Worldwide: September 2012 Global Corporate Insurance & Regulatory Bulletin

UK – Update on the transition to the new regulatory regime

FSA Handbook changes

On 12 September 2012, the FSA published a consultation paper on its proposed changes to the FSA Handbook in light of the planned transition from the FSA to the “twin peaks” system of the Prudential Regulatory Authority (“PRA”) and Financial Conduct Authority (“FCA”). This consultation paper includes consideration of the following topics:

• changes to regulatory disclosure and use of regulators’ logos;
• changes to the skilled persons’ powers;
• changes to the way in which a firm will apply to vary or cancel authorisations, permissions and requirements imposed by the regulators;
• changes to the way in which a firm will apply for waivers or modifications of rules;
• how the new regime will deal with applications regarding controllers and close links, passporting and related issues, and various types of notification; and
• changes to guidance on the roles of the PRA and FCA in relation to transfers of insurance business.

PRA developments

The FSA has sent a letter to firms to advise them of forthcoming publications that will set out the PRA approach and key elements of the framework.

The FSA has also launched a new webpage relating to the PRA’s approach to prudential regulation for insurance firms. This indicates that the FSA will issue a document outlining the PRA’s supervisory approach for those insurance firms designated for regulation by the PRA in early October 2012. This document is intended to provide an overall view of the PRA’s supervisory authority, with the aim of providing a principal point of reference for firms in understanding how the PRA will supervise firms once it becomes the prudential regulator in 2013.

FCA developments

On 18 September 2012, Martin Wheatley, FSA Managing Director and Chief- Executive designate of the FCA, gave a speech on how conduct regulation will change under the new regime, with a focus on what is expected from the insurance industry.

The Director General of the Association of British Insurers (“ABI”), Otto Thoresen, also gave a speech relating to the FCA, focusing on the ABI’s report entitled “The Way Ahead for Conduct Regulation”. The ABI has identified six themes that it considers can form the foundation of a successful conduct regime:

• making markets and regulation work to support the delivery of public policy goals;
• having a regulator that is in touch with consumers;
• having regulation that focuses on ensuring markets deliver products which meet consumer needs;
• having regulation which enables effective competition and innovation in financial services markets;
• having strong engagement between industry and the regulator to shape the agenda in the UK and in Europe; and

• having a relationship between the regulator and the regulated that is built on mutual confidence and respect and involves working in partnership.

On 26 September 2012, Clive Adamson, FSA Director of Supervision, Conduct of Business Unit, gave a speech on the supervision of firms under the FCA. Key points included the following:

• firms will be categorised according to their impact on consumers and the market, and supervisors will be allocated accordingly; and
• the FCA supervision model will be based on three key pillars – Firm Systematic Framework, Event Driven, and Issues & Products.

FPC developments

HM Treasury has published a consultation paper on the macro-prudential tools that will be available to the Financial Policy Committee (“FPC”) to help it to ensure financial stability. The FPC is the body that will be responsible for UK macro-prudential regulation under the new regulatory regime and it is designed to identify, and then take action to mitigate, risks to systemic stability. It is proposed that the FPC will have the power to make recommendations to the regulators, to the Treasury and within the Bank of England, and that it will also have the power to direct the regulators to take action in certain circumstances.

Europe – Solvency II update

Timing

The official timetable for Solvency II will require transposition by member states on 30 June 2013 followed by implementation by firms from 1 January 2014. However, in light of continued disagreement in the trialogue process and the consequent postponement of the European Parliament plenary sitting date for discussion of Omnibus II to November 2012, some voices in the insurance sector, including EIOPA Chairman Gabriel Bernardino, who has recently sent a letter to the trialogue parties in this regard, are questioning whether this timetable is still achievable.

It appears that the main sticking point in reaching agreement on the text of Omnibus II is in relation to the treatment of long-term guarantees under the regime. Insurance Europe has issued a statement in support of an impact assessment on this matter, even if it means a delay to the planned 1 January 2014 implementation date for Solvency II.

FSA developments

On 14 September 2012, the FSA published a report providing interim feedback to firms participating in its internal model approval process (“IMAP”) on the findings of its review of compliance with the requirements of Solvency II regarding the data used in the internal model. The report sets out the FSA’s approach to the data review, a summary of the results, and then detailed observations on the findings (from both general and life insurance firms). The FSA has said that most firms are moving in the right direction towards compliance with the Solvency II requirements on data used in internal models. It has also identified the following key findings:

• although all firms have an established data policy, ensuring a consistent interpretation and application of the policy across the firm remains a challenge;
• most firms have underestimated the time required to embed a group-wide data governance framework into “business as usual”;
• most firms did not apply proportionality by conducting an impact and risk assessment;
• some firms failed to grasp the underlying purpose of a data directory, and nearly all firms struggled with an efficient classification of data within the data directory;
• some firms had difficulty in demonstrating the effective operation of data quality checks, primarily due to a lack of evidence of controls and inconsistent reporting of issues highlighted;
• third party data was not always independently validated; and

• compliance with existing end user computing policies and standards was often inadequate or non-existent, and many firms were implementing complex IT systems without a clear definition of user requirements, design, testing and appropriate controls for effective operation in business as usual.

