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 incorporates the FSA’s agenda for consultations, discussion documents, thematic work or events of interest to insurers for 2006 and beyond. On the next page we list the events, papers and developments on the horizon from other bodies in the UK, Europe and internationally.

Table1: Forthcoming FSA papers and events of interest to insurers

Title	Date	Detail
General insurance regulation – FSA review	April 2006 – Q1 2007	The regulator announced in September 2005 that it will review the effectiveness of the general insurance regulatory regime since it was first introduced at the beginning of 2005 in line with EU requirements for intermediary regulation. The FSA will test the benefits of the regime to consumers and the industry will get a chance to identify areas of both effectiveness and ineffectiveness. The FSA has hinted that it will look at deregulation options for household and motor insurance. Initial findings of the review are expected towards the end of 2006 with a final report due in the first quarter of 2007.
National Audit Office review of the FSA	July 2006 – H1 2007	The Treasury has commissioned the NAO to review the “economy, efficiency and effectiveness” with which the FSA carries out its statutory duties. It will be the first time that the NAO has got its hands on the regulator and the areas due to be covered include internal performance management, external joint working within the UK, influencing and representation internationally, financial crime and financial capability. The NAO said it hopes to publish its findings as early as possible into 2007 and the Treasury said it will lay the report before Parliament during the first half of 2007.
Travel insurance review	Q1 2007	The UK Treasury is reviewing travel insurance sold by travel agents – currently unregulated – following pressure from consumer groups and the insurance industry to address the imbalance. A formal consultation was launched in November 2006, open until February 2007, which listed the options as no change, strengthened self-regulation or full FSA regulation. The government is expected to announce its decision in Q1 2007.
Financial Services Practitioner Panel survey of FSA	November 2006	The FSPP’s biennial survey of regulated firms got due in November. The Panel collects the views of practitioners on a range of issues relating to the performance and effectiveness. Previous surveys have proved instrumental in influencing the FSA. Its 2004 survey saw the costs of regulation rise to be the number one concern amongst practitioners, leading to the joint Costs of Regulation study with the FSA (published summer 2006).
EU Reinsurance Directive	December 2006	The UK regulator has opted for a largely principles-based approach and has chosen not to introduce any additional options allowed by the European Commission. It launched a consultation with the market in June which closed on 20 August 2006. The FSA wants to have the rules in place by year-end 2006, one year before the EU transposition deadline.
Client money review	Before end 2006	Thematic reviews conducted in the wholesale insurance market in mid-2005 and in the retail market in late 2005 revealed a “worrying” level of breaches of client money rules. As a result, the FSA will begin a large-scale review in both wholesale and retail insurance before the end of this year. The FSA will visit over 200 firms looking for “significant improvement” in compliance with client money rules.
Contract certainty – challenge deadline	By end 2006	The FSA issued the market with a warning in December 2004 that it would be given two years to develop a market solution to improve contract certainty between insurers and brokers and the insured. The market is meeting regularly with the FSA but the regulator has a plan for greater enforcement if the market fails to rise to the challenge. The market is expected to have raised standards significantly by the end of 2006.
Better Regulation Action Plan	2006 ongoing	A number of measures will get underway in 2006, according to the plan published in December 2005. Part of the agenda includes consultation on simpler conduct of business rules for businesses dealing with retail customers, simplification of listing rules, a review of the “approved persons” regulatory burden on wholesale financial markets and the first results from research to measure and track with selected regulatory processes. An update report is due in the fourth quarter of 2006.
Individual Capital Adequacy Standards (ICAS)	2006	The FSA will conduct thematic work during 2006 to examine how far the ICAS regime has brought about improvements in firms’ risk management processes. The year since its introduction in November 2005. The regulator said developing individual capital guidance to firms had taken longer than expected but that it hopes to complete the reviews over the next two years (with general insurance reviews due to complete before end 2006). From the reviews already completed, the FSA said ICG should be given for most of the firms reviewed at higher levels than the assessments. It also urged firms to exercise more caution in the treatment of reinsurance credit risk and intra-group reinsurance.
Contract certainty – market meeting	January 2007	The FSA will meet with the market for the eighth time when it is expected to reveal whether the market has done enough to meet the regulator’s challenge, raise standards or face regulatory intervention if progress was lacking by December 2006. The FSA said it was not inclined to pursue regulation but warned that its plans could be resurrected at any time.
Financial Ombudsman Service – funding Review	Early 2007 consultation paper due (delayed from Autumn 2006) – April 2008 for changes to take effect (delayed from end 2006)	A consultation paper due for release in the Autumn, following the joint discussion paper between the FOS and the FSA published in May, has been delayed until early 2007. The FOS and FSA told firms they would restructure the fee structure to make it fairer, Given the delay, any changes are not expected to take effect before April 2008 (the original intention was to have changes in place by the end of 2006). On announcing the delay, the FSA and FOS said respondents to the discussion paper favoured the more radical “new model” options that would target case fees from the firms that use the service the most. Under current rules, firms are allowed two free cases with the FOS before paying a charge per case but under the new model proposals this could be raised to five or 10 free cases. The FSA said it is looking at four options more closely “before the FSA can be satisfied that it should be adopted”.

