MEMORANDUM PART A - OVERVIEW OF THE INSURANCE ACT AND THE INSURANCE (LLOYD'S ASIA SCHEME) REGULATIONS

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1 DATE: 19 OCTOBER 2009 MEMORANDUM SUBJECT : OVERVIEW OF THE SINGAPORE INSURANCE ACT, THE INSURANCE (LLOYD S ASIA SCHEME) REGULATIONS AND OTHER LEGISLATION AND ISSUES RELEVANT TO THE TERMS OF BUSINESS AGREEMENT (LLOYD S ASIA) This guidance note and the attached Lloyd's Asia Terms of Business Agreement have been prepared by DLA Piper Singapore in conjunction with JLC Advisers LLP as Singapore counsel. This note seeks to provide an overview of the Singapore Insurance Act and the Insurance (Lloyd's Asia Scheme) Regulations, and to explain why certain changes to the original UK Terms of Business Agreement were necessary due to regulatory requirements in Singapore. PART A - OVERVIEW OF THE INSURANCE ACT AND THE INSURANCE (LLOYD'S ASIA SCHEME) REGULATIONS 1. The Monetary Authority of Singapore ( MAS ) is the regulatory authority appointed to oversee the insurance industry in Singapore. The Insurance Act (Cap. 142) 2. The Insurance Act ( the Act ) is the primary legislation which governs the conduct of insurance companies and insurance business in Singapore. 3. Any person or company must be registered or authorised by the MAS in respect of a particular class of insurance business as an insurer before he can carry on that business in Singapore. 1 The MAS may at any time add to, vary or revoke any existing conditions of registration or authorisation of an insurer or impose any conditions thereto. 2 1 Section 3 of the Act. 2 Section 10(1) of the Act. 1

2 4. The Act also governs the conduct of insurance broking business and it is stated therein that no person shall carry on business as any type of insurance broker in Singapore unless the person is registered as that type of insurance broker, or exempted from being so registered, under the Act An insurance broker is regarded as an agent for the insureds or intending insureds under the Act In comparison with the UK legislation and rules governing the conduct of insurance business, the Act, subsidiary legislation and rules governing the conduct of insurance in Singapore are not as comprehensive. Foreign Insurer Schemes 7. Part IIA of the Act sets out the legislation concerning foreign insurer schemes. A foreign insurer is defined as an insurer which is: (a) authorized under the law of another country to carry on insurance business in that country; and (b) not registered as an insurer under section 8 of the Act The MAS has the power to establish any foreign insurer scheme for the purpose of permitting any member of any class, society or association of foreign insurers specified in the scheme to carry on insurance business in Singapore In respect of each foreign insurer scheme, the MAS will appoint an administrator who shall be resident in Singapore. 7 This administrator shall have responsibility for the operation of the scheme and shall carry out such tasks in relation to the carrying on of insurance business in Singapore by the foreign insurers under the scheme as may be 3 Section 35W of the Act. 4 Section 1A of the Act. 5 Section 35A of the Act. Section 8 of the Act relates to the registration of insurers under the regime of the Act and does not include foreign insurers who are registered under the law of another country. 6 Section 35B of the Act. 7 Section 35C(1) of the Act. 2

3 directed by the MAS or by law. 8 Where the appointment of the administrator of any foreign insurer scheme is revoked, all foreign insurers carrying on business in Singapore under that scheme shall cease to carry on in Singapore insurance business under the scheme Where a foreign insurer scheme is established, each member of the class, society or association of foreign insurers specified in the scheme may, in accordance with the terms of the scheme, carry on such insurance business in Singapore as may be prescribed. 10 However, the MAS may by notice in writing prohibit any foreign insurer from carrying on all or any kind of insurance business in Singapore under any foreign insurer scheme if (a) the foreign insurer breaches or contravenes any of the terms of the scheme under which the foreign insurer carries on insurance business in Singapore; or (b) the MAS considers it necessary in the public interest The MAS has the power to make such regulations as are necessary or expedient for carrying out or implementing a particular foreign insurer scheme. 12 Insurance (Lloyd s Asia Scheme) Regulations 12. The MAS has established the Lloyd s Asia Scheme ( the Scheme ) and, in doing so, has come up with the Insurance (Lloyd s Asia Scheme) Regulations ( the Regulations ). 13. The administrator of the Scheme is Lloyd s of London (Asia) Pte Ltd Under this Scheme, a member of Lloyd s may carry on insurance business as specified at the First Schedule of the Regulations if 14 : (a) The member registers with the administrator; 8 Section 35C(4) of the Act. Further details of the requirements and duties of the administrator under the Lloyd s Asia Scheme are set out at Part IV of the Insurance (Lloyd s Asia Scheme) Regulations. 9 Section 35J(1) of the Act. 10 Section 35D(1) of the Act. 11 Section 35F of the Act. 12 Section 35L of the Act. 13 Regulation Regulation 3. 3

