Bulletin May 2009 Insurance & Reinsurance Industry Group: Corporate Insurance & Regulatory Bulletin London Analysis of National Insurance Consumer Protection Act On 2 April 2009, citing the ongoing economic crisis, Representatives Melissa Bean (D-Ill.) and Ed Royce (R-CA) introduced the National Insurance Consumer Protection Act (H.R. 1880) ( NICPA or the Act ) in the U.S. House of Representatives. NICPA would create an optional federal charter for insurance companies, agencies, and insurance producers. NICPA would include life insurance, property and casualty insurance and reinsurance. Key provisions include: Creation of the Office of National Insurance ( ONI ): The ONI would reside within the U.S. Department of Treasury and would be headed by a National Insurance Commissioner ( NIC ). The President would appoint the NIC for a 5-year term, subject to the advice and consent of the Senate. Consumer Protection: In a move intended to appease several main criticisms of federal regulation (namely, preemption of state law and a resulting laxity of consumer protection), the Act includes rigorous consumer protection provisions. In addition, the NIC must issue market conduct regulations implementing model laws of the National Association of Insurance Commissioners ( NAIC ) to prevent unfair and deceptive practices. Guaranty Fund: In another move to silence critics of federal insurance regulation, NICPA would establish a National Insurance Guaranty Corporation, which would assume, up to certain limits, the obligations to policyholders of a national insurer placed into receivership. The Corporation would be funded by a post-event assessment of only those insurers in the same line of business. In addition, insurers opting for a federal charter would be required to participate in the guaranty associations for each line of business it offers in each state in which it does business. Applicable State Law: Though insurers opting for federal regulation under the Act would largely not be subject to state law, certain state law provisions would not be preempted. Systemic Risk: The Act would require the NIC and all state insurance commissioners to share information with an eventual Systemic Risk Regulator ( SRR ). The SRR is authorized under the Act to make corrective action determinations to the NIC or state commissioner to take action to mitigate or avoid conduct by insurers or affiliates that may have adverse consequences on economic conditions or financial stability.
Co-ordinating Council for Financial Regulators: The Council is intended to be a forum for financial regulators to collectively identify and consider issues relating to the stability, condition, and competitiveness of the financial services industry as a whole. Self-Regulatory Organizations: NICPA authorizes the NIC to register and oversee self-regulatory organizations for nationally-chartered and licensed insurers, agencies and producers. The Act applies to life insurance and reinsurance, two sectors of the industry that have long been advocating federal regulation, and for whom federal regulation creates efficiencies that the current state system cannot meet. However, the Act would also apply to property and casualty insurance, which in the past has been a strong point of disagreement within Congress and the industry. NICPA would establish a dual regulatory system for insurance, which leaves intact the concern over a race to the bottom for insurance regulation as states would have an incentive to compete with the federal regulator to maintain their current hold over registration and licensing fees from insurers. The success of this Act will ultimately depend on how Congress chooses to approach financial regulatory reform, and whether, and to what extent, insurance is included in that effort. It is difficult to predict whether Congress will include insurance within a broader effort at regulatory reform in the financial sector or in efforts to establish a systemic risk regulator, which is a focus of the House Financial Services Committee at this time. With respect to the creation of a systemic risk regulator, it appears that there may be some effort on the House side to include some level of federal regulation of non-federally regulated entities within the scope of legislation to establish a systemic risk regulator. Approval of new Regulation on credit rating agencies The European Parliament and the Council recently approved a proposed Regulation on credit rating agencies (CRAs). This Regulation establishes a common regulatory framework for CRAs, and is likely to have a significant impact on the activities of CRAs. The Regulation requires CRAs to register with their home competent authority if they would like their ratings to be used in the EU. Additional requirements include the following: CRAs may not provide advisory services to a rated entity - this is to deal with potential conflicts of interest; there must be increased transparency - this will require CRAs to disclose information about the basis on which ratings have been based (eg the models, methodologies and key assumptions used) and to publish an annual transparency report; the ratings of more complex and innovative products must be differentiated by way of a specific symbol (ie a kind of health warning); and internally there must be a function which reviews the quality of ratings, and there should be at least two independent directors on the boards whose remuneration does not depend on the business performance of the CRA. 2 India s Competition Law Regime Starting Pistol Fired
