Global Corporate Insurance & Regulatory Bulletin - August 2013

Edited by David W. Alberts, Lawrence R. Hamilton and Vikram Sidhu

Keywords:longevity risk, transfer markets, motor insurers, NAIC, ORSA model act, insurance industry

GLOBAL

JOINT FORUM PUBLISHES ITS CONSULTATION ON THE LONGEVITY RISK TRANSFER MARKETS

On 15 August 2013, the Joint Forum (made up of the Basel Committee on Banking Supervision, the International Organization of Securities Commissions and the International Association of Insurance Supervisors) published a consultation on longevity risk transfer markets. Longevity risk is the risk of paying out on pensions and annuities longer than anticipated. This risk is becoming of increasing concern as people are living longer and there is also concern surrounding the sustainability of existing retirement saving products.

The Joint Forum's aim in publishing its forward-looking consultation is to provide a preliminary analysis of the longevity risk transfer markets and highlight the factors affecting its growth and development. The consultation also aims to highlight the potential risks and issues for all of those concerned in the market. The Joint Forum has emphasised the importance of ensuring that longevity risk transfer markets function safely. In the consultation, the Joint Forum states that whilst longevity risk markets are not presently sizeable enough to present an immediate systematic concern, its potential large size and growing interest from investment banks makes it a paramount goal to ensure that these markets operate effectively. In its press release, the Joint Forum announces that it is hoping that the timing of the consultation would help global policy makers remain ahead of the curve and for the longevity risk markets to continue to grow.

UK/EUROPE

EUROPE - INCREASED USE OF AGGREGATOR WEBSITES

Recent studies have revealed a trend towards an increased use of aggregator websites across mainland Europe, with Spain and Italy coming out on top as the countries with the fastest growth rates in this sector. Whilst the UK is still predominately the largest market for insurance aggregator websites, the gap is closing with other European countries. In light of this increase, the European Insurance and Occupational Pensions Authority ("EIOPA") has recently launched a consultation into aggregators which is due to close towards the end of September. EIOPA aims to provide a 'best practice guidance' for aggregator websites that compare insurance products by the end of the first quarter of 2014. EIOPA is concerned that customers rely too heavily on the information provided through the aggregator website, rather than scrutinising the terms and conditions of the policy being bought. Also, EIOPA has highlighted the potential for conflicts of interests to arise in this sphere between insurers and aggregator websites. Additionally, there is the concern that aggregator websites might not be the most suitable forum for certain types of insurance products.

Those working in the aggregator sphere are positive that this increased use of aggregator websites will continue across Europe. However, some industry commentators are more dubious and have raised the point that just because something works well in the UK, it does not necessarily mean that the same approach will work well in all European countries. Thus, if the trend of increased use of aggregator websites continues to keep rising across mainland Europe, aggregator websites will need to react to the differing demands of customers in the various European countries.

UK - UNCERTAINTY AMONGST MOTOR INSURERS OF THE LEGAL AID, SENTENCING AND PUNISHMENT OF OFFENDERS ACT (LASPO)

The Legal Aid, Sentencing and Punishment of Offenders Act (LASPO) came into force on 1 April 2013 and has been welcomed by most motor insurers and consumers. Motor insurers see the new legislation as a potential reduction in their legal expenses and savings have been almost universally passed on to consumers by reducing the premiums charged. The AA have reported that the average price of car insurance in July 2013 is down by 9.8% from July 2012. However, not all insurers are as optimistic about the potential savings to be made.

The main features of LAPSO are as follows:

the abolition of 'no-win, no-fee' success fees; the abolition of 'after-the-event' insurance premium recovery; and the abolition of referral fees for personal injury claims. The act is particularly relevant to motor insurers who hope to benefit from a reduction in legal expenses as a consequence of the reduction in fighting frivolous law suits. Previously, claimants would use conditional-fee agreements (CFA) to bring a claim without assuming any financial responsibility, and, therefore, drastically increasing the number of claims lodged and pushing premiums higher. The changes introduced by LAPSO reduce this risk which in turn has lead to a decrease in premiums.

Some motor insurers have dropped their rates by somewhere in the region of 5 - 15% in anticipation of the savings to be made post the coming into force of LAPSO. However, this position has not been universally adopted. Some insurers have suggested that the savings to be made by LAPSO have been over-estimated and that they are not likely to be as prudent as the general market is anticipating. If such a prophesy proves correct, this could be challenging for those motor insurers who have already passed these expected savings onto consumers. However, the general consensus in the market has been a positive one and confidence in LAPSO has seen a noticeable fall in rates - in fact, the greatest drop in prices since 1994.

US/AMERICAS

US - STATES BEGIN TO ENACT NAIC'S ORSA MODEL ACT

As discussed in our prior bulletin (here), the National Association of Insurance Commissioners ("NAIC") adopted its Risk Management and Own Risk Solvency Assessment ("ORSA") Model Act in September 2012. Thus far in 2013, five states - Iowa, Maine, New Hampshire, Rhode Island and Vermont - have enacted the ORSA Model Act, and more are expected to follow. The ORSA Model Act requires insurance companies and insurance groups with annual premiums over $500 million and $1 billion, respectively, to file annual "high level" reports outlining their enterprise risk management processes, identifying risks the group could face going forward and addressing the adequacy of capital resources to meet those risks. Initial filings in states that adopt the ORSA Model Act will be due on January 1, 2015. It is expected that ORSA will become part of the NAIC's accreditation requirements for state insurance departments.

US - FINANCIAL STABILITY BOARD EXPANDS...