


Regulatory
Disputes
The FCA has recently published its observations on the work firms have undertaken so far to comply with the operational resilience rules which were introduced on 31 March 2022. This article looks at some of the insights from the FCA.
Background
In the aftermath of the disruption caused by Covid-19, the rules were developed to prevent harm to consumers and instability within the financial services sector due to operational disruption. Firms are currently within a transitional period and have until 31 March 2025 to comply with the rules.
Operational disruption has been a focus of the FCA, and minimising its impact is one of the FCA’s commitments in its 2024/2025 business plan. The operational resilience rules are just one part of the wider work that the FCA has been undertaking on operational resilience. It has also recently consulted, in conjunction with the Bank of England and the PRA, on proposed rules for the oversight of providers of critical third-party services. For more information on that consultation please see our Bulletin article here.
The rules
The operational resilience rules apply to all Solvency II insurers. Insurance intermediaries may also be in scope where they are enhanced scope SM&CR firms.
Under the rules a firm must:
Operational resilience is defined as the ability of firms, and the financial sector as a whole, to prevent, adapt, respond to, recover and learn from operational disruptions. The rules ask firms to assume that major operational disruptions will occur and have in place robust and reliable policies and procedures to deal with those disruptions within specific impact tolerances.
Business services will qualify as important under the rules where a firm provides services to an external end user and failure of those services could, among other things, threaten policyholder protection or cause intolerable levels of harm to consumers, market participants or market integrity.
Insights
Some of the observations that the FCA has made in its recent publication include that:
The high-level message from the FCA is that firms need to be working on embedding compliance with the rules into overall firm culture. The FCA has reminded firms that, whilst 31 March 2025 marks the end of the transitional period, the requirement to be operationally resilient is not a tick-box exercise.
Ali Mynott
Associate, London
The PRA published in May a Policy Statement (PS 8/24) on its updated policy in respect of authorising and supervising insurance branches. Although the Policy Statement largely consolidates the PRA’s existing approach, it includes various clarifications, including on branch reporting and SM&CR requirements.
Background
In 2023, the PRA consulted on its proposals to consolidate and formalise existing PRA policy on overseas insurers that write business in the UK through the establishment of a third-country branch, and to offer more clarity on its expectations in respect of those third-country branches. The PRA proposed to make these changes in light of its experience of authorising and supervising third-country insurance branches following the UK’s withdrawal from the EU.
In response to the feedback it received, the PRA has now published Policy Statement PS 8/24, which sets out the final relevant policy and provides various further explanations and clarifications. The Policy Statement includes the final version of a new statement of policy on the PRA’s approach to insurance branch authorisation and supervision.
Branch reporting – ORSA
In particular, the PRA has clarified that branches can submit either a standalone branch own risk solvency assessment (ORSA) for the branch, or a legal entity ORSA. Any submitted ORSA must cover at minimum the requirements set out in paragraph 9.3 and 9.5 of the updated SS 44/15, which is also included in the Policy Statement. SS 44/15 will be updated again in December 2024 to incorporate changes arising from the Solvency UK reforms.
The PRA has confirmed that it does not require notification from firms on their intended approach.
In respect of third-country branches incoming from non-Solvency II jurisdictions, the PRA considers that ORSA-equivalent reports may be sufficient subject to conversations with the firm’s PRA supervisor.
SM&CR – key function holders
The PRA has also clarified the application of its key function holder requirements to third-country branches. The PRA requires third country branch undertakings to establish the four minimum key functions (risk management, compliance, internal audit and actuarial) in respect of the branch’s operations, and the relevant individuals responsible for these key functions to be notified to the PRA for an assessment of their fit and proper status if they will not directly be in either a PRA SMF or FCA controlled function.
The PRA has further clarified that where a third-country branch undertaking has a key function holder acting as Chief Finance Officer, Chief Risk Officer, Chief Actuary, Chief Underwriting Officer or Head of Internal Audit functions and that person’s role is solely dedicated to the branch, then it would expect the firm to apply for approval for the relevant functions. Conversely, where that individual’s role is not wholly dedicated to the branch, the PRA would not expect them to apply for approval, but they should still notify the PRA of their identity and provide relevant personal information as appropriate. The third-country branch undertaking should assess whether that individual is carrying out the role of a Group Entity Senior Manager (SMF 7), in which case they must apply for PRA approval.
Other clarifications
The Policy Statement sets out some additional clarifications, including those summarised below:
Implementation timetable
The PRA has confirmed that the new policy (including the current updated version of SS 44/15) came into force on 23 May 2024. The implementation date of the future version of SS 44/15 is 31 December 2024.
