On 5 June 2019, the Treasury Committee launched an inquiry into the decarbonisation of the UK economy and green finance which will look at the role of the UK regulators and financial services firms in supporting the government’s climate change commitments. One of the areas under scrutiny is how financial services firms are delivering green finance or investing in ‘green assets’ and what prudential risks climate change poses. The Committee will also consider what steps the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) are taking to support decarbonisation and the ‘greening’ of the economy. Continue Reading
Tesla CEO Elon Musk recently declared that the company intends to create an insurance product ‘much more compelling than everything else out there’. Victor Fornasier, partner at Hogan Lovells, discusses with Tom Inchley from Lexis Nexis, Tesla’s plans and what they could mean for the car insurance industry. Click here for the article.
This article was first produced for Lexis Nexis in May 2019.
In the first judgment to provide guidance on the allocation of mesothelioma liabilities at a reinsurance level, the Court of Appeal in Equitas Insurance Limited v Municipal Mutual Insurance Limited  EWCA Civ 718 has ruled that insurers cannot choose to allocate their full loss to whichever reinsurance policy would produce the maximum recovery, ie so-called “spiking” or “pick-and-choose” is not permitted. Rather, losses must be presented to reinsurers on the basis of a pro rata allocation by reference to time on risk.
1. Background to Mesothelioma Claims
The epic struggles of the English Courts in grapplling with the unique problems presented by mesothelioma claims are well-known. One of the outcomes was the development of a common law rule allowing an employee who has been exposed to asbestos over a number of years (and a number of employers) to recover the full amount damages from any single employer, even where it is not possible to prove on the balance of probabilities which employer was responsible for the critical exposure which caused the disease (Fairchild v Glenhaven Funeral Services  UKHL 22; Compensation Act 2006, s.3). Employers can then pursue other employers for contribution (apportioned on basis on the period of employment).
Similarly, any Employers’ Liability insurer on risk during the period of wrongful exposure is liable to indemnify the employer in full, regardless of the period for which it provided cover (Zurich Insurance plc UK Branch v International Energy Group Ltd  UKSC). Insurers can then pursue other insurers on risk for contribution (apportioned on a time on risk basis) or even the employer itself for periods during which it was uninsured.
Until the decision of the Court of Appeal in Equitas, there had been no guidance as to whether an insurer who has indemnified an employer in full can “spike” its full loss to a single policy year of reinsurance. Continue Reading
On 20 May 2019, the FCA published findings from its multi-firm review into the supervision by principal firms of their appointed representatives (“ARs“) in the investment management sector (“Investment Management Sector Review“).
This review was conducted following the publication in July 2016 of the FCA’s Thematic Review TR16/6: Principals and their appointed representatives in the general insurance sector (see our blog post here for more details) (the “General Insurance Thematic Review“) which identified a number of shortcomings in the control and oversight of ARs by their principal firms. The FCA states that while the Investment Management Sector Review was focussed on the investment management sector, the findings may also be relevant to principals and ARs operating in other sectors of the UK financial services industry. Continue Reading
Global mergers and acquisitions transactions hit $3.5 trillion in 2018 making it the third-largest year on record for M&A by value. Within the private equity and real estate investment worlds, the insatiable appetite for warranty & indemnity insurance (“W&I”) to support transactions that has emerged in the last decade has persisted. This is not without good reason – sellers and buyers are now well aware of the deal-enabling benefits that laying off thorny transactional risk to a neutral, well-capitalised, third party can bring. Moreover, the W&I market continues to welcome a healthy torrent of new capital seeking underwriting return and market participants looking to build businesses; both of which have kept W&I premiums low and terms of cover on offer broad.
Click here to read the full article
The past decade has seen far reaching changes in the occurrence, management and restructuring of liabilities in the life and non-life insurance sectors.
Please join a team of Hogan Lovells thought leaders from New York and London for a breakfast discussion of both these changes and the opportunities they might create for insurance industry professionals on both sides of the Atlantic.
