After two rounds of consultation, the China Insurance Regulatory Commission (“CIRC“) released the final version of the Administrative Measures for Equity Interests in Insurance Companies (the “New Measures“) on March 7, 2018, which will take effect on April 10, 2018. The New Measures introduce a number of restrictions in relation to shareholdings in insurance companies. A single shareholder will not be permitted to make investments amounting to more than one third of the share capital of insurers, subject to certain exceptions. The cap will not, in principle, be applied retrospectively to existing shareholdings in insurers, although certain additional regulatory measures may be taken in relation to insurers where a single shareholder holds more than one third of the equity. The New Measures have a limited impact on foreign-invested insurance companies.
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In October 2017, the Treasury Committee of the House of Commons (the Committee) published its report on the Solvency II Directive and the upcoming issues generated by Brexit for the UK insurance industry. As part of its report, the Committee made a series of recommendations to the PRA, which we highlighted in our previous note in November of last year. The Committee asked the PRA to produce a report containing commentary on any substantive progress made on the recommendations by 31 March 2018.
The PRA has now published its report, parts 3 and 4 of which detail its response on the issues raised by the Committee’s report. In addition, Sam Woods, Deputy Governor of the PRA, has recently delivered a speech addressing certain elements of the PRA’s response. This note explains the key points raised by the PRA and the likely consequences for the industry. The PRA also took the opportunity to explain progress made on certain recommendations made by the Association of British Insurers, which we have not addressed in this note.
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In a much anticipated public hearing, The National Association of Insurance Commissioners (“NAIC”) discussed how U.S. states should address the elimination of reinsurance collateral requirements for EU reinsurers of U.S. insurance business that qualify under the bilateral agreement between the U.S. and the EU (the “Covered Agreement”).
To learn about key takeaways from the hearing and next steps planned by the NAIC, please click here for a full analysis.
The Italian Insurance Regulator (“IVASS“) and the Italian Competition Authority (“AGCM“) have taken coordinated actions against certain clauses contained in health and accidents insurance policies that cover permanent invalidity, because they have been presumed unfair to the insurance beneficiaries.
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On 14 February the EU Council agreed the text of the proposed Directive to postpone the deadline for the transposition into Member States of Directive 2016/97 on insurance distribution (IDD) to 1 July 2018 and the application date of new rules to 1 October 2018.
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The Hogan Lovells’ Corporate Insurance Newsletter for January has been published. This provides a round-up of UK, EU and international regulatory developments relevant to UK based insurance market participants. In this issue, amongst other items, we cover:
- The statements and announcements from the FCA and HM Treasury about preparations for the implementation of the Insurance Distribution Directive in the UK
- The HM Treasury and PRA’s responses to the Treasury Select Committee report on Solvency II
Just before Christmas, the Law Commission announced plans to develop laws to support the safe development and use of driverless cars in the UK. The aim is to develop legislation which may be ready as early as 2021.
The Law Commission is an independent law reform watchdog for England and Wales and this review is one of 14 new project areas unveiled as part of its 13th Programme of Law Reform. Amongst the other projects announced by the Law Commission, the laws on smart contracts (which are self-executing contracts written in computer code), electronic signatures and certain residential leasehold topics (namely commonhold, enfranchisement and the regulation of managing agents) will also be getting attention. The Law Commission Chair and Court of Appeal judge Sir David Bean said that this programme of law reform “attracted unprecedented interest across a broad range of areas.” Continue Reading
On 29 January 2018, HM Treasury announced that the Senior Managers & Certification Regime (the “SM&CR”) will apply to insurers from 10 December 2018. This means that insurers have less than a year to ensure compliance with the new requirements.
The SM&CR builds on the existing accountability requirements applying to insurers, namely the Solvency II governance requirements, the Senior Insurance Managers Regime and the Approved Persons Regime. Firms will therefore need to ensure their existing compliance arrangements are updated to reflect the changes under SM&CR before the end of 2018.
Why is the regime being extended to insurers?
The SM&CR was first introduced in March 2016 for banks and PRA regulated investment firms, in order to impose on them a stronger accountability regime. In May 2016, Parliament gave the FCA the obligation to extend the SM&CR to all regulated firms. The extension of the regime to insurers is the first step in this process. HM Treasury is yet to announce when the regime will commence for other firms regulated solely by the FCA.
