Over the last year, the IUA’s public policy work has of course been dominated by the UK’s decision to exit the European Union, an issue discussed in detail on page 4 of this report.
Brexit aside, however, there have been many other legal and regulatory topics occupying our attention, not least the announcement of a covered agreement on reinsurance regulation between the EU and US.
In finally reaching an agreement, negotiators opened up a path towards more efficient cross-border trading and increased global access to reinsurance services. There has been a great deal of support for a covered agreement with the US across our industry and it is a resolution that the IUA has promoted for many years.
The deal addressed difficulties that have arisen in recent years with restrictions imposed on US firms that are not deemed to be subject to a regulatory regime equivalent to Europe’s Solvency II. At the same time it promised a removal of collateral requirements demanded of international firms reinsuring US risks.
The possibility of a more level playing field between EU and US reinsurers arose, both in terms of collateral treatment and mutual recognition of two important and respected trading blocs. Furthermore, a powerful message was sent to other jurisdictions that protectionist regulation is not in the long term interests of clients.
Unfortunately, the announcement of the covered agreement did not represent a final successful chapter in this story. A new presidential administration in the US cast doubt on the deal being ratified and Brexit means the London Market, which is a major reinsurer of US risks, will not necessarily benefit from its provisions. The agreement does, however, clearly illustrate the possibilities for a more productive international trade in reinsurance service.
The EU’s new General Data Protection Regulation will introduce new obligations for business surrounding data breach notifications, consent to use personal data, and data portability and erasure. Insurers will need to take careful note of the legislation which also introduces significantly increased enforcement measures for when data breaches do occur. The IUA has been working with other industry bodies to obtain legal advice and produce guidance papers for members on how to comply with the new regulations.
Elsewhere, the US state of New York introduced new cyber regulation in 2016 that requires enhanced encryption data for all non-public information. Foreign reinsurance companies, however, were exempted from the rule after the IUA argued strongly that it should not apply to its members. The association successfully explained that companies are already fully regulated for cybersecurity by their own home supervisors and do not generally hold ‘non-public information’ anyway.
The latter half of 2016 proved to be a relatively quiet time for new international sanctions that could impact the business operations of IUA members. Nevertheless, regular updates to existing arrangements continue to be made and it is important for company compliance departments to stay on top of developments.
We have, therefore, enhanced our sanctions information service. In addition to the popular quarterly bulletins we have issued in previous years the IUA website now also includes a country by country analysis of trade restrictions, allowing for more detailed and frequent updates. Each new country page carries details of arms embargoes, financial and other sanctions, together with links to relevant documents issued by government authorities. There are also links to summary pages of measures issued by the United Nations, United States, European Union and United Kingdom.
Another government decision with huge implications for the cost of insurance is the setting of UK discount rate, which is used to calculate lump sum payments for personal injury claims.
PRA and FCA Regulation
The majority of the IUA’s representation work naturally continues to involve the UK’s Prudential Regulation Authority and Financial Conduct Authority. In early 2017 we commented on the FCA’s Future Mission paper, endorsing its aim to develop a transparent set of regulatory objectives and calling for more work on identifying the potential costs of future rule changes. We highlighted the need to establish a proportionate, risk-based approach to regulation, in relation both to the supervision of individual firms and specific financial services sectors.
Other PRA and FCA consultations to which we have responded include those on rules for non-executive directors, remuneration requirements under Solvency II, group supervision under Solvency II, the role of legal counsel and insuring cyber risk.
The IUA also continues to press for the UK’s insurance regulators to have a balancing statutory objective to promote London as a centre for international insurance business. Many other insurance hubs around the world already benefit from their home supervisors providing such support. The old Financial Services Authority was also required to encourage market growth and, with the UK seeking to boost its global trade reach post Brexit, there is now a very strong argument for reinstating this target.
Taxation, the Discount Rate and Insurance Contract Law
Insurance premium tax rates are a cause for increasing concern. The UK rate has been raised three times in the past two years and from July 2017 will stand at 12%, after being introduced at 2.5% in 1994. Millions of insurance policies have been made more expensive by this move and insurance dependent industries like manufacturing, construction and exporters have been hit the hardest. The IUA has therefore joined forces with many other business representatives to try and pressure the Government to limit the impact of this tax. Meanwhile, we continue to monitor movements in other insurance premium taxes across Europe for our members.
Another government decision with huge implications for the cost of insurance is the setting of the UK discount rate, which is used to calculate lump sum payments for personal injury claims. An unexpectedly large reduction in the rate from 3.25% to -0.75% resulted in significantly increased reserves and projected large rises in premiums. It clearly demonstrated that the methodology for calculating and reviewing the discount rate is fundamentally flawed and requires urgent revision. The IUA has conveyed the views of senior casualty re/insurers to the Government in the hope of developing a more realistic and equitable process.
Whilst a complete overhaul of insurance contract law was completed in 2015 with the passing of the Insurance Act, the IUA remains focussed on this issue as implications from such a significant upheaval continue to emerge. Further changes have also been introduced by the Enterprise
Act which allows for insurers to be potentially sued for damages if a claims payment is unreasonably delayed.