Nottingham Insurance Institute

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Nottingham Insurance Institute
General insurance regulation need it be a
minefield?
Chris OBrien Director, Centre for Risk and
Insurance Studies Nottingham University Business
School
2
Plan

• What is FSA proposing for general insurance?
• FSAs principles for regulation
• Whats the evidence from regulation of the life
  sector?
• A minefield?
• Actions general insurance intermediaries FSA

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WHAT IS FSA PROPOSING?

• Anyone who advises, sells, arranges or assists in
  the administration of insurance contracts
• must be
• authorised by FSA or
• exempt as an appointed representative (AR) of an
  authorised firm
• from October 2004 (31st?)

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Where were starting from

• EU Insurance Mediation Directive
• Consultative paper 159 appointed representatives
  in general insurance
• CP160 insurance selling and administration high
  level principles (107 pages)
• January CP prudential other requirements
  (late!)

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All authorised firms(1)

• Must meet the Threshold Conditions in Schedule 6
  to Financial Services Markets Act (FSMA) have
  adequate resources, be fit and proper
• Rules on senior management arrangements, systems,
  controls
• Measures to prevent financial crime

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All authorised firms(2) Principles for
Businesses

• 1 Integrity 2 Skill, care, diligence
• 3 Management, control
• 4 Financial prudence 5 Market conduct
• 6 Consumers interests
• 7 Communication with clients
• 8 Conflicts 9 Relationships of trust
• 10 Client assets 11 Regulators

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Approach to new regulated products
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Advising and selling

• Private customers advised sales
• Should recommend a product adequate to needs
  incl renewals collect info on demands, needs,
  give suitability statement
• Private non-advised sales
• Demands needs statement (less detailed if no
  advice high risk products?)
• Non-private protect themselves
• IMD (fair analysis) for advice

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Further proposals (1)

• Firm status and disclosure
• Key facts form incl complaints procedure
• Training and competence
• Employees competent, supervised rules on
  recruitment, training
• Fair treatment
• No need to disclose commn unless asked
• Consulting on rule re excessive charges

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Further proposals (2)

• Disclosure
• Pre-commitment policy summary
• Post-application insurer responsible
• Renewal information
• Claims handling (beyond IMD)
• Respond to new claims within 5 w/days
• Handle claims fairly, promptly once claim
  agreed, settle in 5 w/days

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PRINCIPLES OF GOOD REGULATION FSA

• Use its resources efficiently
• Recognise responsibilities of firms mgt
• Proportionate burdens/restrictions
• Facilitating innovation, competition
• Consider international character and UKs
  competitive position
• Moving to risk-based regime

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Comments

• U.S. academics principles
• Adequate, impartial, minimal intrusion,
  transparent
• Risk-based regime has merit but any new system
  can have problems
• Industry wants caveat emptor as higher priority

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EVIDENCE FROM THELIFE ASSURANCE REGIME

• Began 29 April 1988 with Lautro
• Delays in setting rules
• Firms hadnt learnt about compliance compliance
  officers werent trained
• Lautro weak staff
• Why was personal pensions mis-selling identified
  in 1994 not 1988?

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FSA Practitioner Survey(1)
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FSA Practitioner Survey(2)
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FSA Practitioner Survey(3)
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Lessons

• Dont under-estimate compliance as a function
  and it will add to costs
• Dont wait for final rules before planning,
  getting on as much as you can
• Running the business can be helped by
• Better defined management roles
• Better systems, cant afford to go wrong
• Better records of customers

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FSAs position

• FSA has big increasing workload hit by
  Equitable, Independent having to cope with
  stock market decline in many ways ahead of rest
  of Europe in better regulation principles
• ? difficult for the industry and for FSA
• ? strategic issues for firms (e.g. ARs?)

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A MINEFIELD?

• Takes effort to follow consultations
• Wont have final rules for some time
• Easy to get consistent guidance???
• Many issues of detail to get right
• Admin problems (auth. firms up 300)
• Cost, frustrations may hinder compliance culture
• Trust enforcement process?

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ACTIONSGeneral insurance intermediaries

• Effort to understand what is happening
• GISC etc advice
• Set systems in place early
• Do early what can be done early
• Understand FSA perspective and ensure culture of
  compliance is consistent with this

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ACTIONSFSA

• Finalise rules early good incentive
• Improve admin
• Ensure has staff who
• can give clear consistent guidance
• understand general insurance intermediaries
• Undertake cost-benefit analysis
• Establish monitoring of ongoing performance as
  well as policy

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The future..

• The end of this lecture
• but only the beginning of the road to regulation