United Kingdom Insurance And Reinsurance

 

 

Regulatory agencies

Identify the regulatory agencies responsible for regulating insurance and reinsurance companies.

Under the Financial Services and Markets Act 2000 (as amended) (FSMA), insurance and reinsurance companies in the UK are regulated by both the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), which are responsible for prudential regulation and conduct supervision of authorised firms. The PRA and the FCA are under a statutory duty to cooperate and coordinate their activities. Insurance intermediaries, such as brokers, are regulated by the FCA only. Lloyd’s of London (or the Society of Lloyd’s) is regulated by the FCA and the PRA. Lloyd’s managing agents are also dually regulated by the FCA and the PRA. Members’ agents and Lloyd’s brokers are regulated by the FCA. The Bank of England and Financial Services Act 2016 makes the PRA a part of the Bank of England.

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Formation and licensing

What are the requirements for formation and licensing of new insurance and reinsurance companies?

A firm intending to conduct insurance and reinsurance business in the UK must obtain a Part 4A FSMA permission (Part 4A permission) from the PRA (unless it is exempt or able to rely on the EU’s passporting regime). The FCA must consent to the PRA’s grant of permission. Insurance intermediaries must apply to the FCA for permission. In order to obtain a Part 4A permission, an applicant must be able to satisfy the ‘threshold conditions’ on an ongoing basis. This includes demonstrating that its head office is in the UK or it carries out business in the UK; it is adequately capitalised to conduct the insurance and reinsurance business in question; and it has appropriate management systems and controls in place, as well as suitably qualified and fit and proper persons capable of performing the relevant ‘controlled functions’.

Other licences, authorisations and qualifications

What licences, authorisations or qualifications are required for insurance and reinsurance companies to conduct business?

Unless an exemption applies, prior regulatory approval must be obtained to carry out ‘regulated activities’ in the course of business in the UK. ‘Regulated activities’ are defined in the Financial Services and Markets Act (Regulated Activities) Order 2001 (as amended). Insurance mediation activities are regarded as regulated activities. The relevant regulator (the PRA, the FCA, or both) must approve each regulated activity individually. The regulator has the power to impose restrictions on the scope of an insurer’s or reinsurer’s regulated activities.

The Insurance Distribution Directive ((EU) 2016/97) (IDD) that will amend and replace the Insurance Mediation Directive (2002/92/EC) (IMD) entered into force on 22 February 2016 and was expected to be implemented into national law by 23 February 2018. The implementation date has been delayed until 1 October 2018. Once the IDD is implemented into national law, the UK FCA will publish final rules (based on the near-final rules published by the UK FCA on 19 January 2018). The IDD deals with the authorisation, passporting and general regulatory requirements for insurance reinsurance intermediaries/distributors. It also encompasses organisational and business requirements for insurance and reinsurance undertakings.

Officers and directors

What are the minimum qualification requirements for officers and directors of insurance and reinsurance companies?

Officers, directors and persons who exercise senior management functions or ‘controlled functions’ under FSMA (eg, the director function, chief executive function, actuary function, or systems and controls function) must be approved by the FCA or the PRA, or both, prior to performing such functions. Once approved to perform such functions, the person in question becomes subject to the senior insurance managers regime (SIMR) and accompanying Conduct Rules that impose a number of significant responsibilities, including a duty to comply with regulatory requirements, general principles and expectations on an ongoing basis. The SIMR, which came into force on 1 January 2016 for Solvency II firms, including UK branches of non-EEA firms, the Society of Lloyd’s and Managing Agents, and insurance special purpose vehicles, as well as the more streamlined version of the SIMR for smaller insurers falling outside the Solvency II framework, which was introduced between 1 January 2016 and 7 March 2016, replace the Approved Persons regime. The senior insurance management functions (SIMFs) are intended to be more detailed than was the case under the Approved Pensions regime. The purpose for introducing the SIMFs was to ensure greater transparency about which individuals have responsibility for which aspects of managing the business. There is a new Group Entity Senior Manager Function (SIMF7) that is intended to capture anyone who exercises significant influence over the management or conduct of the affairs of the UK regulated entity and is employed by, or is an officer of, a parent or holding company. Such a person, regardless of his or her physical location, will need to be approved by the relevant UK regulator prior to exercising significant influence over a UK regulated firm. New conduct rules apply to the new SIMR.

On 28 September 2016, the PRA published Policy Statement 27/16 ‘Strengthening accountability in banking and insurance: PRA requirements on regulatory references (part II)’ which follows Policy Statement 5/16 ‘Strengthening accountability in banking and insurance: Implementation of the senior managers and certification regime (SM&CR) and SIMR; PRA requirements on regulatory references’ and Policy Statement 16/22 ‘Strengthening accountability in banking and insurance: regulatory references’ which set out requirements for the obtaining of regulatory references from all current and former employers in the previous six years for persons intending to exercise FCA controlled functions, other key function holders and notified non-executive directors. On 7 March 2017, the regulatory reference requirements set out in PS27/16 ‘Strengthening Accountability in Banking and Insurance: PRA Requirements on Regulatory References (Part II)’ and certain SM&CR related FCA requirements came into effect. The PRA and the FCA are expected to consult on the extension of the SM&CR to all regulated firms, including further developing the regime for insurers in 2017. The extended regime is expected to enter into force in 2018.