4 (b) (c) (d) The member carries on insurance business, and enters into contracts of insurance, in Singapore through a Service Company; The member authorises the Service Company to: (i) establish and maintain the insurance funds in respect of Singapore policies and offshore policies in separate funds 15 and specific deposits 16 ; and (ii) to accept service of notices and legal processes in respect of or connected to the carrying on of insurance business in Singapore; Lloyd s has given an undertaking to the MAS that the holder of any insurance policy issued by the member under the Regulations shall have recourse to the Chain of Security to the same extent as the holder of a general business policy issued by the same member of Lloyd s in London. 15. In respect of Service Companies, only companies registered under the Singapore Companies Act (Cap. 50) and meeting the following requirements may act as agents for any member of Lloyd s under the Regulations 17 : (a) (b) (c) The company must, unless otherwise permitted by the MAS, be a subsidiary of a managing agent at Lloyd s; The company must have a paid-up capital of not less than SGD 300,000; and The company must be registered with the administrator. 16. The duties of a Service Company include: (a) No Service Company shall without the MAS approval: (i) enter into any contract of insurance on behalf of the members of any syndicate; (ii) cause or permit any amendment or alteration of its memorandum or articles of association; (iii) cause or permit any reduction of its paid-up capital; (iv) cause or permit any significant 15 As further detailed at Regulation As further detailed at Regulation Regulation 5. 4

5 change in its ownership; (v) participate in any pool business other than pools formed by the Singapore insurance industry to cover special risks 18 ; (b) No Service Company shall write any insurance business, unless it has reason to believe that suitable arrangements for the reinsurance of the business written in Singapore are in place at all times and that the reinsurers are of good security 19 ; (c) Every Service Company shall at all times maintain a surplus of assets over liabilities of not less than SGD 150, ; (d) Every Service Company shall immediately inform the MAS if: (a) it is or is likely to be unable to maintain a surplus of assets over liabilities of SGD 150,000 or to meet its obligations as they fall due; (ii) it becomes aware that any of the reinsurance arrangements has been, is being or is likely to be rendered inadequate or ineffective; or (iii) for any accounting period, the permitted trust outgoings of any insurance fund established by it under Regulation 11 exceed the premium receipts of that insurance fund 21 ; and (e) A Service Company shall inform the MAS of any intention by it, on behalf of any member of Lloyd s of which it is an agent under the Regulations, to introduce into Singapore policies insuring risks of a nature which have not been previously underwritten in the Singapore general insurance market Regulation 6A(1). 19 Regulation 6A(2). 20 Regulation 6A(3). 21 Regulation 6A(4). 22 Regulation 9. 5

6 PART B- CHANGES MADE TO THE TERMS OF BUSINESS AGREEMENT IN DRAFTING THE LLOYD'S ASIA TOBA 17. The Lloyd s Asia TOBA has been prepared specifically for use in the Lloyd s Asia market which is based in Singapore. As such, the Lloyd's Asia TOBA is governed by Singapore law. Generally, in drafting the Lloyd's Asia TOBA changes have only been made from the London market TOBA where necessary to reflect Singapore law and regulatory requirements. Should managing agents wish to amend the Lloyd s Asia TOBA further to reflect particular commercial arrangements it is open for them to do so, although it is recommended that they seek appropriate legal advice with regard to any changes made. Where Service Companies are entering into TOBAs with non-singapore registered brokers, it of course remains an option to adopt a different choice of law. However it is important to note that if an alternative law is chosen as the governing law then the managing agents should seek advice from a law firm qualified to advise on the alternative governing law selected to ensure that the terms of the TOBA accurately reflect and are compliant with the Parties' rights, duties and obligations as determined by that governing law. 18. The Lloyd's Asia TOBA is modelled closely on the model TOBA prepared previously by the Lloyd s Market Association and the London Market Brokers Committee for use in the London market. There are, however, a number of differences between the Lloyd s Asia TOBA and the London market TOBA. To assist in reviewing the changes made, we highlight below certain of the amendments and the rationale behind such changes. (a) Clause 1 (Definitions) As mentioned in paragraph 6 above, the Singapore legislation on the conduct of insurance business is not as comprehensive as its UK counterpart. One consequence is that certain terms that are defined in the UK legislation may either not be defined, or have a different meaning, in the Singapore legislation. For 6

