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 the year ahead 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.

Table 1: Forthcoming FSA papers and events of interest to insurers

Title	Date	Detail
General insurance regulation – FSA review	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. A final report is due in the first quarter 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.
Client money review	Q1 2007	Thematic reviews carried out in the wholesale insurance market and the retail intermediary market in 2005 revealed a “worrying” level of breaches of client money rules. The FSA undertook a follow-up review towards the end of last year involving visits to firms to check that firms had made “significant improvements” and the results are due before the end of Q1 2007. The regulator said it was prepared to “close firms that show a persistent deficit in their client money accounts”.
FSA’s Insurance Sector Annual Conference	21 March 2007, QE II Conference Centre, London	The regulator gathers practitioners to air the main issues of the day. On this year’s line- up expect to hear from economic secretary to the Treasury Ed Balls, John Tiner in his last appearance at the annual conference as chief executive, Otto Thoresen, chief executive of Aegon UK, Stephen Catlin, chairman of Catlin and Joe Plumeri, group chairman and chief executive of Willis.
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 system 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”.
Principles-based regulation	April 2007	The regulator is due to present the market with further details on its principles-based supervision concept in April, following a series of meetings held with chief executives at the beginning of the year.
National Audit Office review of the FSA	H1 2007	The Treasury commissioned the NAO (July 2006) 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 been granted access to 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.
Payment Protection Insurance (PPI) thematic work	June 2007	The FSA is to revisit firms failing standards in the sale of PPI in its two-year long effort to improve practices. The FSA said the programme is one of the largest pieces of thematic work it has ever undertaken. The FSA is also considering changing its rules regarding PPI saying it is “not convinced that its current rules relating to PPI are delivering the protections that customers deserve and intends to see if there is a case for changes to some of the existing rules or the introduction of new rules”. The current exercise will concentrate on whether firms are informing customers that PPI is optional, that customers receive clear details about the product, its costs and exclusions, that the advice given meets the policyholder’s needs and that a refund is offered if the policy is cancelled.
Commission disclosure	Throughout 2007, with results of work due to be published in Q4 2007	The FSA has been disappointed by the industry’s failure to come up with its own solution to the lack of transparency surrounding commissions earned by wholesale Intermediaries. The regulator said it will analyse the extent to which lack of transparency leads to customer detriment or impairs market efficiency and whether regulatory intervention, via mandatory commission disclosure, would lead to benefits that outweigh the costs.

Table2: Timetable of major regulatory and accounting developments

Organization	Development	Date	Detail
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.
European Commission	Framework directive for Solvency II	February 2007 – 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 was planned for 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.
Office of Fair Trading (OFT) – Payment Protection Insurance (PPI)	Consultation paper to refer the industry to the Competition Commission	Early 2007	The OFT said in October 2006 that it intended to refer the UK PPI market to the Competition Commission and at the beginning of 2007 it made good on its word. The Competition Commission has opened a case on PPI to decide whether “any feature, or combination of features, of each relevant market prevents, restricts or distorts competition in connection with the supply or acquisition of any goods or services in the United Kingdom or a part of the United Kingdom”. Written evidence will be collected until 2 March. The OFT’s market study in April 2006 revealed consumers were “failed” by PPI with policies offering a poor deal financially and providing less protection than consumers believed.
HM Treasury	Competitiveness of UK financial services	20 February 2007, City breakfast meeting	Economic secretary Ed Balls will hold a discussion of EU regulation and competition policy. He will be joined by European Commissioners Neelie Kroes and Charlie McCreevy in a City breakfast meeting as part of the government’s dialogue on ensuring the competitiveness of the UK based financial sector.
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.
Competition Commission at the EC	Sector investigation into business insurance and retail banking	April 2007 & September 2007	The consultation period for the Commission’s 155-page interim report raising several competition issues in the industry is open until 10 April 2007, during which time respondents will be able to comment on the findings to date. The Commission has also announced that it will be conducting additional investigations in targeted areas to clear up some issues and also to help sharpen the focus of the inquiry. The review was first announced in June 2006.
HM Treasury	Chancellor’s High Level Group meeting	10 May 2007, Downing Street	The Chancellor Gordon Brown will host the second meeting of the High Level Group, first formed for a meeting in October 2006 to discuss the UK’s competitiveness. Lord Levene from Lloyd’s, Grahame Millwater from Willis Re and Andrew Kendrick from Ace European Group are working on the modernisation of the wholesale insurance and reinsurance market in London via the Wholesale Market Review Group.
Ceiops	Solvency II Quantitative Impact Studies	H1 2007	Ceiops is to conduct a third QIS to build on the findings of the first two exercises. Ceiops said QIS 3 will include more detailed calibrations that will give firms a better idea of their capital requirements under the proposals for Solvency II.
European Commission	Insurance Guarantee Schemes	Second half 2007	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 have been set and an external consultant appointed in Autumn 2006. The study could take until the second half of 2007 to be completed.
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.
National Association of Insurance Commissioners (NAIC)	Reinsurance collateral	September 2007	A vote 15-5 in favour of a new collateral charging system will now be passed to the E Committee of the NAIC to refine the proposals by September 2007. Under the proposals drafted by the Reinsurance Task Force of the NAIC, all reinsurers (whether domestic or foreign) will be assigned a rating based on their financial strength and will have to lodge between 20% and 100% of their liabilities in collateral accordingly. The proposal introduces a collateral system for US reinsurers for the first time and offers foreign reinsurers the opportunity to file less than the 100% collateral currently levied on all non-US reinsurers. The latest development follows a draft proposal issued by the Reinsurance Task Force at the end of October which was voted on during the NAIC’s Winter Meeting in December 2006.
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.
Better Regulation Executive of the UK government’s Cabinet Office	Davidson Review of Implementation of EU Legislation	By end 2007 and by July 2008	Lord Neil Davidson QC’s review of the UK’s implementation of EU legislation has identified the Insurance Mediation Directive as over-implemented in the UK. It has recommended that the Treasury should consult on reducing the scope of activities caught by the FSA’s regulatory regime by the end of 2007. In addition, it recommends that the FSA should simplify rules on product disclosure, remove the requirement for insurers to check the authorisation status of intermediaries, reduce and simplify client money rules and reduce prescriptive rules in areas such as training and staff competence - all by July 2008.

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