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.

Table1: Forthcoming FSA papers and events of interest to insurers

Title	Date	Detail
National Audit Office review of the FSA	First half 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 is the first time that the NAO has been granted access to the regulator. The NAO published its report in April and the Treasury is expected to lay the report before Parliament during the first half of 2007.
General insurance regulation – FSA review	28 September 2007 Consultation paper deadline	The regulator announced in September 2005 that it was to 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. A final report was published in March that made some early suggestions for rebalancing the insurance regime, to include deregulation for some insurance lines such as household and motor and new rules for protection products to reflect the different levels of consumer detriment and understanding. The FSA published a consultation paper in June 2007 setting out the proposed changes to insurance conduct of business rules. Final revised rules will be made in December 2007 to come into effect in January 2008.
Payment Protection Insurance (PPI) thematic work	September 2007	The FSA is due to report on its latest investigations into PPI sales standards in September 2007 following re-visits to firms failing standards in the sale of PPI. The two-year long programme is one of the largest pieces of thematic work the FSA has ever undertaken. 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.The FSA is also consulting on introducing more rules regarding the sale of PPI as part of its general insurance review.
Financial Services Compensation Scheme – wholesale pool proposals	Autumn 2007	Following its funding review of the FSCS in March 2007 the FSA said it would launch a separate review for a wholesale pool to be made available in the event of a serious market failure exhausting the funds of the enlarged retail pool. The FSA said it does not envisage the wholesale pool, should it go ahead, to be implemented before 1 April 2009. It said levies on the wholesale market are likely to be “irregular” and although it will announce a limit on wholesale businesses during the forthcoming consultation it has aired a figure of between £1bn and £2bn per year.
Industry guidance	Q3 2007	The FSA published a discussion paper on industry guidance – how firms can use FSA confirmed guidance in its compliance with principles and rules – in November 2006. Adherence to the guidance is not mandatory but will supplement the FSA rules and principles where needed. The FSA is due to respond to the comments it received on the discussion paper in a statement during the third quarter of 2007.
Travel insurance – extension of scope consultation	Towards end 2007	The Treasury has confirmed that it wants the FSA to regulate sales of travel insurance by travel agents by 2009. The FSA said it will review the proposals following the Treasury’s next stage of consultation (which ends in September 2007) and if the decision is confirmed it will issue its own industry consultation towards the end of the year regarding its regulatory approach. The Treasury says it expects travel firms to be able to apply for FSA authorisation from 30 June 2008. (Also see Table 2 for more information).
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.
International Financial Reporting Standards	Q4 2007	The FSA is to follow up on the changes to its prudential regimes in 2004/05, designed to accommodate IFRS and closely-related UK accounting standards. It will review the practical application of IFRS and consult on any proposed changes towards the end of the year.
Financial Ombudsman Service – funding	January 2008	Changes to the way the FOS is funded to make it fairer for firms have been shelved with the FSA and FOS deciding to defer any serious changes until the FOS’s case load stabilizes. The review,
review	A consultation paper due in early 2007 - already delayed from Autumn 2006 – has been postponed and will now form part of the FOS’s annual budget	initiated in May last year, was expected to result in a consultation paper to discuss the more radical option, favoured by firms, to target case fees from the firms that use the service the most. The consultation had been subject to several delays, with the rules originally expected to be changed by the end of 2006, but will now be dealt with in a more modest form as part of the FOS annual budget. The FSA said the FOS is about to experience “significant volatility” in case numbers and that it “ is not possible to model with any degree of certainty how significant changes at this stage would affect both the financial stability of the FOS and any alternative distribution of costs among firms”.
Financial Services Compensation Scheme – retail proposals	1 April 2008	New funding arrangements following a two-year review were published in March 2007 and proposed to enlarge the size of the fund to a potential £4.4bn. The FSA wants to disband the current system which sees defaults contained with their own sector in order to increase the available pool in the event of a serious collapse or a series of defaults. Any new funding arrangements will take effect from 1 April 2008.