7 example, the UK's Financial Services and Markets Act 2000 (Regulated Activities Order 2001) provides a definition of "contract of insurance" but the Singapore Insurance Act does not. In light of this, certain changes have been made to the definitions in Clause 1 from the UK model TOBA. In particular, it has been necessary to remove the definition of contract of insurance in the definition of "Insurance Business" as it was considered that there was no suitable equivalent provision that could be substituted and which would provide the necessary legal certainty. (b) Clause 4.3. (Signing Down) At present, we understand that signing down is not common within the Lloyd's Asia market as that practice is presently understood in the London market. However, as the market develops, it is anticipated that signing down may become more common. To reflect the possible differences in practice in the Lloyd's Asia market and recognising that market practice may develop further, clause 4.3 has been amended to recognise that brokers may be authorised to sign down the MASC's participation in any insurance or reinsurance slip or contract. It should be noted that the TOBA itself does not authorise the broker to sign down. If the broker is authorised to sign down and proceeds to sign down the MASC line then the broker is obliged by clause 4.3 to notify the managing agent promptly of its signed line. (c) Clauses 6.1 and 6.2 (Transfer of Risk) The Lloyd's Asia TOBA is drafted in accordance with, and is governed by, Singapore law. Singapore law provides that in respect of direct insurance risks payment to the broker of premium is effective as payment to the underwriter. 23 In practice, this means that the insurer takes the credit risk of the broker failing to 23 Section 350 (1) of the Act. 7

8 pass on the premium. This is in contrast to the position in the UK where, unless the broker and the insurer enter into a so-called risk transfer agreement, the insurer is only deemed to have received the premium once the premium is received by the insurer or its agent. Similarly, under Singapore law, money paid by the insurer to the insured (such as claims money or return premium) is only treated as paid once it is actually received by the insured and the insurer has the credit risk in the event the broker does not pass the money to its client. 24 Under Singapore law this risk transfer to underwriters is mandatory and it is not possible for the parties to contract out of the statutory requirements 25. Singapore law, however distinguishes between insurance and reinsurance and in the latter case, the position in relation to the payment of premium and other monies under the reinsurance contract is similar to the UK. 26 The Lloyd s Asia TOBA has therefore been drafted to reflect the position under Singapore law. As the Lloyd's Asia TOBA is governed by Singapore law, it is important to note that if the Lloyd's Asia TOBA is entered into with a broker which is not based in Singapore, unless the Parties select another governing law, Singapore law will still determine the allocation of risk. In other words, even though the broker may be based in a country which does not automatically apply risk transfer, clauses 6.1 and 6.2 will still apply to determine the allocation of risk. The TOBA addresses insurance business at clause 6.1 and, separately, reinsurance business at clause 6.2. (i) Direct insurance business Under Section 35O of the Act (as reflected in the Lloyd s Asia TOBA), the insured s payment to the insurance broker of monies payable by the insured to the 24 Section 350 (3) of the Act. 25 Section 350 (4) of the Act. 26 Section 35N of the Act. 8

9 insurer in relation to the insurance contract (e.g. payment of the premium) shall discharge the insured s liability to the insurer in respect of these monies. Further, the insurer s payment to the insurance broker of monies payable by the insurer to the insured in relation to the insurance contract (e.g. return of premiums or claims monies) shall not discharge the insurer s liability to the insured in respect of these monies. (ii) Reinsurance business Section 35N of the Act states that the provisions of Section 35O of the Act do not apply to a general reinsurance broker or life reinsurance broker in respect of contracts for the reinsurance of liabilities under insurance policies. As such, we have maintained the wording of the TOBA so that it is on a non- risk transfer basis. Thus the reinsurer is only deemed to have received the premium once it is received by the reinsurer or its agent. Similarly, the reinsurer is deemed to have paid a claim or returned any premium once the claims money or premium is paid to the reinsurance broker. (d) Clause 6.4. (Terms of Trade) The Lloyd's Asia TOBA is a draft agreement produced for consideration by the Service Company when recording its contractual arrangement with a broker. Consistent with the London market model TOBA, the Lloyd s Asia TOBA includes a provision which allows the Lloyd s Asia Service Companies to set out in the agreement the Terms of Trade to apply between the broker and the Service Company. It is, however, for the Service Company to negotiate and agree with the broker the Terms of Trade which the Service Company wants to adopt when dealing with that broker. Where appropriate, Service Companies may wish to delete this provision and agree the relevant Terms of Trade separately. 9