The PRA has stated that a key objective of the SM&CR is to ensure that insurers’ governance systems are effective and provide for a clear allocation of responsibilities within firms. In addition, the PRA wishes to ensure the individual accountability of senior managers and directors for the following:
- their own conduct in relation to their responsibilities within the firm;
- overseeing the business conduct of the key individuals reporting to them (including regarding business risks taken or managed by these key individuals); and
- the ongoing safety and soundness of the firm and the adequate protection of the firm’s policyholders.
What are the implications for insurers?
The SM&CR impacts the current regulatory requirements on insurers in the following ways:
- the Senior Managers Regime will apply to all insurers meaning that regulatory approval will be focused on fewer senior people in the firm;
- the Certification Regime will apply to all insurers, meaning that firms must now assess the fitness and propriety of certain individuals who could harm the firm, its customers or the market; and
- the Conduct Rules will be extended to all of the firm’s staff (except ancillary staff).
Consultations on transition to the new regime
Both the FCA and PRA are currently consulting on how the regulators will move firms to the new regime (see here for the FCA’s consultation paper and here for the PRA’s). The consultations will close on 21 February.
Both the FCA and PRA consulted on the extension of the regime to insurers in 2017 (see here for the FCA’s consultation paper and here for the PRA’s). The subsequent policy statements are expected in summer 2018.
The National Association of Insurance Commissioners (NAIC) will hold a public hearing in New York City on 20 February 2018 to consider how U.S. States should address the elimination of reinsurance collateral requirements for EU reinsurers of U.S. insurance business that were covered in the bilateral agreement between the U.S. and the EU on Prudential Measures Regarding Insurance and Reinsurance (Covered Agreement), which was signed on 22 September 2017. Under the Covered Agreement, U.S. States will need to consider action with respect to reinsurance collateral reforms within 60 months or be subject to potential federal pre-emption. The NAIC has requested public comments on six points in advance of the hearing. Our note sets out the six points with a brief summary of various industry observations with respect to each point.
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The European Union (the ”EU”) packaged retail and insurance-based investment products (PRIIPs) Regulation (the ”PRIIPs Regulation”) is applicable throughout the EU from 1 January 2018.
The main requirement of the PRIIPs Regulation is the provision of a Key Information Document (the ”KID”) to EU retail investors investing in PRIIPs. The KID, which must be provided prior to the conclusion of the contract, must be in a prescribed format and include certain information, such as the name of the product, the identity of the producer, the types of investors for whom it is intended, the risk and reward profile of the product (which includes a summary risk indicator, the possible maximum loss of invested capital and appropriate performance scenarios of the product), the costs investors have to bear when investing in the product and information about how and to whom an investor can make a complaint in case there is a problem with the product or the person producing, advising on or selling the product.
In light of the above, all insurers selling PRIIPs (for example, unit-linked products) will have to comply with the obligation to draft and provide the KID from 1 January.
As regards non-life insurance products, the Insurance Distribution Directive (the ”IDD”) sets out the obligation for non-life insurance products distributors to provide potential policyholders with a simple, standardized insurance product information document (the ”IPID”) which aims to provide clearer information on the product so that the consumer can make a more informed decision.
On 20 December 2017, the European Commission proposed to push back the application date of the IDD by seven months to 1 October 2018 (although EU Member States are still required to transpose IDD into national law by the original date, 23 February 2018). In order to align the application dates, the Commission is also preparing to postpone the application of two Delegated Regulations adopted under the IDD.
In light of the above, the obligation to provide the IPID will only have to be complied with by non-life insurance companies once the IDD and its Delegated Regulations are applicable (1 October 2018).
Therefore, although we understand that the aim searched with the obligation to provide the KID and the IPID is the same (to increase the consumers’ protection by giving them more detailed information prior to the conclusion of the insurance contract so that they can make a more informed decision), the reality is that the obligation to provide the KID is already applicable and the obligation to provide the IPID is not. Thus, the consumers of PRIIPs are currently more protected than the consumers of non-life insurance contracts.
In any case, this possible lack of equilibrium between the consumers of these two types of products (which mainly obeys to the fact that the PRIIPs Regulation derives from MiFID II, which implementation has been faster than that of the IDD) will be corrected once the IDD is applicable.