Insurance Market Conditions & Trends 2015/16: Other Developments - DAC Beachcroft

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Insurance Market Conditions & Trends 2015/16: Other Developments

Published On: 1 September 2015

In a world of breathtaking change, keeping abreast of legislative, judicial and regulatory developments is essential for managing risk and business planning. Our guide will ensure you have a concise summary of the key legal events from the last 12 months at your fingertips.

1.  ABI guidelines on the instruction of private investigators

On 3 October 2014, the Association of British Insurers (ABI) published guidelines on the instruction and use of private investigators by insurers, their appointed lawyers or other authorised agents in the UK. They are intended to provide a framework for insurers to devise their own procedures for investigating claims from policyholders and third parties, appointing only private investigators who operate lawfully and to high ethical standards.

The guidelines consider entering into a relationship with a private investigator (including due diligence checks, fair processing wording and access to, and retention of, data collected), management information, auditing and the Financial Conduct Authority’s requirements.

2.  Building Information Modelling

The government’s 2016 deadline for level 2 Building Information Modelling (BIM) to be used on all public sector projects is rapidly approaching. There are conflicting reports as to whether the industry is ready.

BIM is a cradle-to-grave design process. It involves the creation of a digital model of the building, which is then used by the design team, the construction team and finally the building owner to manage the facility through its life. Level 2 BIM requires the participants to develop their own separate models, which are then shared with the project model. Use of level 2 BIM does not seem to be causing any major concerns for insurers.

Looking further ahead, however, the government has now published its report on level 3 BIM. It is generally accepted that there is a big leap to level 3 BIM, which requires a fully integrated web-based system that can be accessed by all members of the construction team. Concerns arise over risk allocation and transfer, intellectual property rights, ownership of the model and confidentiality of the data supplied. Existing types of insurance arrangements may not work for level 3 projects. The government is promoting integrated project insurance for its BIM projects.

3.  Client money rule changes for insurance intermediaries

The long-awaited Financial Conduct Authority (FCA) policy statement on new client money rules for insurance intermediaries was scheduled for publication in the second quarter of 2015. At the time of writing, this has not been published.

CP12/20, published in August 2012, proposed a new CASS 5A to replace CASS 5. It identified concerns over a poor understanding of the current rules, poor compliance, missing or incomplete trust documents and the effect of conditional risk transfer in Terms Of Business Agreements (TOBAs).

Subject to what the final rules say, firms will need to review their FCA permissions (if you have risk transfer agreements in place for all business, do you need permission to hold client money?), update client money reconciliation and audit procedures and replace any TOBAs with conditional risk transfer.

It is expected that the new rules will have a 12-month transition period.

4.  Faulds Wood heads review of UK product recall system

In March 2015, the UK government announced a review into the UK’s system for recalling unsafe products, chaired by Lynn Faulds Wood. Its objective is to “make enforcement more effective and explore consumer understanding of the process”.

The key issue is to boost consumer awareness of recalls and ensure that more product is removed from consumers. Typical recall success rates can be as low as 10-20%, particularly for low-value goods. Stories of recalled goods being sold on eBay are not uncommon. The motor industry typically has high recall rates, but of course motor recalls involve high-value products and have the advantage of a compulsory vehicle and registered keeper database maintained by the Driver and Vehicle Licensing Agency.

Manufacturers and retailers have developed tools that can boost the success of recalls, from guarantee registration schemes to loyalty cards, which can provide key contact information in the event of a product recall – provided it is kept up to date.

With the advent of the internet of things, where household appliances, cars and other internet-enabled devices are permanently connected, manufacturers could communicate recall information without needing to locate the consumer, but technical, social and privacy concerns remain.

5.  FCA General Insurance Add-Ons

In March the Financial Conduct Authority (FCA) published its consultation on new rules for add-ons (CP15/13). This follows the FCA’s General Insurance Add-Ons Market Study, which found that competition in add-on markets does not always work in the interests of consumers.

The final report for the Add-Ons Market Study (published in July 2014) proposed four remedies. The March consultation proposed rules and guidance in relation to two of these remedies: banning opt-out selling for all add-ons (not just general insurance) when sold alongside a regulated product, and improving product information provision in relation to general insurance add-ons.

The FCA has also published a policy statement (PS15/13) on its proposed remedy for Guaranteed Asset Protection (GAP) insurance. The new rules, which come into force on 1 September this year, will require a deferred opt-in (a pause in the sales process) and greater information disclosure to encourage consumers to shop around. The FCA says it remains committed to its fourth proposed remedy – introducing a value-for-money measure in general insurance markets. It published a discussion paper (DP15/4) in June, which explains that the FCA is considering requiring firms to publish claims ratios.

