design of the IPID, the key features of non–life insurance products are presented in a simple and easy to understand question & answers format. EIOPA proposes that the summary should have a maximum length of 2 A4 pages or up to 3 pages where the need for this can be established. The design also takes into account how information will be presented via digital media, for example, it allows for the adjustment of the layout of information on the small screen of a mobile device. A draft standard template is attached in the Annex to the draft implementing technical standards.

A link to EIOPA's press release is here.

A link to the draft implementing technical standards submitted to the European Commission is here.

A link to the final report with consolidated feedback is here.

INSURANCE BLOCK EXEMPTION REGULATIONS EXPIRES ON 31 MARCH 2017

On 31 March 2017, the Insurance Block Exemption Regulations (IBER) will expire. IBER currently exempts two types of (re)insurance agreements from the general EU competition law prohibition on anti-competitive agreements. The exemptions relate to the exchange and/ or aggregation of data in statistics and studies and to the joint insurance and/or reinsurance of risks in pools.

The expiry of IBER does not mean that these agreements are automatically anti-competitive. However, (re)insurers will need to conduct a self-assessment of these arrangements to see whether they are in line with antitrust rules. The Commission has also stated that it will continue to monitor developments in the market to evaluate how (re)insurers adapt to this change.

A link to the European Commission's press release is here.

EIOPA CHAIRMAN GABRIEL BERNARDINO ADDRESSES THE EUROPEAN CONSUMER PROTECTION CONFERENCE

On 16 February, EIOPA Chairman, Gabriel Bernardino addressed the European Consumer Protection on EIOPA's strategy to strengthen conduct of business supervision and on the challenges that digitalisation presents for consumer protection.

In relation to the implementation of the Insurance Distribution Directive (IDD), EIOPA has drawn-up specific criteria to assess whether inducements to intermediaries have a detrimental impact on the quality of services to customers. This criteria includes practices such as quantitative thresholds and upfront commissions. However, the EIOPA Chairman stressed that this criteria is not intended to be a prohibition on the receipt or payment of commission and EIOPA does not advocate for fee-based distribution model over a commission-based one.

As part of its work on the IDD, EIOPA has also developed a standardised template Insurance Product Information Document (IPID). The object of the IPID is to empower consumers, who might not otherwise read lengthy pre-contractual information, to compare different non-life insurance products and to make informed decisions. Mr. Bernardino stated that the implementation of the IDD would necessitate more effective supervision of insurance intermediation and to achieve this FMA's supervisory powers over intermediation activities should be reinforced.

Finally, Mr. Bernardino addressed the potential need to regulate and supervise how customer information analysis, "Big Data", affects the interactions of product providers with consumers. EIOPA are to hold a round table discussion on the topic of "Insurtech" in April 2017.

Mr. Bernardino's speech can be accessed here.

ESAS WARNING ON MONEY LAUNDERING AND TERRORIST FINANCING RISKS AFFECTING THE EU'S FINANCIAL SECTOR

On 21 February, The European Supervisory Authorities (ESAs) (the European Banking Authority, the European Securities and Markets Authorities and the European Insurance and Occupational Pensions Authority) published a joint opinion addressed to the European Commission on the risks of Money Laundering and Terrorist Financing (ML/TF) affecting the European Union's financial sector.

The joint opinion found that there are problems in relations to firms' understanding and management of the ML/TF risks that they are exposed to. The opinion noted considerable differences in the way national competent authorities discharge their functions, as well as a lack of timely access to intelligence, which creates difficulties for firms identifying and preventing ML/TF.

The Opinion states that addressing these issues is of particular importance as Member States move towards more risk based Anti-Money Laundering and Counter Terrorism Financing regimes, which require a level of ML/TF awareness and management expertise that not all firms and sectors currently have.

A link to the joint opinion is here.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.

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