Insurance Regulation & Accounting

Sarah Jolly

Document

Coming your way…

IR&A’s timetable is regularly updated to cover as many new developments as possible while also keeping an eye on events as they unfold. The first table is dedicated to the FSA’s agenda for consultations, discussion documents, thematic work or events of interest to insurers for the year ahead. A second table lists developments elsewhere in the UK, Europe and internationally.

Table1: Forthcoming FSA papers and events of interest to insurers

Development	International Financial Reporting Standards
Date	Q2 2008
Detail	The FSA has delayed its review of the practical application of IFRS and the implications to its prudential regimes. Originally due to be published at the end of 2007, the FSA will now release a consultation in the second quarter of this year, which it said would give it more time to consider “current accounting issues”.
Development	Solvency II discussion paper
Date	H2 2008
Detail	Sally Dewar, managing director of wholesale markets at the FSA, has said the FSA plans to publish a discussion paper on Solvency II later this year that will present “initial thinking on what implications the Directive might have for systems of governance, reporting, internal models, standard formula and other elements of ‘Pillar 1’, based on the Directive proposal”. In addition, the paper will include suggestions for firms’ priorities over the next 12 to 18 months to help prepare for implementation of the new regime. “Although ICAS and Solvency 2 have some similarities, they are not the same. There are differences that you will need to understand and prepare for”, Ms Dewar said.
Development	Travel insurance – FSA opens application process
Date	30 June 2008
Detail	The FSA published its final rules for travel agents selling insurance in May 2008 having made several amendments (extending the transitional period for introducer appointed representatives for a further six months and applying the same PI requirements as met by general insurers). From 30 June 2008, firms that want to continue selling travel insurance along with holidays can apply for FSA authorisation. Early applications, received before 30 September 2008 will benefit from a 30% reduction in application fees. In any case, applications must be received before 15 November to qualify for interim authorisation when the new regime begins on 1 January 2009.
Development	Extension of FSCS scope to EEA branches - consultation
Date	July 2008
Detail	Partly in response to the concerns of the European Commission about the UK’s different treatment of UK and EEA policyholders in the event of an insurance company failure, the FSA has consulted on changes to the scope of the Financial Services Compensation Scheme. Under the proposals, policies issued by EEA branches of UK insurers for an EEA risk will be entitled to the same compensation rights as UK policyholders and policies issued by EEA branches relating to UK risks. The consultation paper says the proposals take into account “the need to minimise the adverse effects on competition that may arise from FSA rules and in particular the competitive position of UK insurers operating through EEA branches”. The consultation period, open for just one month, closed on 9 June 2008 and the FSA is now expected to ask the Board to approve the rule change in July. Should this go ahead, the rule change would apply to insurers declared in default on or after the rule change has been made in respect of policies issued on or after 1 December 2001, the date when the FSCS was established.
Development	General insurance regulation – new ICOB rules
Date	5 July 2008
Detail	The regulator published a policy statement in December 2007 confirming changes to the Insurance Conduct of Business sourcebook that take effect from 6 January 2008. The FSA says the new regime “is a significant step forward in our programme of principles-based regulation” with the removal of many of the more detailed rules for low risk general insurance products that are not required under the EU Insurance Mediation Directive but the addition of new rules for higher risk protection products: term assurance, critical illness, income protection and PPI. Providers and intermediaries of protection insurance products have six months – until 5 July 2008 – to comply with the new rules. The FSA first announced that it would review the effectiveness of general insurance regulation in September 2005. A consultation paper was published in June 2007 proposing a differentiated regime for low and high risk general insurance products.
Development	Disclosure – discussion paper deadline for responses
Date	29 August 2008
Detail	In October 2007, David Kenmir, managing director of regulatory services at the FSA, revealed that the FSA is interested in “the extent to which we could better achieve our statutory objectives by disclosing more about what we know or think about individual firms”. On publishing its paper in May 2008, the FSA looked at how increasing disclosures could improve regulatory outcomes across authorisation, supervision and enforcement. In particular, it is seeking views on the principle of using transparency as a regulatory tool and how to take forward some of its proposals which include publishing complaints data and in effect naming the companies with the highest number of complaints from consumers. The FSA said it was aware that many of these issues are controversial and said “we will be seeking to reach areas of agreement in the middle ground” while offering assurances that it will not propose anything that requires changes to the rulebook. Comments should reach the FSA by 29 August 2008.
Development	Commercial insurance commission disclosure thematic work
Date	Third quarter 2008
Detail	The FSA confirmed in December 2007 that it will not introduce mandatory rules to require brokers to disclose commission received to its clients for now, but said further work in 2008 could lead to stricter rules. In the first half of this year the FSA is undertaking thematic work to consider the extent and nature of conflicts of interest arising from remuneration and contractual agreements between insurers and brokers. The FSA expects to publish its findings during the third quarter of 2008. In a discussion paper published in March 2008 (deadline for responses, 25 June 2008), the regulator said mandatory disclosure is still an option, alongside an enhanced on request regime and more rigorous supervision and enforcement of existing rules. Independent analysis by CRA International in December last year found that the costs of mandating for commission disclosure exceeded the benefits. The regulator said it will consult on any changes to the handbook in Q4 2008 with a view to publishing final rules in Q1 2009.
Development	Payment Protection Insurance
Date	Third quarter 2008
Detail	As part of its treating customers fairly initiative, the FSA is targeting poor sales practice in PPI. An update on its work in this area – known as Phase III after several earlier work streams – is due in the third quarter of this year. The FSA is conducting site visits, mystery shopping and analysis of peer group data to identify the worst performing firms and address the major issues.
Development	Treating Customers Fairly
Date	December 2008
Detail	The FSA has set two deadlines for retail insurance firms to comply with its Treating Customers Fairly requirements under Principle 6. By March 2008, retail firms selling policies to customers must have the appropriate management information in place to test whether they are treating customers fairly (an update report on market progress is due in the second quarter of 2008) and by December 2008 firms must be able to demonstrate that they are consistently treating customers fairly.
Development	Travel insurance regulation
Date	1 January 2009
Detail	HM Treasury has requested that the FSA authorise and regulate travel agents selling insurance as part of its general insurance regime from the beginning of 2009.