The FSA has said that it aims to complete its review process by the third quarter of 2013, as per its current Solvency II implementation plan.

Europe – EIOPA and FINMA enter into memorandum of understanding

The European Insurance and Occupation Pensions Authority (“EIOPA”) has entered into a memorandum of understanding with the Swiss Financial Market Supervisory Authority (“FINMA”) on the supervision of insurance groups. The principal objective of the memorandum is stated to be to ensure optimal co-operation in the supervision of insurance groups with international activities in the European Economic Area and in Switzerland, and creates a formal basis for co-operation in the following areas:

• group supervision;
• assistance in the work of EEA and FINMA colleges of supervisors;
• action required in emergency situations;
• safeguarding financial stability by monitoring and assessing risks;
• interconnectedness; and
• conducting stress tests.

The memorandum will not modify or supersede laws or regulatory requirements that are in force, nor will it affect any arrangements in other memoranda signed between FINMA and EEA national supervisory authorities.

US – EU-US insurance regulators issue joint draft report comparing certain aspects of the insurance supervisory and regulatory regimes in the EU and the US

On 27 September 2012, the Steering Committee of the EU-US Dialogue Project released for public comment a draft report comprising the Technical Committee Reports “Comparing Certain Aspects of the Insurance Supervisory and Regulatory Regimes in the European Union and the United States.” This Dialogue Project began in early 2012 and involves insurance regulators from the European Commission, European Insurance and Occupational Pensions Authority (“EIOPA”), the National Association of Insurance Commissioners in the US (“NAIC”), and the Federal Insurance Office of the US Department of the Treasury (“FIO”). The stated goal of the project is “to contribute to an increased mutual understanding and enhanced cooperation between the EU and the US to promote business opportunity, consumer protection and effective supervision.” The three US members of the six person Steering Committee are Kevin McCarty, Commissioner of Insurance, Florida and current President of the NAIC, Michael McRaith, Director, FIO, and Terri Vaughan, CEO, NAIC.

The report addresses seven areas based upon the work of a separate Technical Committee that was assembled for each topic as part of the exchange of information and discussion under the Dialogue Project. The EU-US jointly drafted technical reports identify key commonalities and differences of the EU and US insurance regulatory regimes in relation to the following topics:

• professional secrecy and confidentiality;
• group supervision;
• solvency and capital requirements;
• reinsurance and collateral requirements;
• supervisory reporting, data collection and analysis and disclosure;
• supervisory peer reviews; and
• independent third party reviews and supervisory on-site inspections.

The draft report can be found here. Public hearings will be held on 12 October 2012 in Washington, DC and on 16 October 2012 in Brussels and written comments are requested by 28 October 2012. Based upon the public comments, the project will move to a second phase that will involve discussions among the EU-US regulators about the commonalities and differences between the EU and US regimes and “will lead to policy decision by their respective organizations regarding whether and how to achieve further harmonization in regulation and supervision.” The project is intended to conclude by 31 December 2012.

US – New statute penalizes California insurers for Iran-related investments

On 23 September 2012, California Governor Edmund G. Brown Jr. signed into law a bill that will require insurance companies domiciled in California to treat investments in any company identified as having financial ties to Iran’s energy sector (based on the inclusion of such company on a list published by the California Department of General Services) as non-admitted assets in their financial statements filed with the California Department of Insurance. Assembly Bill 2160 (codified as section 1241.2 of the California Insurance Code) will become effective on 1 January 2013. The bill was generally opposed by the insurance industry and is likely to become the subject of a constitutional challenge, since a series of decisions from the US Supreme Court have clearly established that actions by state and local governments that infringe on the conduct of foreign policy by the federal government are pre-empted by federal law.

Global – IAIS consultations

Consultation on global systemically important insurers

The International Association of Insurance Supervisors (“IAIS”) has published a compilation of the responses it has received to its May 2012 consultation on a proposed methodology for identifying global systemically important insurers (“G-SIIs”). Responses were received from a range of insurers and institutions from across the globe, including the American Insurance Association, the Association of British Insurers, the Institute of International Finance, Insurance Europe and the International Actuarial Association.

The IAIS has also published its proposed resolution, setting out its comments on the 49 main issues that were apparent from the responses received and its proposals to resolve these issues. Some of the key points made by the IAIS are as follows:

• the G-SIIs process will have three stages of data collection: (i) public data used to select participating insurers, (ii) data call from all participating insurers, and (iii) additional data from G-SII candidates;
• the designation of G-SIIs will be done by the Financial Stability Board and national authorities, in consultation with the IAIS;
• there is no intention to designate a fixed number of insurers as G-SIIs and it is possible that no G-SIIs will be identified by the process;
• the assessment methodology will involve the use of both qualitative and quantitative indicators to assess whether any insurers should be considered to be systemically important at a global level;
• national authorities will be relied upon to implement agreed measures for G-SIIs; and
• the IAIS will finalise the weightings given to certain criteria after reviewing the results from the 2011 data call, after which a list of G-SII candidates will be determined for the supervisory judgment process.

