Wave of new regulation to impact on insurers as industry leaders point to digital changing the market

Speaking at an industry forum on the future of general insurance distribution organised by Pinsent Masons, the law firm behind Out-Law.com, assistant director of the Association of British Insurers (ABI) Jonathan de Beer identified the Solvency II reforms as a particular challenge that UK insurers will need to address.

Some would describe the EU's Solvency II framework as "a monster" and there was a concern it has been "over-engineered", de Beer said, referring to the length of the new legislation and the fact that it has been approximately 15 years in the making.

The Solvency II Directive, which comes into force from 1 January, is aimed at introducing harmonised risk-based rules for insurers operating in the EU. The Directive will force insurers to operate above set capital thresholds to ensure that the companies hold sufficient assets to cover their liabilities.

De Beer said that insurers face extensive questioning by regulators if they fall below their solvency capital limit and possible de-authorisation if they fall below the minimum capital threshold for their company. The Solvency II reforms will also impose new qualitative risk management rules on insurers which will require them to have robust "internal controls" in place, and the insurers will also be forced to disclose asset data for the first time under the new regime, de Beer said.

De Beer, who is head of prudential regulation at the ABI, said, though, that moves to establish "a new global capital standard" to protect the world's biggest insurers from poor economic conditions could replace the new capital requirements rules under Solvency II.

Whilst chief financial officers and chief risk officers at insurers would love to "wake up tomorrow and find a new global capital standard is in place", de Beer said the industry would not welcome the length of negotiations and cost involved in moving to new standards so soon after the long process of setting rules at EU level had concluded.

Insurance law specialists Iain Sawers and Katie Tucker at Pinsent Masons said that other regulatory issues will occupy insurers over the coming months too.

Sawers said insurers need to be aware of changes to consumer credit rules and that there are issues around regulatory authorisation for businesses operating in this market. This is because many are in the process of updating their 'interim permissions' ahead of the 31 March 2016 end of a transitional consumer credit framework that the Financial Conduct Authority (FCA) introduced when it took over the regulation of consumer credit issues from the now-defunct Office of Fair Trading last year.

Tucker pointed to the proposed new EU Insurance Distribution Directive which she said is expected to be finalised by the summer and must be implemented by member states and firms two years later. The new Directive will replace the existing Insurance Mediation Directive and apply to all distribution of insurance, not just the sale of cover through intermediaries, she said.

Among the changes expected to be introduced is with the way the distribution of insurance will be regulated across the EU through the 'passporting' regime to make it easier for firms to trade cross border. 'Passporting' refers to EU single market initiatives that allow firms authorised to provide certain financial services in one EEA member state to deliver similar services in other member states within the EEA.

Insurance distributors operating in more than one member state may have to engage with both the 'home' and 'host' state regulators. Under the new Directive, host state regulators will be able to claim jurisdiction over enforcement matters in certain circumstances, Tucker said. While the Directive is intended to harmonise the laws and regulations relating to the distribution of insurance, it is a minimum harmonisation directive so there are likely to be differences in implementation and the way that firms operate through the EEA. As a result, Tucker said that firms must be clear on the host state laws and regulations that apply to them when operating under a passport.

Insurers will have to grapple with changes to the regulatory environment at the same time as responding to consumers' expectations in a market increasingly being influenced by changes in technology, Edward Dutton, chief executive at British Gas Insurance, told the Pinsent Masons conference.

Dutton said that insurers need to be prepared for the 'connected home', where more household appliances can be manipulated remotely by consumers and where data can be recorded about the performance of those devices.

He said that there are data privacy implications for insurers looking to collect this information, and pointed to the likely launch of a 'connected boiler' service which he said will allow for boilers to be monitored and for consumers to be notified of any issues before any breakdown happens.

Andy Elkington, director of banks and affinity at Legal & General, said that getting digital sales channels right is important for insurers, and that they need to adapt to consumer behaviours. This means serving prospective policy holders that first browse for available deals via price comparison platforms, visit insurers' individual websites for further information and then look to conclude a deal over the phone, he said.

Elkington said that insurers have to put consumers at the centre of their operations and that those that trust their customers stand to gain their loyalty.

"You need controls in place, but if you demonstrate you trust your customers and do the right thing at the right time you will get that trust back," he said.