Dominic Pereira
Associate, London
One of the less thought about consequences of the snap general election is the effect it has on legislation that has been laid before Parliament but has yet to come into force.
This is of particular relevance at the moment, given the swathe of Brexit-related revocations of EU-retained law, which will take effect on their given dates irrespective of whether a replacement or transitional provision has been enacted. More information is available here.
Bob Haken
Partner, London
On 9 May 2024, the Court of Appeal handed down judgment in Technip Saudi Arabia Limited (“Technip”) v The Mediterranean & Gulf Insurance and Reinsurance Co1, dismissing an appeal against a decision of Jacobs J2 in which he had denied a claim brought by Technip against Medgulf on the basis of a policy exclusion in an Existing Property Endorsement.
Background
The Appellant, Technip, was the principal contractor on an offshore construction project in the Khafji Field, offshore Saudi Arabia. Medgulf underwrote a policy of offshore construction all risks insurance on the WELCAR 2001 form in connection with the project. The policy named both Technip and the field operator as Principal Insureds. Technip time-chartered a vessel to assist in the performance of certain of the contract works. On 16 August 2015, the vessel was returning to port when it allided with an unmanned wellhead platform. Technip claimed an indemnity under the policy in respect of its liability for the allision.
At first instance, the Judge held that Technip’s claim was excluded by the Existing Property Endorsement in the policy which defines the scope of cover for damage to existing property. The Endorsement excludes cover for property owned by “the Principal Insured”. The Judge held that this applied because the platform was owned by the field operator, a Principal Assured. The Judge granted permission to appeal on the proper construction of the Endorsement.
Appeal judgment
On appeal, Technip argued that the reference in the Endorsement to “the Principal Assured” in a contract of insurance where there is a single contracting party (that being the consequence of the composite nature of the policy) should be read as a reference to the Principal Assured that is claiming an indemnity under the policy. As a result, the exclusion did not apply because the damaged platform was not owned by Technip but by another Principal Insured. Technip believed that the effect of the Judge’s construction was to deprive Technip of any, or a very substantial part of any, effective property liability insurance.
The Court of Appeal dismissed Technip’s appeal and upheld the first instance Judge’s decision. Sir Geoffrey Vos MR, with whom Lewison LJ and Arnold LJ agreed, held that the exclusion in the Endorsement is to be properly interpreted as excluding claims for damage to property owned by any of the Principal Insureds named in the policy. This includes Technip’s claims for damage to the platform which was not scheduled in the Endorsement. The first instance Judge’s construction accorded with the natural and ordinary meaning of the Endorsement and its commercial rationale. The composite nature of the policy was irrelevant.
Comment
This finding leaves contractors (when they, as opposed to the project owner, are the principal insured, who arranged the insurance – not the traditional scenario but not uncommon in some regions) in an awkward position. Without a crystal ball, it is difficult for a contractor to know what assets between a project site and the ports might be (or during the project become) owned by one of the other principal insureds. In a case like this the liability cover would not respond. This does leave, for the contractor, a potential gap in cover for damage to any property which is not scheduled. There are sound commercial reasons for this for insurers but the converse could also be argued from a contractors’ perspective.
Jonathan Bruce
Partner, London
Marli Wildschut
Associate, London
The Court has handed down judgment in Hamilton Corporate v Afghan Global relating to reinsurance of a warehouse in Afghanistan and the AFB political violence wording.
It held that an exclusion for seizure applied to the facts of the case, and that “seizure” was not restricted to action by governments. The Court also considered arguments on the distinction between Political Violence and Political Risk insurance.
In this article we set out further detail.
Kate Ayres
Knowledge Counsel, London
In the matter of Norman Hay, the Commercial Court applied loss of a chance principles to a professional negligence claim against an insurance broker, in the context of a strike out application.
Specifically, the judge found that where a claimant had no insurance policy in place at all, due to alleged negligence of the broker, the measure of loss will be the claimant’s loss of a chance to recover under the hypothetical policy.
This means that the claimant may recover in full if it can establish that there would certainly have been cover that would have paid out. If, on the other hand, it can show that there would have been an opportunity to settle at a discount, notwithstanding a coverage defence, it may be entitled to recover damages on that lost chance to settle for a lower sum.
More information is available here.
Rupert Warren
Partner, London
Alex Walley
Senior associate, London
Footnotes
1 [2024] EWCA Civ 481
2 [2023] EWHC 1859 (Comm)