The IAIS also noted that it intends to publish a list of G-SIIs along with its final policy measures in April 2013.

Consultation on a common framework for the supervision of internationally active insurance groups

The IAIS has also published a compilation of the responses it has received to its July 2012 consultation on a common framework (known as “ComFrame”) for the supervision of internationally active insurance groups. Responses were received from a broad range of insurers and institutions from across the globe, including the FSA, Lloyd’s, the Association of British Insurers, the European Commission, EIOPA, Insurance Europe, the American Insurance Association, NAIC, the Institute of International Finance, the International Actuarial Association and the International Network of Insurance Associations.

Global – Monte Carlo Rendez-Vous report – “It ain’t over till it’s over”

First published in Insurance Day, 20 September 2012

As Monte Carlo returns to some degree of normality after the recent reinsurance industry invasion one of the familiar themes to again reflect upon is the relationship between renewal rates, capital flows and consolidation in the market.

While last year’s Monte Carlo Rendez-Vous was dominated by the unprecedented severity and number of natural catastrophes of 2011, leading to record insurance claims, 2012 has to date seen a relatively benign period for major global property catastrophe loss. On the eve of Monte Carlo, latest industry estimates for Hurricane Isaac suggested something in the region of $1-$2 billion of loss on an industry-wide basis. Although a significant hurricane to make US landfall this will not move the market.

In fact, at this year’s Rendez-Vous the general mood pointed towards flat rates at the next major renewal season on 1 January 2013 with an industry well capitalised despite the events of last year and an increasing investor appetite for reinsurance products distributed via the capital markets. ILS and other forms of alternative risk transfer were a hot topic this year.

What is the message from an M & A perspective? In common with most industries, convincing arguments can be made in favour of increased M & A from varied and sometimes contradictory factors. For instance, some commentators point towards excess capital being a driver of M & A while others can easily point to periods of increased M & A in the past which followed significant capital outflow from the industry. The reality is more likely to be that there is no one dominant factor that points to the health or otherwise of M & A activity in the sector. Rather, it is always a combination of many factors. There are certainly regulatory and macro-economic headwinds to contend with and, like any other industry, transactional activity requires a degree of certainty, stability and confidence in order to flourish – conditions not much in evidence of late.

Against the backdrop of the latest predictions flowing out of Monte Carlo one thing to bear in mind is that the North Atlantic hurricane season still has some way to go – the shape of next year’s renewal season could be very different because that’s the nature of the global reinsurance industry.

Hong Kong – New Companies Ordinance published

In what represents a significant milestone for the development of company law in Hong Kong, a new Companies Ordinance (the “New Ordinance”) was published in the Government Gazette in August 2012, and will become effective on a day to be appointed (expected to be in 2014). The changes introduced by the New Ordinance are extensive and, in this article, we discuss a couple of significant changes which might be of interest to insurance companies:

Codification of directors’ duty of care, skill and diligence

Certain directors’ duties, namely the duty to exercise reasonable care, skill and diligence, have been codified (whereas previously those duties were found mainly in case law). Directors’ fiduciary duties remain defined by case law and uncodified.

In line with the UK Companies Act 2006, under the New Ordinance, a director must exercise the care, skill and diligence that would be exercised by a reasonably diligent person with:

• the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director relating to the company (objective test); and
• the general knowledge, skill and experience that the director has (subjective test).

The civil consequences for breach of these duties under common law and equity are preserved.

Auditor’s rights to information and liabilities

Under the New Ordinance, an auditor may require a wider range of persons (including persons who hold or are accountable for the accounting records of non- Hong Kong subsidiary undertakings of a Hong Kong company) to provide information or explanation reasonably required for the performance of the auditor’s duties, and the company must take all reasonable steps to obtain such information or explanation as soon as practicable. A person commits an offence if he makes a statement to an auditor that conveys or purports to convey any information or explanation that is materially misleading, false or deceptive.

In addition, the auditors will face criminal liabilities (fines only, not imprisonment) if, in the event of accounting fraud, they knowingly or recklessly failed to include in their report a declaration that the financial statements were materially different from the company’s accounting records, or that they could not obtain all the information or explanation needed for the audit.

Directors’ report

The New Ordinance introduces a requirement on a public company (listed or unlisted), or larger private companies which do not qualify for simplified reporting, to prepare a more comprehensive directors’ report, which will include an analytical and forward looking business review of the company, containing information regarding the risks and uncertainties the company faces, the future development of the company’s business, and matters relating to employees, customers and suppliers that have a significant impact on the company.

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.