Click here for more information and to register your interest.
On 27 March 2019, the European Insurance and Occupational Pensions Authority (EIOPA) published a report that looks at outsourcing to the cloud by (re)insurers.
The report was issued in response to the European Commission’s request (through its FinTech Action Plan published on 3 March 2018) that the European Supervisory Authorities – EIOPA, the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) – explore the need for guidelines on outsourcing by regulated entities to cloud service providers. As adoption of cloud computing in the financial sector increases, the Commission has concerns about the uncertainties of its interpretation by supervisory authorities within the scope of existing outsourcing requirements.
While all three of the European Supervisory Authorities launched initiatives to answer the Commission, the EBA lead the charge. It issued detailed Recommendations on outsourcing to cloud service providers (EBA Recommendations) that have applied to credit institutions and investment firms since 1 July 2018. The EIOPA report announces EIOPA’s intention to publish guidelines on cloud for the (re)insurance sector in the course of 2019. The report notes that EMSA is currently considering whether to issue any guidelines, although ESMA’s 2018 Annual Report and 2019 Work Programme summarises the work that it has already done as part of its supervisory project on cloud computing.
In addition to outlining EIOPA’s plans to provide guidance for (re)insurers that outsource to cloud service providers, the EIOPA report provides an overview of cloud computing and market practices in the EU, drawing on feedback from National Supervisory Authorities (NSAs).
Amongst the key takeaways outlined in the EIOPA report are that:
- cloud services are not yet extensively used by (re)insurance undertakings in the EU, but that the level of use by (re)insurance companies differs between EU jurisdictions and the cloud services used are aligned to those used by the banking sector
- cloud computing is used mainly by newcomers, by a niche of the market and by larger undertakings mainly for non-critical functions, but many large European (re)insurers are expanding their use of cloud as part of their wider digital transformation strategies
- the impact of cloud computing on the (re)insurance market is assessed differently among jurisdictions, due to its complexity and level of technicality.
Cloud computing regulation
Under both banking and (re)insurance regulation, an outsourcing to a cloud service provider is covered by the same provisions that would apply to any other outsourcing for regulatory purposes.
For (re)insurers in the EU, this means compliance with the measures on outsourcing within the Solvency II framework. However, the report notes that the current level of national guidance on cloud outsourcing for the (re)insurance sector is not standardised across EU countries and is not being applied consistently.
For example, while certain regulators have already issued or are planning to issue national guidance on cloud outsourcing (e.g. the UK, France, Germany and Poland), other regulators rely on broader national standards to support the management of specific critical areas of cloud outsourcing (e.g. in Spain, Italy and the Netherlands) and others have no specific plans (e.g. Portugal and Ireland). The report also notes that NSAs take different views as to whether cloud computing is always outsourcing, and some NSAs have adopted a specific definition for cloud computing.
Despite this divergence, the EIOPA report finds that “most NSAs (banking and (re)insurance supervisors at the same time) declare that they are considering the EBA Recommendations as a reference for the management of cloud outsourcing”.
In determining whether separate guidance was needed for the (re)insurance sector, EIOPA carried out a gap analysis between the existing Solvency II regulations and the EBA Recommendations, and its findings are set out in the EIOPA report. EIOPA has concluded that:
- the current Solvency II recommendations are sound to discipline outsourcing to cloud service providers and already cover most of the contents of the EBA Recommendations, which just appear to be more specific about certain areas
- despite this, EIOPA should issue guidance on cloud outsourcing in order to provide legal transparency to regulated undertakings and service providers in the market and “to avoid potential regulatory arbitrage”. This guidance will be aligned with the EBA Recommendations and, where applicable, the EBA’s new Guidelines on outsourcing arrangements (as these incorporate and will repeal the EBA Recommendations when the Guidelines come into effect on 30 September 2019).