The full impact for CRAs of this proposed Regulation (not only operationally but also in terms of potential increased legal exposure) is still to be determined. The Regulation enters into force on the twentieth day after publication of the Regulation in the Official Journal of the EU. Publication in the Official Journal is expected to take place later this year. Adoption of Solvency II Directive (the Directive ) As reported in our April Bulletin, negotiations in the Council of the European Union and the European Parliament on the Directive were concluded on 26 March 2009. The Directive was officially adopted on 5 May 2009 and implementation is intended to take place on 31 October 2012. In the UK, a feedback statement titled Insurance Risk Management: The Path to Solvency II (FS09/1) has been published by the FSA. This is designed to help firms with their Solvency II implementation planning. For a copy of FS09/1 please click here: www.fsa.gov.uk/pubs/discussion/fs09_01.pdf UK Government launches trade credit insurance top-up scheme On 1 May 2009, the UK Government launched a trade credit insurance top-up scheme designed to help suppliers whose trade credit insurance limit has been reduced. The scheme will enable businesses with a trade credit insurance wholeturnover policy to purchase additional insurance. Insurance can be purchased to the value of the lower of the following amounts: the amount which restores the level of cover to its original level; the amount equal to the reduced level of cover offered under the existing credit insurance policy; or 1 million. A minimum level of cover of 20,000 must be purchased and the level of cover given is linked to the amount of cover provided by the underlying credit insurance policy. As each policy purchased covers the relationship with one buyer, suppliers are able to purchase more than one policy, provided they meet the eligibility criteria. This includes a requirement that the trade takes place within the UK as the scheme does not cover exports. The scheme will be open to new applicants from 1 May 2009 until 31 December 2009, and each policy purchased will run for six months. A maximum of 5 billion of top-up cover will be available and the scheme is currently being offered by Atradius Credit Insurance N.V, Coface S.A and Euler Hermes UK PLC. Trade credit insurance covers businesses against the risk of bad debt due to the insolvency or payment default by buyers. It helps give suppliers confidence to extend sometimes lengthy payment terms to buyers and gives banks the security to provide working capital facilities. By offering suppliers protection against financial loss, trade credit insurance is sometimes used to support provision of financing products such as loans, invoice discounting and factoring services. mayer brown 3
Online insurance introductory services The High Court in the UK has ruled in the recent cases of InsuranceWide.com Services Ltd v Revenue and Customs Commissioners and Revenue and Customs Commissioners v Trader Media Group Ltd that introductory services supplied by online insurance providers can be VAT exempt insurance intermediary services. HMRC argued in the cases that the services fell outside the scope of the insurance intermediary exemption since the introducer played no part in the negotiation of the contracts, had no power to bind the insurer, did not recommend or endorse any particular insurer and did not have the necessary relationship with both the customer and the insurer. In short, HMRC argued that the services were advertising rather than insurance and were, therefore, taxable. The court found for the taxpayer on all counts and stated that introduction necessarily involves a relationship between the introducer and the customer. The court added that the introducer did not need to have a direct relationship with both the customer and insurer provided that it formed part of a chain of introduction between the customer and the insurer. This decision is good news for providers of insurance introductory services, as they should now fall within the scope of the insurance intermediary exemption, and casts some doubt on HMRC s criteria for distinguishing between exempt introductory services and taxable advertising services. It can be expected that HMRC will appeal the judgment. Suppliers who have accounted for VAT on introductory services such as those at issue in these cases may wish to lodge a claim for the repayment of VAT plus interest. 4 Corporate Insurance & Regulatory Bulletin London
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