Regulatory issues in the general insurance sector – the 2016 agenda


Brexit & EU Reform

Insurers and brokers need to consider their contingency plans in case there is a vote to ‘leave’ the EU in the forthcoming UK Brexit referendum on 23 June 2016. You can learn more about the impact of Brexit and EU reform: our seminar on Brexit; our Brexit & EU reform page for FS-related issues; and our dedicated Brexit microsite covering a broader range of issues and sectors.

Insurance Distribution Directive / IMD

It looks likely that the IDD implementation deadline will be January 2018. IDD leaves Member States the option to impose additional requirements in many areas and so can be regarded as a minimum harmonising directive.

The scope of IDD is broader than that of IMD – (a) it has been extended to all sellers of insurance products (insurance distributors), including insurers/reinsurers that sell directly to clients; (b) some ‘introducers’ will no longer be caught; (c) IDD also captures certain activities conducted via price comparison/aggregator websites.

The IMD/IDD requirements relating to conflicts of interest and disclosure of commission and employee remuneration have been hotly debated. Some of these issues were the focus of domestic scrutiny in FCA’s Thematic Review.

Senior insurance managers regime

The Solvency II regime includes rules on fitness and propriety and governance for certain insurers/reinsurers in the EU. The UK’s senior insurance managers regime (SIMR) gives effect to Solvency II requirements and is based on similar rules that apply to senior bankers. The new rules took effect on 7 March 2016. The new rules will replace the PRA’s current approved persons regime for senior managers in UK insurers and reinsurers and will provide an enhanced individual accountability framework. For smaller insurers that fall outwith the scope of Solvency II there is a similar SIMR regime – you can read more here.

In October 2015, the government published a policy paper which stated its intention to extend the Senior Managers Regime and Certification Regime (SM&CR) for banks to all firms authorised under the Financial Services and Markets Act 2000 (FSMA). The SM&CR will be extended from around 2018 and will replace the SIMR rules for insurers.

More section 166 reviews for insurers

There are concerns that the PRA will launch an increasing number of reviews under section 166 FSMA 2000. Collecting and updating information in this way is a supervisory tool. We expect that the PRA may use skilled persons’ reports to monitor compliance with the new Solvency II regime. The PRA advises firms – in its updated SS7/14 (Reports by skilled persons) – to engage in dialogue with their supervisors before commissioning any external review on subject matters which may be of interest to the PRA. This may avoid firms incurring unnecessary costs.

Mobile Phone Insurance

The FCA revisited their 2013 Thematic Review on mobile phone insurance to ascertain whether a sample of 14 firms had implemented their recommendations. They highlighted some continuing shortcomings in claims processes and referred to further action if firms and new entrants do not respond appropriately.

EIPOA has also published its thematic review into mobile phone insurance. It made a number of recommendations which have to a large extent been reflected in the IDD legislation (see above).

FinTech and insurance

CMS and Die Zeit recently held an event in Davos on Fintech and the future of business (video here). One of the pannelists, Taavet Hinrikus, co-founder and CEO of TransferWise, predicts that in ten years’ time 40% of all financial services will be handled by FinTech companies.

FinTech will challenge traditional models: telematics, Big Data, and the Internet of Things are particularly relevant to the insurance sector. More broadly, new P2P models, the cloud and other IT outsourcing, robo advice and block chain are of growing interest to those in financial services.

The UK Government and regulators are keen to support innovation: the FCA’s Project Innovate has expanded to launch the forthcoming Regulatory Sandbox in Spring 2016, and there have been calls for input as to how the regulators can develop RegTech.

We expect to see firms in the insurance sector making efficient use of new technology and more providers in this area offering systems for firms to white-label.

Data protection

Increasing emphasis has been placed on data protection at European level: in December 2015 the EU agreed the text of the proposed General Data Protection Regulation (GDPR). This concerns the processing of personal data and the free movement of such data. The reforms are part of the EU’s wider Digital Single Market initiative.

The GDPR will enter into force in 2018 and has a number of key provisions that firms should note:

  • Extra-territorial effect. GDPR will apply to firms outwith the EU that wish to offer goods/services to clients in the EU. This also captures firms monitoring individuals’ behaviour (if this takes place within the EU), e.g. cookies.
  • Criminal penalties and hefty fines. Breach of the new rules could see firms face fines of EUR 20million or 4% of annual global turnover (whichever is greater). Member States have the ability to set their own penalties, including criminal penalties.
  • Requirement to notify breaches. Personal data breaches must be reported to the competent supervisory authority within 72 hours of becoming aware of the breach. The exception is where the data controller can demonstrate that the breach is unlikely to result in a risk for the rights and freedoms of the data subjects concerned.

