FSA Cites U.K. Market Progress; Won’t Propose Regulations

March 21, 2006

The U.K.’s Financial Services Authority (FSA) announced that it has “put on hold its work to develop rules to bring about contract certainty in the insurance market.” The U.K.’s insurance community applauded the decision as an endorsement of its own efforts to achieve compliance with the FSA’s directives by December 2006.

Speaking at the FSA’s Insurance Sector Conference on Monday, March 20 – the date set for the decision – John Tiner FSA CEO, “acknowledged the progress made by the insurance market in meeting the FSA’s challenge to achieve contract certainty. The challenge to end the ‘deal now, detail later’ approach was issued to the market in December 2004.”

In an interview last week Dane Douetil, CEO of Brit Plc and Chairman of the Market Reform Group, said he was “confident, but not complacent” that the market would be able to produce appropriate guidelines within the time frame set by the FSA. He noted that the Reform Group is dedicated to producing “clear and unambiguous policy wordings,” and that all of the Lloyd’s Syndicates were now working together to “achieve that goal.”

Reacting to Tiner’s announcement, Douetil stated: “We welcome the FSA’s trust in the market’s ability to deliver contract certainty. Today’s decision reconfirms the good progress that the market is making, and the FSA has again made clear that they are encouraged by our achievements to date. We are determined not to lose any of the current momentum, and to ensure that the 85 per cent end of year target is achieved.

“Although as much as 65 per cent of all contracts achieved certainty in December 2005, the challenge will become harder as we get closer to the end of the year. Achieving contract certainty is commercially vital to the market’s survival, and the FSA has made clear that they will still intervene if necessary. Every business must therefore continue its commitment to this issue.

“This expression of trust in the market’s actions and progress to date will also focus our minds on what further practical steps we might need to take to achieve our target. This will be an important aspect of the MRG’s work going forward.”

While the FSA’s directive, which gave the London market two years to ensure that insurance contract terms are agreed at the time the policies commence, was not exactly a sword of Damocles hanging over its operations, it was nonetheless a powerful incentive to change the way a great number of policies are written. The alternative would have been to comply with rules set by the FSA. Although the FSA has frequently indicated that it would prefer a solution from the Market itself, it has also indicated that it was fully prepared to intervene, if it wasn’t satisfied that progress was being made. Tiner’s announcement indicates that those conditions have been met.

However, “the stick” as well as the “the carrot” remains. In his announcement Tiner stated: “To demonstrate our good faith in the market’s ability to reach its goal, we will not be pressing ahead with our work on the contingency plan of regulatory intervention. We are putting it on the back-burner, although we are not taking it off the stove altogether. I would strongly caution against complacency in these next few crucial months; the market must continue to stretch itself to guarantee that the challenge is met by the end of the year. On our part, we will continue to assess progress beginning in the next quarter, not least to see how the market has performed against the challenging 1 January renewal period. We will continue to work with the market in our role as over-seer and facilitator, and will not hesitate in consulting on new rules should progress falter.”

The FSA also made two unrelated announcements at the Conference, aimed at “creating a regime that offers greater flexibility to firms and is responsive to changing market needs.” The FSA said it “will speed up the process of authorizing new insurers in response to market needs at times of pressure, for example following major catastrophes, when new capital becomes available, and ahead of critical market renewal periods.”

It also said that “as part of the FSA’s consultation on the Reinsurance Directive later this year, the FSA will consult on the introduction of Insurance Special Purpose Vehicles (ISPVs) [presumably Captives and ART’s]. Through the consultation, the FSA aims to open up the SPV market here in the UK.”

The FSA indicated that these two decisions form part of the its “wider agenda of better regulation.. They will make the London market an easier place in which to do business and will help to position London as the regulatory platform of choice for the wholesale market, whilst maintaining its high standards.”

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