Table2: Timetable of major UK, European and global regulatory and accounting developments

Development	European Commission - Insurance Guarantee Schemes
Date	7 July 2008
Detail	The EC has launched a public consultation on the findings of an independent report on the feasibility of mandating for insurance guarantee schemes across Europe with a response date of 7 July 2008. A public hearing took place on 2 June 2008. The Oxera study, published in January 2008, said it is “unlikely” that an EU-wide insurance guarantee scheme will be proposed but said it had identified areas where some of the differences between existing guarantee schemes could be minimized to improve consumer protection. The EC put a decision on whether to raise new legislation (due in the first half of 2006) on hold until the study was completed. In its latest consultation, the EC has not proposed a preferred approach but has listed the options as no change (leaving the decision over safety net schemes to member states), mandatory requirements for guarantee schemes or case-by-case intervention in the event of an insurance company failure.
Development	European Commission – Insurance Block Exemption Regulation consultation
Date	17 July 2008
Detail	The Insurance Block Exemption Regulation – which allows insurers to co-operate in the issue of standard policy wordings and create insurance pools without breaching competition laws – is due to expire on 31 March 2010. The Commission launched a public consultation in April that will lead to a decision on whether the exemption should be renewed or abolished. The Commission said it wants to find out how the exemption is used. Responses to the consultation close on 17 July 2008, after which the Commission will draft a report. The Commission said if it decides not to renew the exemption the industry will be informed in 2009. On publishing the findings of a sector inquiry into business insurance last year, the Commission suggested that a specific industry block exemption is no longer necessary, adding that the industry had not presented “compelling reasons” why the exemption should continue after 2010.
Development	Competition Commission - Inquiry into Payment Protection Insurance
Date	August/September 2008
Detail	The Competition Commission opened a case on PPI at the beginning of 2007, looking at whether any features of the PPI market have an adverse effect on competition, following a referral by the OFT. A provisional report of its findings in June 2008 questioned whether PPI customers were receiving value for money. The report said that there is little competition for the sale of PPI when it is sold with the credit it insures and policies are “highly profitable”. In its final report, due in August or September 2008, the Competition Commission said it will look at whether there are countervailing benefits to consumers that outweigh the adverse effects on competition identified in the provisional report. “If we do not find benefits which fully compensate consumers, we would be very concerned that consumers are receiving poor value from the sector and would need to impose remedies”, the Commission warned.
Development	English and Scottish Law Commissions reform of Insurance Contract Law
Date	Autumn 2008
Detail	After several consultations and issues papers to reform insurance contract law, the Commissions have said that a further issues paper – this time on post-contractual good faith and whether insurers should be liable in damages for the late payment of claims – will be published in the Autumn. In June 2008, the Commissions published a response to its consultation paper “Insurance Contract Law: misrepresentation, non-disclosure and breach of warranty by the insured” – limiting the responses to consumer issues which it said were in “urgent need of reform”. It said a response paper on the business issues will follow shortly. In the meantime it is planning for a draft bill scheduled for Summer 2009 that will change pre-contractual information for consumer insurance – namely removing the legal duty on consumers to disclose information and requiring insurers to ask relevant questions on application of an insurance policy.
Development	European Commission – Framework directive for Solvency II
Date	2008
Detail	The EC published its framework directive for Solvency II in July 2007, kick-starting the political process that will now ensue. The Council of Ministers and the European Parliament will look at the framework, and the timetable for now estimates about 12-18 months (from mid-2007) before the project hands back to Ceiops to develop implementing measures which the Commission hopes will be in place by 2010 to give firms until 2012 before the measures become effective. There are several difficult issues to iron out, namely group supervision proposals, but the Commission has said it is confident that these issues can be worked out by the end of 2008.
Development	Ceiops QIS 4
Date	July 2008
Detail	Ceiops has officially launched the fourth quantitative impact study which will provide a particular focus on insurance groups and will also look again at the problematic issue of calculating the Minimum Capital Requirement. Companies are encouraged to participate through their national supervisor and Ceiops wants to receive contributions through the national supervisors by 7 July 2008 and by 31 July 2008 for (re)insurance groups.
Development	HM Treasury High Level City Group on Competitiveness
Date	During 2008
Detail	The London Insurance Market Review Group, set up as part of the Treasury’s High Level City Group and headed by Lloyd’s chairman Lord Levene, updated the Treasury on its work on the modernisation of the wholesale insurance sector at a special Insurance Summit in November 2007. The High Level Group met for the third time and economic secretary Kitty Ussher said she will hold another meeting with MPs in 2008 to discuss the UK’s principles-based regulatory approach.

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