Insurance Bulletin, March 2018 Edition 3
In this issue: Regulation and legislation; Market developments
1. Regulation and legislation
UK: Transition period agreed
On 19 March, the UK and EU agreed in principle to a 21 month transition period following the UK's exit from the EU in March 2019, giving UK businesses additional time to plan for Brexit. The transition period will last from 29 March 2019 until 31 December 2020, during which time EU laws will generally still apply to the UK. Importantly, this means that freedom of movement for people, goods, capital, and services, including the passporting regime for (re)insurance businesses, will continue during the transition period. Under the terms of the agreement, the UK government will also be able to negotiate and ratify trade deals with third countries in readiness for 1 January 2021 when the transition period is due to end. As yet there is no agreement on Northern Ireland, and disagreement still looms over the trade framework, judicial cooperation, and data protection issues.
(Re)insurance business should not treat the agreement of a transition period as more than a breathing space to complete the preparatory work needed for Brexit. Regulators have emphasised that businesses need to continue to prepare to make authorisation applications and begin portfolio transfer processes as soon as possible.
The European Commission has published the draft agreement on withdrawal from the EU showing the agreed and disputed terms in detail. The transition agreement is set out in Articles 121 to 126. The text of the draft agreement is in different colours to indicate its current status: green text is agreed at negotiators’ level and will only be subject to technical legal revisions in the coming weeks; yellow text is agreed on the policy objective but drafting changes or clarifications are still required, and white text corresponds to text proposed by the Union on which discussions are ongoing as no agreement has yet been found.
To see details of our Brexit services, click here: www.hfw.com/Brexit. An updated edition of our Insurance and Reinsurance Brexit Considerations briefing will be published shortly.
UK: The Senior Managers and Certification Regime: Don’t delay – set a deadline today!
The British Insurance Brokers’ Association (“BIBA”) has called on the Financial Conduct Authority (“FCA”) to determine when the Senior Managers and Certification Regime (“SMCR”) will be extended to insurance brokers.
The SMCR aims to protect consumers and to strengthen market integrity in the financial services sector by increasing individual accountability for conduct and competence within financial services firms, and by requiring firms to make it clear where responsibilities lie within the organisation.
The regime is already in place in the banking sector and is now being extended to the insurance industry. It will apply to all insurance and reinsurance firms regulated by the FCA and the PRA, including insurers and reinsurers; insurance special purpose vehicles; the Society of Lloyd’s; managing agents; and UK branches of third-country firms and European Economic Area (EEA) firms. The SMCR comes into force for insurers on 10 December this year.
In July 2017, the FCA published Consultation Paper CP17/26 “Individual Accountability: Extending the Senior Managers & Certification Regime to Insurers”1, in which it set out proposals for the transition from the current Approved Person regime to the SMCR. The consultation closed in February this year and a Policy Statement is expected in the summer.
In the Consultation Paper, the FCA proposed extending the scheme to insurance brokers and it is currently anticipated that the new rules will apply to brokers towards the second half of 2019. However, BIBA has called on the FCA to determine when this will take place in order for brokers to have sufficient time to prepare their submissions on a timely basis.
The FCA has proposed that individuals at “core and limited scope” (those firms whose business is limited to certain types, for example smaller insurance intermediaries) will automatically move to the new regime. This would include a significant number of BIBA members. BIBA has welcomed this proposal as it this will simplify matters for many firms.
However, for those firms which fall within the definition of “enhanced firms” (such as the larger brokerage firms which have current total intermediary regulated business revenue of £35 million or more per annum), conversion will be far more onerous. They will be required to submit conversion notifications, statements of responsibility for each approved person, and a responsibilities map before moving over to the new regime. The FCA has stated that it seeks to effect a smooth transition and will reduce paperwork where possible. However, BIBA is urging brokers to begin the process by identifying who is currently an approved person, and assessing who will fall into the category of a Senior Manager and who will be required to be a Certified Person under the SMCR. BIBA anticipates that for the smaller brokerage firms it is unlikely that their employees will fall within the Certified Persons Regime due to size. David Sparkes, the Head of Compliance and Training at BIBA has explained that “Certified people are people who have the ability to cause significant harm to the business and so in the FCA’s eyes this will be people who are divisional directors of a large organisation that could operate above the firm’s systems and controls.”