10 (e) Clause 6.5 (Marine Insurance Act) The Marine Insurance Act (Cap 387) Section 53 (1) provides that the broker is liable to the insurer for the premium payable in respect of a marine policy which is secured with that insurer whether or not the broker has received the premium from the assured. In the same way the insurer is liable for any amount payable in respect of any losses whether or not the broker has paid the premium. Section 53(2) provides that the broker shall have a lien against the assured for the payment of the premium and brokerage and against the insurer for payment of brokerage if acting on behalf of the insurer in broking the policy. Clause 6.5. preserves the statutory obligation of the broker to pay the premium of any marine insurance secured and of the insurer to make payment in respect of any losses impacting on that insurance. The broker's obligations to pay the premium in respect of any marine insurance secured on behalf of the assured whether or not the assured makes payment to the broker, are distinct from the broker's obligation to receive and hold monies in accordance with its statutory obligations which are addressed in Clause 6.6. (f) Clause 6.6 (Broker's Holding of Funds) Clause 6.6 of the Lloyd's Asia TOBA obliges the broker to hold monies in accordance with its statutory obligations. If the broker is based in Singapore then those statutory obligations are set out within Section 35ZD of the Act. It should be noted that it is the responsibility of the broker, not the Service Company, to ensure that the broker holds monies in accordance with its statutory obligations. Please note that under Regulation 7 of the Insurance (Intermediaries) Regulations which applies to brokers based in Singapore, it is provided that interest arising from any payment which is due to the insurer that is received by an insurance 10

11 broker from any bank account, shall belong to the insurer, unless the insurer and the broker have agreed otherwise. However, any interest arising from any payment which is due to the insurer that is received by a reinsurance broker from any bank account, shall belong to the reinsurance broker, unless the insurer and reinsurance broker have agreed otherwise. This is consistent with the position concerning the transfer of risk and has been reflected in the clause. If the insurer and the broker agree that any interest arising from any payment which is due to the insurer shall be retained by the broker then the following clause 6.6 may be adopted: "6.6. At all times the Broker shall receive and hold monies in accordance with its statutory, legal and regulatory obligations and any interest accrued on these monies which otherwise would be payable to the MASC shall be retained by the Broker." (g) Clause 9 (Data Protection) Unlike the Data Protection Act 1998 in the UK, Singapore does not have any overarching and comprehensive data protection legislation, save for individual obligations found in sector-specific legislation. There is a Data Protection Model Code in Singapore but this does not have the force of law and is merely a general code of practice that parties are encouraged to abide by. Clause 9 of the TOBA has accordingly been amended to reflect the different legal position in Singapore. (h) Clause 11.1 (Access to Records) There is no particular requirement under Singapore law in relation to the period of retention of records relating to insurance or reinsurance business. However, for certain purposes tax records are required to be kept for seven years and therefore 11

12 this has been adopted for the purposes of this agreement. It is, of course, open for the parties to agree a longer period. (i) Clause 20 (Choice of Law and Jurisdiction) The Lloyd's Asia TOBA is governed by Singapore law. This means that if there is any dispute arising out of the Lloyd's Asia TOBA, including any dispute as to its existence, validity, termination or meaning, then that dispute shall be determined in accordance with the principles of Singapore law. The Lloyd's Asia TOBA is subject to arbitration in Singapore as the forum with jurisdiction to determine any dispute arising out of the Lloyd's Asia TOBA. As such, the Singapore Courts do not have jurisdiction to determine such disputes but may still be called upon to support the arbitration procedure. Arbitration in Singapore has been selected as the dispute resolution procedure because an arbitration award may be enforced in more than 150 countries in accordance with the New York Convention of A Singapore Court award, however, may only be enforced in a limited number of overseas countries. The ability to enforce decisions in overseas countries is important if the Lloyd's Asia TOBA is entered into between a Service Company and a broker which is not based in Singapore and would fall outside the jurisdiction of the Singapore Courts. Where the parties wish to, it is open for them to select a different choice of law and jurisdiction clause and where the broker is Singapore domiciled and regulated the parties may prefer to adopt a Singapore courts jurisdiction clause. Appropriate legal advice from a firm qualified to advise on the local law should be obtained if any change is made to the choice of law or jurisdiction provision. It should be noted that notwithstanding the selection of mediation and arbitration to resolve any disputes arising from the Lloyd's Asia TOBA, the parties may still apply to the Singapore Court, or any other Court of competent jurisdiction, for 12

13 any interim measures of protection or assistance as provided by the UNCITRAL Model Law Article 9 which is incorporated into Singapore law by Section 3 of the International Arbitration Act (Cap 143A) of Singapore as reflected at clause 19.2 of the Lloyd's Asia TOBA. DLA Piper Singapore 80 Raffles Place UOB Plaza 1 Singapore JLC Advisors LLP Singapore 22 Malacca Street Royal Brothers Building Singapore October