Today, Friday, Jan. 14, marks the long anticipated official takeover of regulatory responsibility over the U.K.’s insurance industry by the Financial Services Authority. There should be no major surprises, as the FSA’s insurance division, headed by David Strachan, has been preparing for the event, in cooperation with the industry, since it was first announced in 2001.
Enforcement regulations are in place that stress transparency in the industry’s dealings with the public and a greater effort to more accurately assess risks. Many of the regulations deal with the capital requirements and advertising rules applicable to the life and pensions sector.
This was made abundantly clear with the almost simultaneous announcment that the FSA has levied a £500,00 ($940,000) fine on AXA’s U.K. Subsidiary Sun Life for misleading advertising involving its ‘”Cash Builder Plus” with profits policy. The FSA charged that the company had inadequately advised potential buyers of the downside risks involved.
The U.K.’s P/C insurers, however, are also going to be governed by the FSA, which will require some changes in their operations. “Our approach is more ‘risk sensitive,'” Strachan told those attending the European Insurance Summit in Vienna last October. “We will review reports from the companies for both capital solvency and risk assessment,” he continued. “The company can agree or disagree with our conclusions, but we will be issuing ‘capital guidance’ bulletins, that should give [companies] an incentive to improve risk management practices.” He also indicated that the U.K. rules are in many instances stricter than the European Union’s Solvency II proposals, which are scheduled to go into effect next year.
Strachan explained that the FSA has adopted a “three pillar approach,” which is based on capital analysis, supervisory review and adequate disclosures to insure market discipline. The FSA in general, and Strachan in particular, have also stressed that they want the industry to comply with the spirit of the overall regulations, rather than simply going through checklists of whether or not they have fulfilled specific rules.
Initially the FSA regulations have established a three tier system consisting of insurers, brokers, agents and related service providers who are fully licensed to trade in insurance products, insurers and others who are awaiting a decision by the FSA to grant licenses, and those who have not been approved or are exempt. The approved firms have demonstrated that they have the personnel and procedures in place to comply with FSA’s requirements and have agreed to do so.
Most large U.K. companies and brokers are admitted, and they’ve already taken advantage of their position, by warning the public that by doing business with firms, who haven’t received licenses they are putting at risk any recovery they may be entitled to in the future, if such companies fail.
The British Insurance Brokers’ Association (BIBA) issued a statement last week which noted: “As of the 14 January, insurance brokers and intermediaries will be regulated by the FSA and every broker and intermediary will need to meet industry standards of professionalism and competence, which will ensure that customers are sold products that are suitable to meet their demands and needs and, importantly, give them access to the Financial Ombudsman Service (FOS) and the Financial Services Compensation Scheme (FSCS).”
The announcement was coupled with a warning that consumers could “face added danger and confusion in the future, if they buy their insurance from a non-regulated company.” Eric Galbraith, BIBA Chief Executive stated: “We have serious concerns over the secondary market, i.e. those companies who do not offer insurance as their main product or service such as motor dealers, freight forwarders, property managing agents etc. Consumers should check that these companies are properly regulated before buying an insurance product from them.”
Many analysts question whether the U.K.’s P/C industry is fully ready to comply with all of the FSA’s regulations, and the added cost burdens involved in doing so. They’ve estimated that the cost of the average policy could increase by around £3 ($5.60), as those additional costs of compliance are passed on to the customer.
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