6.  FCA thematic review of delegated authority foreshadows shake-up of outsourcing in general insurance market

In June 2015 the Financial Conduct Authority (FCA) published the results of its thematic review into the use of the outsourcing by insurance companies of significant functions such as underwriting authority, claims handling and complaint handling.

The review highlighted that some insurers do not treat these arrangements as outsourcing and identified a need for improvements to due diligence and the management of outsourced arrangements, particularly in considering and assessing customer outcomes, the allocation of responsibilities between firm and outsourced service provider and management information.

The FCA reviewed 12 insurers’ outsourced underwriting and claims handling arrangements and the associated activities of 19 intermediaries and third party administrators.

A strong theme is the importance of being able to evidence compliant systems and processes to the regulator through appropriate documentation and record keeping – a firm must not just be compliant but must be able to prove that it is compliant.

The FCA plans to discuss its findings with the industry and relevant trade bodies and will follow up with individual firms to address specific issues identified as part of the review. All insurers, intermediaries and third party administrators should study the report carefully and identify any areas for improvement.

7.  Financial Services (Banking Reform) Act 2013 update

This Act makes significant reforms to UK financial services regulation and further parts of the Act have come into force over the past year. The Act gave the Financial Conduct Authority new competition powers – concurrent with the Competition and Markets Authority (CMA) – with effect from 1 April 2015. These are enforcement powers under the Competition Act 1998 used to address restrictive practices engaged in by companies operating in the UK that distort, restrict or prevent competition; and power under the Enterprise Act 2002 to carry out market studies and make references to the CMA.

New rules on the price cap for high-cost short-term credit (as required by the Act) came into effect on 2 January 2015.

The Act created a new regulator, the Payment Systems Regulator (PSR), to regulate the £75 trillion payment systems industry in the UK. The PSR was launched on 1 April 2015.

The new senior managers’ regime for banks will come into force on 7 March 2016 (the same time as the senior insurance managers regime). From 7 March 2016 there will be a new criminal offence of reckless misconduct in the management of a bank.

8.  Flood Re will not be open for business until April 2016

The insurance industry and the government reached a final agreement on this scheme to ensure the continued availability of flood insurance to householders in December 2014, including within it all council tax band H (and I in Wales) properties, which had initially been excluded. At the end of May, Flood Re announced that it will not be ready to accept its first policies until April 2016 despite most of the scheme’s systems and infrastructure being in place from summer this year. The original target was the fourth quarter of 2015.

In January 2015, Flood Re was given the green light by the European Commission, which had been reviewing its compliance with rules on state aid.

February saw Capita appointed as the scheme’s managing general agent and Guy Carpenter has been chosen as Flood Re’s broker to help develop its reinsurance strategy. A senior management team is being built under the leadership of Brendan McCafferty, previously commercial director at Paymentshield.

Regulations defining how the Flood Re scheme will operate were laid before Parliament on 24 March. The regulations did not, however, obtain the necessary positive approval before Parliament was prorogued. Consideration of the draft regulations was therefore held over to the new parliamentary session. The scheme is also awaiting approval from the Financial Conduct Authority, another factor probably contributing to the delay in it starting full operation.

9.  Law Commission: updated proposals on insurable interest

The Insurance Act 2015 implemented recommendations in the Law Commission’s July 2014 report. The report did not, however, cover all the insurance contract law matters on which they had previously consulted, as there was insufficient consensus in some areas.

The Law Commission, with the Scottish Law Commission, is now revisiting the issue of insurable interest. Earlier proposals for reform can be found in its Issues Paper 4 and 2011 Consultation Paper. Updated proposals were published in a new Issues Paper 10 in March this year and the closing date for responses was 29 June 2015. We await the summary of responses with interest.

10.  ‘MyLicence’ data sharing initiative set to bring down the cost of motor insurance

Branded ‘MyLicence’, the Insurance Industry Access to Driver Data database was launched in 2014 as part of the last government’s digital agenda. Set up by the Driver and Vehicle Licensing Agency (DVLA) in conjunction with the Department for Transport, the Association of British Insurers (ABI) and the Motor Insurers’ Bureau, the database provides insurers with instant access to an individual’s driving licence details from the DVLA (to include endorsements and disqualifications).

According to DVLA statistics, 23% of individuals seeking a quote fail to disclose their driving record accurately. Prior to the launch of MyLicence, motor insurers were unable to access this information at the point of quote, resulting in the need to factor in a margin of error within the premium to allow for both fraudulent misrepresentations and genuine mistakes.

While its use is not mandatory for insurers or drivers, MyLicence enables insurers, brokers and aggregators to pursue more accurate risk-based pricing, ensuring that each individual’s premium reflects their actual driving record. According to the ABI, this will save the honest consumer about £15 a year on their motor insurance premium.

There are also benefits to be gained beyond the point of quote, through quicker claims settlements by virtue of the fact that policyholders need not be asked to provide documents to support their driving record at the point a claim is made.