The effect of the changes for the broking community under the new regime is not yet clear, but BIBA agrees that the changes seem sensible, in particular for smaller firms and is “keeping an open mind”.
Gibraltar and the UK: The Special Relationship and Brexit
The UK is taking steps to ensure that Gibraltar will be able to trade with the UK on the same basis when the UK leaves the EU (expected in March 2019). A substantial proportion (up to 90%) of Gibraltar’s financial services sector trade within the EU is with the UK due to Gibraltar’s offshore services in the banking and insurance sectors. The Gibraltar government says that one in five British drivers insure their cars with firms based in Gibraltar and that the services companies employ thousands of people in the UK.
Gibraltar is therefore a significant consideration in the Brexit negotiations and the Gibraltar business community has been concerned to achieve certainty about the nature of its relationship with the UK after Brexit. As matters currently stand, Gibraltar will lose all its current rights on Brexit, unless a deal is achieved to preserve the status quo.
The strength of the UK and Gibraltar’s special relationship has been demonstrated by the recent joint ministerial council between Brexit minister Robin Walker and the chief minister for Gibraltar Fabian Picardo. It was agreed that Gibraltar financial services firms would be granted access to the UK markets until 2020. This will give the UK government time to work closely with the government of Gibraltar to design a replacement framework, to include continued high standards of regulation, based on information-sharing, transparency and regulatory co-operation.
The discussions also set out the manner in which the UK and Gibraltar will collaborate in other areas such as online gaming, transportation, the environment, healthcare and higher education.
2. Market developments
UK: Drone insurance takes off
The global drone industry is forecast to be worth US$100bn by 2020, according to Goldman Sachs. Allianz Global Corporate & Specialty (AGCS) estimates the commercial drone insurance market has the potential to reach US$1bn within the same period. However, until recently, the insurance product offerings on the market have been criticised as “unfit for purpose”. That is now beginning to change with some new innovative offerings.
Today drones are used commercially in an increasingly diverse range of industries, ranging from loss adjusting, photography, television, emergency services, law enforcement, agriculture and construction to prisons. In the EU, those using drones for commercial purposes are considered aircraft operators, and so are required be compliant with EU regulation EC 785/2004 (“Insurance requirements for air carriers and aircraft operators”). However, many of the risks typically associated with drones such as collisions with buildings, people or other aircraft, and claims for nuisance, trespass and invasion of privacy are often not covered by standard aviation insurance policies. This issue has traditionally been resolved by bespoke policy endorsements, which are both time consuming and expensive.
However, a number of companies now provide drone insurance specifically for commercial drone users, such as Drone Guard (underwritten by Starr) and Icarus (underwritten by Swiss Re). Typically, such policies are EC785/2004 compliant, and provide standard cover for loss and damage, as well as third party property and injury liability. Policy extension options include cover for legal claims arising from noise complaints, invasion of privacy and trespass, ancillary equipment (such as expensive photography apparatus), and even accidents caused by the loss of control of the drone resulting from a cyber attack locking the controls.
Whilst such policies are a welcome development, perhaps the most interesting development in this area are the insure-tech products developed by companies such as Flock (underwritten by Allianz) and Coverdrone. Both companies’ products are suitable for commercial operators and hobbyists alike. Those who fly drones purely for recreational purposes are unable to purchase the commercial policies referred to above. Some household policies covered loss and damage to the drone itself, but do not cover third party liability. More and more, home insurance policies exclude drones from the cover.
These new products are apps which allow users to purchase per flight or per day cover through the app, with premium calculated on a range of factors, including weather, windspeed, and building / population density. UK-based Flock charges an average of £5 per hour of insurance, and users can even make a claim through the app. With an equivalent annual policy often running into the hundreds of pounds, the on-demand insurance model is currently unrivalled in terms of convenience and expense. Whilst such apps are still in their infancy, Coverdrone already operates in several countries across the globe, and Flock plans to expand into Europe imminently. In an age when we expect everything to be available at the tap of our smartphone, why should purchasing insurance be any different?
Trainee Solicitor, Hong Kong