By Georgina Squire, Head of Dispute Resolution, Rosling King.
From January 1, a far-reaching new Europe-wide insurance solvency scheme came into force which, in turn, could trigger a surge in M&A activity between insurance companies. By any yardstick, these are eventful times.
The intention behind the Insurance Act 2015 was to modernise the law and rights and remedies when things go wrong, whilst providing a framework for an effective, competitive and trusted business insurance market.
Looking ahead, it is important that policyholders fully understand the new landscape and appreciate how the changes will affect their business. Reviewing their disclosure processes will be key, as they are obliged to provide to their insurers prior to renewal of a policy a fair presentation of the key issues affecting the business. In order to do so, the policyholder needs to consider whether to establish systems and processes to assess whether further enquiries need to be made before presenting their proposal to their insurers.
Further key changes flowing from the Act include the abolition of the out of date concept of avoidance ab initio for any misrepresentation or non-disclosure at inception, whether inadvertent or otherwise. In future, there will be a raft of proportionate remedies for unintentional breach of this requirement. The new law is to be the default position and it is contemplated that any parties who wish to opt out may do so and negotiate their own different commercial terms. This is likely to be attractive to commercial policy holders.
Given that this was such a major alteration to insurance law, it is hoped that the Act will reduce the number of coverage disputes for the benefit of all and bolster the competiveness of the UK insurance market internationally.
The new, pan-European, insurance solvency and supervisory regime will be implemented under the Solvency II Directive as soon as we have rung in the New Year.
Key objectives of Solvency II are to improve consumer protection, establish a revised set of capital requirements and risk management standards, whilst also seeking to increase international competitiveness of EU insurers.
Insurers who have not aligned their strategies and operating processes with the Solvency II requirements, may face tough times ahead. Indeed, Solvency II sets out broader risk management requirements than before and dictates how much capital insurers must hold in relation to their liabilities. Those insurers which are prepared may find that the impact of Solvency II will provide new opportunities for them to break away from their competitors.
To create the capital buffers which will be required under Solvency II, insurers will need to look at and develop their investment strategies in the search for the ideal capital requirements. To avoid shares in insurance companies from becoming unpopular in the financial markets, they may need to think about return on investment more widely than it has done previously.
We may at a result see a surge in M&As between insurance companies following the implementation of Solvency II, particularly in regions where capital requirements placed on insurers are less onerous than under Solvency II.
Although the move to Solvency II should be smoother for the UK insurance industry in comparison to firms in other EU member states, whether or not the prudence advocated by Solvency II will result in lines of insurance becoming significantly more expensive than before, remains to be seen.
The Financial Conduct Authority has also announced that a review into how insurers analyse and utilise information about consumers is underway. Insurers collecting swathes of digital data from customers to price premiums more accurately, will find themselves under scrutiny. Whilst using “big data” can have benefits for consumers, it could also drive up costs for some categories of consumers.
As part of this review into the collection of “big data”, the FCA has published a “call for inputs”, seeking views on how “big data” is affecting, and is likely to affect in the future, consumers and competition within the industry. The review is intended to ensure that consumers are getting a fair deal whilst allowing the insurance industry to remain competitive.
Depending on the outcome of the FCA’s review which is due to be published in 2016, a full market study may be required. One possible consequence could see insurers moving away from pooling large numbers of customers and instead focus on the “micro-segmentation of risk” which in turn could have an impact on a consumer’s access to insurance.
There is little doubt that the climate of far-reaching change is set to continue.
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