Insurance law update

This year will bring some of the most fundamental changes to insurance law in decades. Gill Wadsworth examines the changing regulatory landscape for the insurance industry, including the Insurance Act 2015, the Enterprise Bill, and Solvency II

The Enterprise Bill was caught up in a game of parliamentary ‘ping pong’ in March after a third reading in the House of Commons saw the proposed legislation pushed back to the House of Lords.

Anyone hoping for finalisation of the Bill may be frustrated as the government continues to fight resistance from its own backbenchers alongside Scottish, Welsh and Labour MPs over amendments to Sunday trading laws.

This contentious element of the Bill has little bearing on insurers but, elsewhere in the draft, there are notable changes to the way in which policyholders can make claims for damages for late payment.

In January, the Bill was amended following lobbying from the insurance industry, which limited to one year the time in which claims can be made.

The limitation provides security for insurers concerned they would be forced to keep their books open for an unlimited period, and hold reserves of cash to pay for possible claims.

However there has been no amendment to the Bill to exclude large claims and reinsurance; an issue insurers had raised ahead of the second reading in February this year.

Jonathan Sacher, partner at law firm Berwin Leighton Paisner, says insurers believe including large claims and reinsurance “could add extra claims costs and considerable aggravation to the insurers concerned”. He also says insurers contend that the Bill in in its current form could make London-based companies less attractive to investment capital and be damaging to the London market.

“It was argued that reinsurance contracts and big risks over £6m should be excluded for fear that, without these amendments, big premium business in London could become bogged down with legal processes and the market could move abroad as a result,” Sacher explains.

However, while no amendment has yet been made, Sacher says there is still time for the market to persuade the government of the ‘uniqueness of the reinsurance market’ and seek change to the proposed legislation.

Elsewhere the Bill has been questioned for its very necessity since there have been few instances of claims for late payment. Terry Renouf, national senior partner at BLM, says there are no systemic issues around late payment that any of the regulators are complaining about. “[The late payment clause] wasn’t addressed to any fundamental underlying issue. My understanding is that it was raised by the judiciary who were talking to the Law Commission.”

A spokesperson for the Association of British Insurers (ABI) says it shares the view there was no systemic evidence of widespread late payment of claims. The spokesperson adds: “It is not in insurers’ interests to unnecessarily delay claims payments as it leads to additional cost for the insurer, both attritional and added alternative accommodation or business interruption costs.”

The ABI also raised the spectre of claims management companies reinstating the ambulance chasing antics employed followed the payment protection scandal, as they seek to cash in on late payment cases.

“The ABI is supportive of the concept of damages for late payments, but has raised concern at the potential for claims management companies to exploit the new right, adding considerable frictional cost to the system,” it added.

Insurance Act 2015

The uncertainty of the Enterprise Bill is counterbalanced by the inevitability of the Insurance Act 2015 which received Royal Assent last year and comes into force for commercial policies written from 12th August this year. A far more pervasive piece of legislation than the Enterprise Bill, the Insurance Act places greater onus on the insured to disclose every material circumstance they know or ought to know, or sufficient information which leads the insurer to make additional enquiries.
While the change to duty of disclosure means more work for the insured, it also creates challenges for the insurer.

Tony Dempster, partner at Herbert Smith Freehills, says the insurer will need to be proactive once it is on notice to make further enquiries for the purpose of revealing any of the insured’s material circumstances.

“Underwriters will therefore need to be more proactive during the underwriting process,” Dempster comments.

Additionally under the Act an insurer is deemed to know ‘things which an insurer offering insurance of the class in question to insureds in the field of activity in question would reasonably be expected to know in the ordinary course of business’.
Dempster says insurers should consider reviewing their existing training programs to ensure their underwriters’ knowledge is consistent with this standard.

The Act also includes new proportionate remedies for insurers following a breach of the new duty of fair presentation. The insurer may only avoid the policy, refuse all claims and return the premium if it can show the breach of duty to make a fair presentation was ‘deliberate or reckless’, or the insurer would not have entered the contract if it had known the full picture.

If the breach was neither deliberate nor reckless but the insurer would have entered the contract charging a higher premium, it may reduce proportionally the amount it will pay the claimant.

While the Insurance Act is a significant piece of legislation, BLM’s Renouf says it is an evolution of existing law and should not represent a major change for insurers.
“You can look at case law and the underlying law and say duty of fair presentation is pretty close to where we are at the moment. There has been a lot of conversation and discussion because [the Insurance Act] is described as a new piece of legislation but it is a piece of law that is an evolution and it has concentrated insurers’, policyholders’ and brokers’ minds on their obligations,” he explains.

Solvency II

One of the most epic pieces of legislation in insurance history – Solvency II – finally hit the statute books in January this year. Sixteen years in the making, tens of thousands of pages long and subject to countless delays and rewrites, the act harmonises the solvency regime governing all insurers operating in the European Union.

Insurers now work under a stricter, more transparent and risk-focused framework, which aims to improve security for customers. The ramifications of Solvency II have been manifold, not least with insurers spending billions of pounds on readying their organisations for the change. However, Charles Portsmouth, director at Moore Stephens, says the industry is as far away as 2021 before it can achieve a real understanding of the EU Directive’s impact.

“It’ll take time for [Solvency II] to be up and running and embedded,” Portsmouth says. “There is a lot still to do and I don’t think you will be able to say whether it has been worth it for another five years or so.”

The ABI, too, is cautious in its approach to the advent of Solvency II, wanting more time for the legislation to bed down before assessing the Directive’s outcome for UK companies.

The ABI spokesperson says: “Solvency II should create a level playing field and ensure the continuing competitiveness of the UK industry [but] we need more clarity on the value for money of these proposals before they are finalised and implemented.”

All the uncertainty aside, Moore says UK insurers are ahead of the game thanks to the Prudential Regulatory Authority’s (PRA) pre-emptive moves in bringing Britain’s risk capital regime up to date with the introduction of individual capital adequacy standards (ICAS).

“The PRA was well head with the ICAS regime which was brought in as a halfway house before Solvency II,” Moore explains. “In the UK we are getting along well with embedding [Solvency II], certainly in the bigger institutions and in some of the smaller ones as well.”

This year will bring some of the most fundamental changes to insurance law in decades. Both international and domestic regulations mean the advent of new practices and approaches for insurers; the full impact of which cannot yet be known. UK companies appear well placed to take advantage of this new framework, but how well they comply and adapt over the next 12 months will prove critical to their success.

This article was published in the March 2016 issue of CIR Magazine.

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