In July 2017, the PRA and the FCA published consultation papers FCA CP 17/26 and PRA CP 14/17, respectively, setting out proposals to extend the SM&CR to (re)insurers and managing agents. On 29 January 2018, the UK Treasury announced that the extension of the SM&CR to (re)insurers and managing agents will enter into force on 10 December 2018.

Capital and surplus requirements

What are the capital and surplus requirements for insurance and reinsurance companies?

UK capital requirements currently adopt, but also enhance, the requirements established by the EU Insurance Directives and are contained in the PRA Handbook. Different requirements are imposed on general and life insurers and pure reinsurers, with an overarching reserve power of the PRA to impose additional capital requirements (individual capital guidance) if deemed necessary. Pillar 1 of Solvency II that came into force on 1 January 2016 introduced new quantitative capital requirements at both the solo entity and the group level. Companies and particularly groups can develop their own internal risk-based capital models according to their economic capital needs relative to their risk profile. Pillar 1 capital requirements have two distinct levels: a minimum capital requirement (MCR) representing the minimum amount of capital that an insurer or reinsurer needs to cover its risks, and a solvency capital requirement (SCR), which is effectively the amount of capital that an insurer or reinsurer requires to operate as a going concern, assessed on a value at risk measure.

Reserves

What are the requirements with respect to reserves maintained by insurance and reinsurance companies?

Solvency II (adopted into the PRA Rulebook) introduced material changes to reserving and the calculation of reserves, or ‘technical provisions’ according to Solvency II. Articles 76 and 77 of Solvency II set out the basic requirements as to establishment and possession of technical provisions and as to their calculation. Unsurprisingly (re)insurers are required to establish technical provisions with respect to all their insurance and reinsurance obligations towards policyholders, and to calculate those provisions in a prudent, reliable and objective manner. The value of the technical provisions must correspond to the current amount the (re)insurer would have to pay if it were to transfer its insurance and reinsurance obligations immediately to another (Solvency II-regulated) (re)insurer. A major challenge introduced to the reserving process by Solvency II, however, is that the technical provisions must not only represent a best estimate, but also include a ‘risk margin’ each of which are to be calculated as prescribed. In addition, when calculating technical provisions, (re)insurers must segment their insurance and reinsurance obligations into homogenous risk groups and by lines of business as prescribed, hence raising specific allocation issues.

In 2017 the PRA conducted its General Insurance Stress Test 2017 and was able to confirm that UK (re)insurers in aggregate and at an individual level met the threshold resilience requirements of Solvency II and that on the ‘reinsurance interconnectedness’ test the concentration of risk placed with specific individual reinsurers had actually fallen, with an increasing role being played by alternative capital (such as the insurance linked securities market (ILS)).

The EU Commission is conducting a 2018 review of capital requirement calculations under Solvency II, recognising that the final 2016 requirements of Solvency II were in some cases based on 2011 methodology and thinking. The 2018 review identifies three priorities: (i) proportionality; (ii) consistency with other financial legislation; (iii) removal of undue barriers to financing. EIOPA is due to report on these issues.

Product regulation

What are the regulatory requirements with respect to insurance products offered for sale? Are some products regulated by multiple agencies?

No prior regulatory approval or registration of insurance products is required in the UK. Instead the FCA, in the exercise of its statutory objective of consumer protection and its ‘outcomes focused’ approach to regulatory supervision, imposes on insurers requirements as to their conduct of business and as to the suitability of insurance products sold to consumers, and regulates the selling and administration of insurance contracts, providing detailed rules including on categorisation of customers, communications with and financial promotions to customers, conflicts of interest, recordkeeping, disclosures required to be made to customers, and product information. Insurers must also comply with the FCA’s General Principles for Business and in this context insurers (particularly selling retail products) must be mindful of the need to ‘pay due regard to the interests of customers and treat them fairly’ and ‘pay due regard to the information needs of clients and communicate information to them in a way which is clear, fair and not misleading’. The FCA has statutory powers of product intervention that would allow it to restrict the use of certain insurance product features, require that a product not be marketed or sold to certain categories of customer, or even ban the marketing or sale of a product.

Recent changes to consumer protection laws in the UK (such as the Consumer Insurance (Disclosure and Representations) Act 2012, the Consumer Rights Act 2015 and the Insurance Act 2015) provide enhanced protection for consumers buying insurance products and regulate the permitted content of policies including in regard to the use of unfair contract terms, prohibition on insurers asking consumers to contract out of statutory rights and, in the case of non life insurance, specific disclosures of product information that have to be provided to the buyer before the insurance contract is formed.

Regulatory examinations

What are the frequency, types and scope of financial, market conduct or other periodic examinations of insurance and reinsurance companies?

US-style examinations of insurers and reinsurers do not occur in the UK, and there is no public hearing process provided for in the usual conduct of regulatory affairs by the FCA or the PRA. Instead, the UK regulatory approach is to provide regulatory oversight through a combination of reporting, self reporting and regulatory intervention if required. Regulatory oversight is usually exercised by the FCA (as to conduct) and the PRA (as to prudential matters) working together pursuant to a memorandum of understanding. Underpinning the oversight function are the duties imposed on insurers and reinsurers under the Principles for Business, which are applied by both the FCA and the PRA. Financial reporting and financial requirements were already provided for in the PRA Handbook, and have been supplemented by Solvency II requirements from 1 January 2016. Both the FCA and the PRA conduct visits and in-person interviews with insurers and reinsurers on a regular basis (the former ‘Arrow Visit’ regime under the FSA was continued initially by the PRA and the FCA, but has now been replaced with a new regime concerned with a Firm Systemic Framework).

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