EIOPA believes that, due to the rapidly-developing nature of cloud computing, cloud outsourcing regulation should not attempt to regulate all (re)insurance-related aspects, but should instead be principles-based. This suggests that EIOPA’s guidance will not be as prescriptive as aspects of the EBA Recommendations and Guidelines, but it will be interesting to see:
- if EIOPA adopts a similar approach to the monitoring of such outsourcings, e.g. the requirement to keep a register of cloud outsourcings containing prescribed minimum information, and to make this available to regulators
- if EIOPA deems all cloud services to be ‘an outsourcing’ and subject to its guidance. The report suggests this might be the case, with the executive summary containing statements such as “the purchase of cloud computing services falls within the broader scope of outsourcing” and “as to applicable regulation, cloud computing is considered as an outsourcing”. Concerns about this approach were raised in feedback to the EBA’s consultation on its draft Guidelines (which now incorporate the EBA Recommendations), in response to which the EBA highlighted that its Guidelines do not say that all cloud services are also outsourcing arrangements.
EIOPA’s current plan is to draft its own guidelines on cloud outsourcing during the first half of 2019, with those being issued for consultation and finalised by the end of 2019.
There will also be a public roundtable on the use of cloud computing by (re)insurance undertakings, where representatives from the (re)insurance industry, cloud service providers and the supervisory community can discuss their views on cloud outsourcing in a Solvency II and post-EBA Recommendations environment.
EIOPA, the EBA and ESMA have also agreed to start a joint market monitoring activity in the second half of 2019. This is aimed at developing policy views on how cloud outsourcing in the finance sector should be treated in the future. The group will consider the increasing use of cloud technology, and the potential for large cloud service providers to be a single point of failure.
Please contact us if you have any questions on the EIOPA report or to find out how we can help you with your cloud outsourcing issues.
FCA publishes the results of its Thematic Review into GI insurance distribution chains
The FCA’s Thematic Review into GI insurance distribution chains (published on 10 April 2019) has concluded that certain GI sector manufacturing, sales and distribution approaches can lead to customers purchasing inappropriate products, paying excessive prices or receiving poor service.
The report highlights how the remuneration of all the parties in the distribution chain can result in customers paying significantly higher prices than the production and delivery costs of the products they are buying. In some distribution chains there can also be a high risk of unsuitable sales (e.g. where an insurance product is sold alongside a non-financial product, such as a car).
The FCA has warned the sector to closely review its practices in light of the recent findings and make immediate improvements or face further regulatory intervention. Continue Reading
In R&S Pilling t/a Phoenix Engineering v UK Insurance Limited  UKSC 16, the Supreme Court addressed the question of whether or not a motor insurer should be liable for property damage caused by a fire which was started whilst a vehicle insured by it was being repaired on private land.
Mr Holden, a mechanic employed by Phoenix Engineering, was working overtime and asked to use the loading bay at the premises to do some work on his car. Whilst welding some plates onto the underside of the car, a fire started and spread inside the car, then to some rubber mats lying close to the car. The fire then spread to Phoenix’s premises and the adjoining building.
AXA, Phoenix’s insurer, paid out over £2m to Phoenix and the owner of the adjoining property for the damage. Subrogated to Phoenix’s rights, AXA brought a claim against Mr Holden’s motor insurers, UK Insurance Limited (“UKI”), having undertaken not to pursue Mr Holden personally. UKI commenced proceedings for a declaration that it was not liable to indemnify Mr Holden. Continue Reading
From 1 April 2019 two significant changes take effect:
- The jurisdiction of the FOS is extended to cover small and medium-sized enterprises, certain charities and trusts and personal guarantors; and
- The FOS award limit is increased from £150,000 to £350,000 (an increase of 133%).
These changes follow a short consultation process in late 2018. For more information on the detail of the changes and the FCA responses to the consultation see the FCA policy statement PS19/8 published in March 2019. Continue Reading