Insurance Bulletin, 10 September 2015
In this issue: Regulation and legislation; Market developments; HFW publications and events
1. Regulation and legislation
UK: Prudential Regulation Authority (PRA) guidance for insurers on preparing for the senior insurance managers regime (SIMR)
The PRA has written to insurers to provide guidance on how to prepare for the implementation of the SIMR.
The final rules and guidance for the SIMR were published on 13 August 2015 and HFW will shortly be publishing a detailed briefing on the new regime.
The PRA’s letter on the implementation of the SIMR1 states that:
- All insurers will need to identify the individuals that are performing certain functions. They will either need to transfer (or ‘grandfather’) the individuals who are currently approved under the approved persons regime to the equivalent function in the SIMR by 8 February 2016, or make a new application for approval of the relevant individuals after 1 January 2016.
- The SIMR is a natural extension of Solvency II, which introduces the concept of “key function holders”.
- These are functions which could potentially lead to significant losses being incurred, or to a failure in the ongoing ability of the firm to meet its obligations to policyholders, if the functions are not properly managed and overseen. Examples of key functions which must be covered by an insurer’s system of governance are:
- Risk management
- Internal audit
...although the PRA has stated that this should not be considered an exhaustive list.
- Solvency II firms will need to notify the PRA of their key function holders as at 1 January 2016. Ongoing assessment of the fit and proper status of these key function holders is then required.
- Firms which are not subject to Solvency II pose different risks to the PRA’s objectives compared with Solvency II firms, so a streamlined version of the SIMR is being developed for these firms. The PRA is currently consulting on the regime for non-Solvency II firms in consultation papers CP26/152 and CP27/153.
UK: Summary of PRA summer consultations
The PRA has issued several Solvency II-related consultations in recent weeks:
- CP31/151 consults on changes to the PRA’s Supervisory Statement2 on third country branches, which was published in March 2015. The proposed revisions include setting out the PRA’s expectation that a third country branch undertakings will comply with the requirements in the branch guidelines of the European Insurance and Occupational Pensions Authority (EIOPA) that are relevant to it and will comply with the rules in the PRA Rulebook that apply to third-country branch undertakings in line with the EIOPA branch guidelines. The consultation paper also sets out details of how the PRA expects third country branch undertakings to report to the PRA where those EIOPA branch guidelines permit the PRA to take a proportionate approach according to the nature, scale and complexity of the branch business.
- CP28/153 is the fourth instalment of the PRA’s proposals for redrafting modules of the handbook which were inherited from the Financial Services Authority to create a standalone handbook containing only PRA rules, i.e. the PRA Rulebook. The draft text that will be of most interest to insurers is the draft Financial Conglomerates Part. This will replace the existing rules in General Prudential (GENPRU) and Senior Management Arrangements, Systems and Controls (SYSC) which apply to firms carrying out activities in both banking/investment and insurance sectors.
- CP27/154 proposes draft text for new parts of the PRA Rulebook that will apply only to firms which are not subject to Solvency II. The draft parts will replace existing rules in parts of GENPRU, Prudential sourcebook for Insurers (INSPRU), Interim Prudential sourcebook for friendly societies (IPRU (FSOC)), Supervision (SUP) and SYSC. The consultation paper states that the PRA’s aim is not to introduce significant changes to policy but to simplify the rules which apply to non-Solvency II firms.
- CP26/155 contains implementation proposals for the SIMR that will apply to non-Solvency II firms. The consultation supplements Policy Statement 21/156 which sets out the final rules for the regime.
- CP25/157 on reporting and public disclosure seeks feedback on a draft supervisory statement setting out the PRA’s expectations of firms where it has an option to specify a different approach to that published in the Implementing Technical Standards (ITS) for the Solvency II reporting templates and the Solvency II public disclosure templates. The draft supervisory statement sets out the PRA’s expectations where it has options in areas such as Solvency II reporting currency, exchange rates and accident or underwriting year reporting.
2. Market developments
China: Tianjin Port explosion losses could reach US$3.25 billion
It has been reported by broker Guy Carpenter that the total insured losses following the Tianjin chemical warehouse explosion could be between US$1.64 billion and US$3.25 billion. The scale of the losses will lead to significant claims across various markets. In particular, terminal insurers and leading container insurer, the TT Club, are expected to feel the full weight of their potential exposure to liability claims.
Marsh have highlighted that the port was a major loss for both the marine cargo and property markets. Multinational companies will be affected by the loss of Tianjin, with the global motor manufacturing industry suffering acutely following estimated vehicle loss from the disaster which could total between US$790 million and US$1.43 billion. Tianjin is a point of entry into north-east China. This geographical importance has led to it handling approximately 40% of imported vehicles. It also imports components for Chinese vehicle manufacturing. However the ensuing disruption to supply chains has resulted in significant ongoing interruption to the business of the port.
Vehicular damage, as reported by manufacturers directly affected such as Mitsubishi and Hyundai, would trigger business interruption and property damage cover and may lead to property damage insurers looking to recover via subrogation. Cargo insurers will also likely seek recoveries from warehouse operators in relation to storage of goods. It is probable that members of protection and indemnity clubs are enquiring about potential liabilities with regard to cargo losses under contracts or carriage.
It is also likely that insurance will have been placed in the Chinese market. However, exposure may be felt by international and London reinsurers. It is not known whether the Chinese courts will even accept jurisdiction for losses, much less whom they will ultimately judge to be liable for them.
HFW has published two detailed briefings on some of the potential consequences of the explosion. These briefings can be found here: http://www.hfw.com/Tianjin-Port-explosion-August-2015 and here: http://www.hfw.com/Tianjin-port-update-following-the-blast-on-12-August-2015.
3. HFW publications and events
Worldwide freezing order obtained in aid of execution of unpaid arbitration awards is enforced by imprisonment sanctions imposed by the English Commercial Court
HFW has published a briefing on the recent worldwide freezing order (WFO) which was granted by the Commercial Court in the case of ADM Rice Inc v Corcosa in aid of execution of unpaid arbitration awards. The court also imposed an 18 month prison sentence for contempt of the provisions of the WFO on two of the directors and officers of the company concerned.
UK: HFW seminar on “reinsurance for non-lawyers”
HFW Partner Andrew Bandurka and Associates Edward Rushton and Ben Atkinson were the speakers at Industry Essential’s “reinsurance for non-lawyers” seminar, which took place on 19 August 2015. The seminar was an interactive session designed to increase the understanding of non-legally qualified industry professionals on certain key aspects of reinsurance and reinsurance policy wordings, including issues such as:
- E&O clauses
- Aggregation clauses
- The ‘back to back’ presumption
- Follow the settlements
- Claims co-operation and control clauses
The session also included guidance on handling reinsurance disputes.