Table2: Timetable of major regulatory and accounting developments

Organization	Development	Date	Detail
European Commission	Framework directive for Solvency II	October 2006-July 2007	A draft for the new solvency regime for insurers has become a moving target, setting back the potential for implementation to 2010. The first draft of the directive is expected in October 2006, followed by a second draft in December 2006 and a final draft for public consultation in February 2007. Adoption of the proposal for a directive is foreseen for July 2007.
European Commission	Insurance Guarantee Schemes	Autumn 2006	The Commission delayed a decision (due in the first half of 2006) on whether to propose legislation for mandatory insurance safety net schemes throughout the EU until it receives the results of a feasibility study. Terms of reference will be set and an external consultant appointed in Autumn 2006. The study could take until the second half of 2007 to be completed.
Office of Fair Trading (OFT) – Payment Protection Insurance (PPI)	Consultation paper to refer the industry to the Competition Commission	Consultation closes 30 November 2006. A decision will be made early 2007	The OFT said in October 2006 that it intends to refer the UK PPI market to the Competition Commission following a review of the market that found consumers were “failed” by PPI and policies offered a poor deal financially and provided less protection than consumers believed. The OFT launched a market study in April 2006 to look at how well competition in the PPI market delivers choice and value to consumers. It found that consumers do not shop around for the best deal on PPI; the complex nature of PPI makes comparison between different policies difficult, and consumers in some cases assumed, were told or given the impression that taking out the PPI would help the application for credit.
Better Regulation Executive of the UK government’s Cabinet Office	Davidson Review of Implementation of EU Legislation	By end 2006	Lord Neil Davidson QC is heading up a review of the of EU legislation to identify any gold-plated rules that “result in unnecessary regulatory burdens”. A call for evidence closed in May 2006 which flagged up both the Insurance Mediation Directive and the prudential requirements of the Life and Non-life Insurance Directives as Over-implemented. The Review will report with conclusions and recommendations by the end of 2006 setting out specific proposals for reducing any unnecessary burdens in EU-derived legislation, as well as wider lessons for best practice implementation of European legislation in the future.
Competition Commission at the EC	Sector investigation into business insurance and retail banking	By end 2006	The competition commission is on the hunt for anti-competitive practices and will begin with retail banking, followed by business insurance. It announced in June 2005 that the sector would be under review. It will Look at both providers and brokers of insurance and reinsurance and also those market associations or committees that are involved in setting policy wordings or terms. Market associations received questionnaires in the summer of 2005 and the EC sent out questionnaires to individual firms at the beginning of March 2006. Results of the investigation are expected before the end of the year.
National Association of Insurance Commissioners (NAIC)	Reinsurance collateral	9-12 December 2006 – NIAC Winter Meeting	The NAIC’s October to use the financial strength ratings of all reinsurers – both domestic and foreign – to set collateral requirements. At present, foreign reinsurers post 100% of their gross liabilities written in the US as collateral. The task force is expected to vote on the proposal during the NAIC’s Winter Meeting
European Commission	IFRS equivalence	End 2006/2007	The EC is due to decide on whether to grant equivalence status to US, Canadian and Japanese GAAP with IFRS for non-European companies with a European listing after the current deadline expires in 2007.
IASB	Phase II of IFRS accounting for insurance	February/March 2007	Work on Phase II started in 2004 although progress has been significantly delayed. The initial output will be in the form of a discussion paper, which failed to meet the end of 2005 deadline, the early 2006 target and now the end of 2006 deadline. The IASB says the paper should be ready for Q1 2007. An exposure draft is expected to take an additional 18 months and a standard an extra year on top.
Securities & Exchange Commission (SEC)	Sarbanes-Oxley (section 404)	15 July 2007	The SEC bowed to international negotiations and granted a one-year extension to foreign firms with a US listing to comply with new governance and internal control rules to 15 July 2006. An additional year – to 15 July 2007 – was granted in October 2005 for smaller companies (including foreign private filers) that are not accelerated filers.
European Commission	EU Reinsurance Directive	December 2007	The Reinsurance Directive was published in the Official Journal on 19 December 2005, giving member states until 10 December 2007 to transpose it into national law. The Commission Services said it will hold a meeting with member states by the end of 2006 in order to ensure consistent transposition of the directive.

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