The Insurance guide provides expert legal commentary on key issues for businesses. The guide covers the important developments in the most significant jurisdictions.
Last Updated June 21, 2018
Increased conduct regulation (for example, the Insurance Distribution Directive (“IDD”) in Europe), Insurtech innovation, cybersecurity and data privacy are themes that have dominated the regulation of the global insurance market over the past 12 months and are likely to continue to do so in 2018. Lawyers in all major markets have pinpointed these as areas of focus in their practice as the insurance market looks at new ways to reach customers and to achieve increased operational efficiency and lower costs. In a dynamic time for the industry, insurers world-wide remain focused on top-line sales and bottom-line profitability when addressing legal and business challenges. This practice guide identifies key legal and market developments that will demand attention from insurers and reinsurers in a number of individual markets over the next 12 to18 months but there are a number of common themes.
2017 saw the insurance industry enter the age of increasing connectivity and automation, driven by Insurtech advancements, for example, big data, wearable technology and blockchain. The potential value offered by Insurtech is clear: better information about customers and risks, alternative methods to access customers and counterparties and new types of insurance products. Blockchain may improve accountability, transparency, security and efficiency for market participants and insureds by speeding up placement of risk, retaining policy information, settling claims quickly and using digital payment systems. However, these technological advances bring new challenges for insurers contracting with the new generation of technology companies and regulators who will need to address the legal and prudential issues that come with the use of such technologies. For example, there is no global regulatory consensus on whether a 'smart contract', which contains the rules for processing transactions made between participants on a blockchain, is itself a legal contract. Further insurance regulation is currently often based on where an insurer conducts business but this becomes less relevant where insurers access customers and operate their business remotely. Although some national regulators have been slow to accommodate Insurtech, others have been proactive, for example the Financial Conduct Authority ("FCA") of the United Kingdom ("UK") has taken a lead by launching, in May 2016, a supervised space (or ‘sandbox’) where ideas could be created and tested. To keep up with industry demands, it is expected that national regulators will become more engaged in 2018 and beyond and international bodies such as IAIS and EIOPA will likely seek to set some international standards.
With increased reliance on technology, many business sectors, including the insurance industry, are increasingly being targeted by threat actors, both internal and external, including disaffected employees, organised crime and rogue nation states. In most cases, the motive is financial gain but there is also reputation risk for the target especially if the data breach results in theft and/or fraud. For these reasons, cybersecurity is a key focus for the insurance sector globally. In recent months, insurers have acted, firstly, to become more cyber-secure themselves and secondly, to raise awareness about the use of insurance for cyber risk and to develop new products in response to the needs of their customers. As the General Data Protection Regulation ("GDPR") takes effect in the European Union ("EU") in 2018, the insurance sector, as well as refining its own practices to comply with this legislation, is likely to increase its cyber insurance offering for European firms. We also see similar developments in response to data privacy and cyber legislation in US and Asia. Given the potential impact of cyber risks we expect to see the insurance industry looking to increase its capacity to cover such risks, potentially working with non-traditional capital markets investors to meet global demand.
Heightened focus on management responsibility and governance is another identifiable global trend, spurred on by increased financial and regulatory reporting requirements such as those established in Europe under Solvency II. Many insurers have responded by adjusting their internal operations, structures and corporate strategies. Restructuring and reorganisations are also being driven by political events, in particular, following the 23 June 2016 referendum vote for the UK to exit the EU (“Brexit”) with many insurers now needing to establish a presence both in the European Economic Area ("EEA") and in the UK to enable them to continue to operate in a post-Brexit world. Once the Brexit position is clearer, this may drive further transactions in 2018 as some UK insurers having taken stock of some parts of their European business, may consider disposals. Similarly some EU insurers may divest their UK business to avoid the inefficiencies associated with operating a separate UK business. Much will depend, however, on the form of ultimate political agreement on the trading relationship between UK and the EU27 for financial services.
Low investment returns for insurers generally has continued to impact their results, particularly with the introduction in Europe and some other countries of risk based capital where risk weighted returns become the important measure. We have seen greater emphasis on capital efficiency and effective investment policies to counter the limited underwriting returns available in a soft insurance market. We also see insurers increasingly replacing banks as participants in corporate debt, property development and infrastructure investments, increasing their participation in the real economy.
Insurers and reinsurers continue to respond to the global soft insurance market by looking for new areas of risk and geographic coverage and opportunities remain to fund insurance gaps in many markets, not only in emerging markets. There are also evolving risks which insurers will consider to see whether they can be addressed by suitable products. In addition to cyber risk, these include responding to new technology, such as driverless cars, and intangible risks such as reputational risk. The legal, financial and regulatory impacts of these new risks will need to be carefully analysed so that any such products can be appropriately designed.
Recent natural catastrophes in America and the Caribbean may lead to some hardening of rates in certain sectors of the insurance market. The 2017 hurricane season is also testing the resolve of some existing market participants in Insurance Linked Securities (“ILS”). Despite this, ILS is expected to attract increased investment from capital markets investors in 2018, particularly where rates harden. Both the UK and Singapore are seeking to establish new centres for ILS issuance. Bermuda continues to see interest in the establishment of further ‘hedge fund Re’ specialist reinsurers, which also provide additional capacity in the reinsurance market. Regulators will need to respond appropriately to new participants in the market, recognising that they bring needed additional capacity and diversity, particularly in the light of new risks, but also ensuring that this extra capacity does not threaten the security of insurers and their customers.
Global M&A activity has continued but with fewer significant industry mergers in 2017. Asia has been an active market and both Chinese and Japanese insurers have also been active abroad. However Chinese buyers have recently found regulatory approvals more challenging in some markets, notably the USA. In Europe, disposals of non-core or capital intensive businesses post-Solvency II continue to be seen, with private equity and run off specialists as active buyers.
Further regulatory changes are expected in 2018 as regulators respond to these developments affecting the global insurance sector. In 2018, Brexit planning will be a focus for UK and EU based insurers as they hopefully get more clarity on post-Brexit access arrangements. Conduct regulation will continue to be challenging for the insurance sector but regulators are also expected to refocus on prudential regulation. For example, the European Commission, will start to look at the implementation of Solvency II across Europe. At the same time and at a global level, the International Association of Insurance Supervisors (“IAIS”) is looking at the phased adoption of Insurance Capital Standards (“ICS”) for Internationally Active Insurance Groups and an activity board approach for assessing the systematic risk posed by insurers and reinsurers. Further convergence of global regulation is expected but, given emerging protectionist trends in some parts of the world, there may be some challenges in making further progress.