In the Schrems case, the Court of Justice held the European Commission’s US Safe Harbour Decision to be invalid. US-EU talks have been held recently over establishing Safe Harbour 2.0 but talks failed to reach a conclusion before the deadline. Firms should have regard to the ultimate outcome and possible inconsistencies with the proposed GDPR rules.

Consumer Rights Act 2015/FCA unfair contract terms guidance

The main provisions of the Consumer Rights Act came into force on 1 October 2015. The Act introduced the following key reforms:

  • Consolidation of UK consumer law: the following key consumer legislation was repealed (in full or in part) or amended by the Act: Sale of Goods Act 1979, Supply of Goods and Services Act 1982, Unfair Contract Terms Act 1977 and Unfair Terms in Consumer Contracts Regulations 1999;
  • Unfair terms and notices: notices and announcements aimed at consumers, such as advertisements or website text, are subject to the Act’s fairness test;
  • Digital content: in a move to modernise UK consumer law, digital content is now covered by a distinct set of rights and remedies; and
  • Enforcement reform: the Act clarifies enforcement powers, reforms class actions and sets down enhanced consumer measures, enabling authorities to force businesses to compensate consumers.

You can read more about the CRA and its impact on the insurance market here and view our CRA training session slides here.

Client money/asset review for insurance

The FCA is yet to publish a policy statement in response to its Review of the client money rules for insurance intermediaries (CP12/20) (August 2012). The FCA’s policy development update 30 (February 2016) lists the Policy Statement to follow CP12/20 as a future publication; however, no expected publication date is given.

Recently, the High Court – Allanfield Property Insurance Services & Ors v. Aviva Insurance Ltd – considered the CASS statutory trust rules in relation to two insurance brokers facing insolvency. Administrators sought guidance as to how to distribute the funds in the absence of proper records. The court held that the accounts were client money.

Product governance in general insurance - Delegated authority and outsourcing

EIOPA is focussing on product governance (in the context of IDD): October 2014 to January 2015 was the consultation period for provisions relating to manufacturers of insurance products, while October 2015 to January 2016 was the consultation period for provisions relating to insurance undertakings and distributors. EIOPA is aiming to achieve cross-sectoral consistency with similar product oversight and governance rules as those existing/forthcoming regarding securities and banking

The FCA has recently carried out a number of thematic reviews concerning product governance and have stressed that they are interested in the whole product life cycle. This increased scrutiny is also reflected in the FCA’s Coverholder and Third Party Administrator (TPA) thematic review. This review unearthed failings in delegated authority arrangements. Firms should be aware that Solvency II (now in force and in effect) brings changes to the requirements for outsourcing and insurers should review any existing and planned outsource arrangements.

Solvency II: Time for insurers to reassess their outsourcing arrangements? (18 July 2014 – RegZone article.)

FCA Thematic Review identifies deficiencies in compliance of outsourcing arrangements in the general insurance market (17 June 2015 – RegZone article.)

Corporate and Solvency II: key themes and issues

Regulatory changes – notably capital requirements under Solvency II – have triggered consolidation in the insurance industry. Consolidation was not only confined to insurers – 2015 also saw increased broker consolidation. We expect an increase in M&A activity in 2016.

The capital requirements for G-SIIs were outlined by the FSB in November 2015. The FSB has developed guidance regarding recovery and resolution plans for those firms deemed to pose a threat to global markets’ stability. The new rules will put pressure on firms to maintain levels of capital above the minimum requirements.


The PRA has approved the use of a full or partial internal model for a number of firms under Solvency II. The PRA published a letter shedding light on the approval process.

The PRA published (November 2015) SS 44/15 regarding third country branches and Solvency II. Specifically, it concerns non-EEA insurance undertakings that have a UK branch (third-country branch undertakings) and includes non-EEA insurance undertakings that have a UK branch that solely carries out reinsurance activities (a third-country pure reinsurance branch).

Continuing soft market conditions in the UK general insurance sector prompted a Dear CEO letter (December 2015) from the PRA’s Director of General Insurance. Firms should have regard to the PRA expectations when considering their business strategy.

Insurance assets

Insurance linked securities are projected to grow in 2016 – a Reuters report stated that the insurance linked securities market reached $70 billion in 2015. The UK Government has recently tabled an amendment to the Bank of England and Financial Services Bill: the Government wants to grant the Treasury powers to make regulations facilitating/regulating the ILS market. As it currently stands, the UK has a number of hurdles to overcome before it can position itself as a centre for ILS activity.