Table2: Timetable of major regulatory and accounting developments

Organization	Development	Date	Detail
European Commission	Framework directive for Solvency II	2007 - 2012	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 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.
European Commission and Ceiops	Review of the Insurance Mediation Directive	Ceiops report due mid- 2007. Changes scheduled for 2008/9	In its green paper on retail financial services (published at the end of April 2007) the European Commission said it is to review the Insurance Mediation Directive “to make sure it is achieving its objectives of protecting consumers while promoting the single insurance market”. As a first step, Ceiops has been asked to look at the way the directive has been implemented. By mid-2007 Ceiops expects to publish a report on the implementation of the IMD’s key provisions, including references to the national implementation laws, specific information on the registration and notification procedures, clarifications on the different national categories of intermediaries and the professional requirements adopted, as well as consumer protection issues. Ceiops said it intends to develop best practices and/or recommendations to the EU Commission in view of any possible review of the IMD and/or the Luxembourg Protocol. The EC said the IMD could be revised as a result of the review and that these changes could take place in 2008/9.
European Commission	Insurance Guarantee Schemes	Second half – end 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 with the results likely by the end of 2007.
HM Treasury	Insurance Summit No 11 Downing Street	Autumn 2007	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, is due to report on the modernisation of the wholesale insurance market to an insurance summit held by the economic secretary. The review will include proposals on improving processes, broadening industry skills and hosting a Global Risk Summit to stimulate market innovation. Also at the meeting, the Treasury is expected to report back on its analysis of the sector and the potential for further reforms.
HM Treasury Competition Commission at the EC	Travel insurance review Sector investiga- tion into business insurance and retail banking	18 September 2007 September 2007	The UK Treasury has asked the FSA to authorise and regulate travel agents selling insurance from the beginning of 2009, reversing its decision of 2003 to exclude travel agents from the FSA’s new general insurance regime. The Treasury has opened a brief consultation – open until September – to confirm its decision after which it will be left to the FSA to conduct its own consultation.
			The consultation period for the Commission’s 155-page interim report raising several competition issues in the industry closed on 10 April 2007. The Commission announced that it will conduct additional investigations in targeted areas to clear up some issues and also to help sharpen the focus of the inquiry before it published its final report in September 2007. The review was first announced in June 2006.
National Association of Insurance Commissioners (NAIC)	Reinsurance collateral	September 2007	A vote in favour of a new collateral charging system has been passed to a 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.
IASB	Phase II of IFRS accounting for insurance	16 November 2007	Work on Phase II started in 2004 and after several delays a discussion paper was published in May 2007. Comments are invited before 16 November, and given the discussion on measurements for liabilities it will be a lively period of debate. An exposure draft is expected to take an additional 18 months and a standard an extra year on top.

Financial Reporting Council	Combined Code on Corporate Governance	Before end 2007	The FRC is assessing progress in implementing the Combined Code on Corporate Governance. It opened comment in April to find whether companies believe the code has helped to improve board performance, its impact on smaller listed companies, and the effectiveness of the “comply or explain” mechanism. Views from listed firms, directors and investors are invited by 20 July 2007. The FRC will publish its findings before the end of 2007.
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.
Better Regulation Executive of the UK government’s Cabinet Office	Davidson Review of Implementa- tion 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.
Competition Commission	Inquiry into Payment Protection Insurance (PPI)	Notify prov- isional find- ings: Feb/ March 2008	The OFT referred the UK’s PPI market to the Competition Commission and at the beginning of 2007. The Competition Commission opened a case on PPI at the beginning of this year 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”.
European Commission	Review of Fina- ncial Conglom- erates Directive	2008	A review of the Financial Conglomerates Directive will take place in 2008. Solvency II does not change the regime applicable to financial conglomerates but any issues identified as part of Solvency II will be addressed in the course of the review.
European Commission	IFRS equivalence	2008	Last year, the EC decided to continue to allow US listings using US GAAP until 2009, in line with the SEC roadmap for allowing IFRS based registrations. The US and EU are still working on mutual recognition and removing the reconciliation requirements for IFRS and US GAAP until the standard setters develop the longer term convergence process. In 2008, Charlie McCreevy said the SEC and the EC will have to take “crucial decisions” for plans beyond 2009.
Securities & Exc- hange Comm- sission (SEC)	Accounting standards	By 2009	The US SEC has proposed to allow non-US companies to file financial results using IFRS without reconciliation to US GAAP. The proposal has been put to public comment before the changes can take effect, scheduled for 2009 at the latest.

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