The Solvency II Delegated Regulation on treatment of infrastructure and ELTIF investments did not meet objection from the European Council. The Amending Regulation introduces tailored treatments to insurers' investments in infrastructure, in European long-term investment funds (ELTIFs), and in equities traded through multilateral trading facilities. The scrutiny period for the Amending Regulation has been extended to March 2016.

Transparency and broader issues in general insurance

At European level, EIOPA’s report on consumer trends (December 2015) highlighted the need for greater transparency in the insurance sector. The report findings included: consumers did not receove sufficiently clear/understandable information; management of conflicts is needed; and, generally, there are low levels of consumer financial literacy.

The European Commission launched a Green Paper (December 2015) on retail financial services: the Commission invites views on how best to improve choice, transparency and competition in retail financial services.

The FCA’s concerns regarding consumer treatment at renewal in general insurance prompted CP15/41. This consultation is still underway and seeks to increase engagement and promote competition through enhanced disclosure. A policy statement is expected by mid-2016 on this matter.

April 2016 will see the FCA’s ban on opt-out selling across the financial services sector come into effect: purchasing add-on products (with any primary regulated financial services product) can no longer be the default position. Firms should be aware of the most common add-ons and assess how information relating to these products is presented to customers. A general review of information that is presented to customers – product features, terms, price, etc. – is recommended.

The FCA is still looking at its idea that personal lines marketing should provide ‘value data’ (such as claims or loss ratios). It recently announced (in FS16/1) that its preferred solution was the ‘scorecard option’ and it will run a pilot scheme to test this approach, starting in the summer of 2016.

Employee related

There are a number of HR-related changes that insurance firms should note: robust whistleblowing policies and a whistleblowers’ champion must be introduced; Solvency II requires remuneration policies that promote sound and effective risk management be put in place; and IDD will introduce requirements that remuneration is transparent. Moreover, SIMR and Solvency II requires HR to map governance and responsibility within the firm.

Insurance Act 2015

The Insurance Act 2015 received Royal Assent on 12 February 2015. When it comes into force in August 2016, it will represent the greatest change to insurance contract law in the UK in over 100 years. The Act makes key changes to the duty of disclosure in commercial insurance contracts, warranties and insurers’ remedies for fraudulent claims. Proposals to imply a new duty to pay claims within a reasonable time have been included in the Enterprise Bill that was published on 16 September 2015. If approved by Parliament, the Insurance Act will be amended to include the new duty. The Enterprise Bill entered the Committee Stage (House of Commons) on 23 February 2016. You can keep up to date with the latest developments on our Insurance Act 2015 microsite.

Governance and Ethics in insurance

The UK regulators emphasis on ‘individual accountability’ is part of a greater shake up in culture, ethics and governance. Firms in the insurance sector should set a firm-wide expectation of ethical conduct, and this culture should promote prudent risk taking. The firm’s governance should oversee the risks of the business. Ensuring ethical conduct and appropriate governance should lead to a prudent operation and fair customer outcomes.


Some of the most important sanctions for the insurance market are those imposed by the US government and the EU. Read more on sanctions in the insurance market here and a more general sanctions update here.

HM Treasury publishes a consolidated list of financial sanctions targets and includes all individuals and entities found on all current sanctions lists.

Premium finance

FCA conducted a thematic review on the – Provision of premium finance to retail general insurance customers (TR15/5) (11 May 2015).

The Government also extended the exemption for instalment credit. Firms that only enter into, or that only broker agreements that meet the relevant criteria, do not need to be authorised for consumer credit unless they carry on any other kind of credit-related regulated activity.

The revised exemption came into force on 18 March 2015. It applies to credit agreements entered into or brokered on or after that date. The revised exemption is not retrospective so regulated agreements entered into before 18 March 2015 do not become exempt as a result of the new legislation even if they meet the criteria.

Other issues subject to FCA thematics in the insurance sector

The FCA has conducted a number of thematic reviews -

Handling of insurance claims for SMEs: thematic review and our article on this issue

Complaints handling: thematic review

Bribery and corruption: thematic review

Price comparison websites: thematic review

Household and retail travel insurance: thematic review

Our seminar (January 2015) on IDD also includes comment on thematic review on Complaints Handling and Managing Bribery and Corruption in Commercial Insurance Broking – click here to watch the presentation.