In Italy, the rules governing insurance and reinsurance contracts and business are spread over a number of different statutory instruments.
Articles 1882 to 1932 of the Civil Code (CC) set out the general principles governing insurance contracts and several other provisions of the CC are, or can be, relevant for insurance and reinsurance contracts. Furthermore, the Private Insurance Code (Legislative Decree No 209 of 7 September 2005 – CPI) provides the main legal framework for the exercise of insurance and reinsurance activities and business. Also, some laws deal specifically with compulsory insurance (eg, the Motor Insurance Act No 990 of 29 April 1969).
There are also a number of secondary regulatory provisions (regulations and letters to the market) issued by the Italian Institute of Insurance Supervision (IVASS) – ie, the Insurance Regulator – the National Commission for Companies and the Stock Exchange (CONSOB) and the National Commission for the Supervision of pension funds (COVIP).
Other Statutory Instruments
There are a number of other statutory instruments which do not specifically regulate insurance matters but nonetheless include rules affecting insurance companies and insurance business, such as, amongst others:
With regard to international rules, EU regulations as well as directives with certain requirements are immediately enforceable in Italy and many other EU directives have been implemented by means of local regulations.
Italy has a civil law system, therefore legal precedents and case law are not binding. However, case law and, in particular, the decisions of the Supreme Court (Corte di Cassazione) tend to be influential and used in the interpretation and application of the law.
The Institute of Insurance Supervision (IVASS), acts on the basis of organisational, financial and accounting independence from the Bank of Italy, as well as in line with the principles of transparency and cost-effectiveness, in order to provide the stability and smooth operation of the insurance system and consumer protection. In this perspective, IVASS took over all functions of the former body, ISVAP, including supervision of transparency and fairness in the activity of insurers, reinsurers, intermediaries and other insurance market players. The main aims of IVASS are:
IVASS issues regulations, procedures and sanctions to insurance/reinsurance companies and intermediaries. It also keeps registers of all insurance companies and intermediaries operating in Italy.
The register of insurance experts and the Italian Information Centre, providing information to parties entitled to compensation following a motor accident that has occurred in an EU member State, have been transferred to an independent public authority: the Concessionaire for Public Insurance Services (CONSAP).
Depending on the products and/or business, the following additional authorities may have concurrent supervisory authority:
The supervisory authorities have the power to issue binding regulations and to enforce precautionary measures and sanctions, where appropriate. IVASS activity is regulated under Law Decree 6 July 2012, No 95; furthermore, regulatory activity is subject to the provisions set out in the CI and in the regulations and letters to the market issued by IVASS and CONSOB.
Insurance and reinsurance are regulated activities under Italian law and carrying out insurance and reinsurance activities (including the distribution/intermediary activity) is subject to the prior “authorisation” (or “passport”) from the Italian Institute for the Supervision of Insurance (IVASS). This applies to companies issuing both life and non-life insurance products. The main requirements for a company to be authorised to carry out (re)insurance business are the following:
According to Article 11, paragraphs 1 and 57 of the CPI, insurers and reinsurers shall limit their activity to solely carrying out insurance and reinsurance business, with some limited exceptions (for example, activities of direct lending). In addition, insurers and reinsurers may provide coverage in relation to the classes of risks in relation to which their undertaking is expressly authorised. In Italy, only licensed or accredited reinsurers can write reinsurance business.
Different rules apply to EU insurance and reinsurance companies with the main offices in a member state and passported in Italy in order to carry out business under the freedom of services or establishment principles. In a nutshell, EU undertakings are subject to so-called “home country control” (therefore, to the laws and regulations of their home member states) but should comply with the general good provisions, as listed by the IVASS.
The same rules apply to the underwriting of excess layers. Furthermore, Italian legislation does not include specific and different rules applying to consumer, SME or corporate insurances. However, insurance contracts, which fall within the application of the consumer code, could be subject to some strict rules protecting consumers (mainly in terms of information requirements, specific approvals of oppressive clauses, etc).
IPT applies on collected premiums with a tax rate varying from 2.5% to 21.25% depending on the nature of the insured risk (ie, on accident and healthcare insurance premiums IPT applies at 2.5%, whereas on fire and property insurance premiums IPT applies at 21.25%). Certain exemptions may apply on specific types of insurances (such as insurances on natural disasters affecting residential real estate stipulated as from 1 January 2018).
The insurer is entitled to charge to the policyholder with the amount of the IPT due on the premium and is responsible for the payment of the IPT on a monthly basis (also an advance payment is due on a yearly basis) as well as for other compliance obligations (such as filing of a yearly IPT return and keeping an IPT register).
Foreign insurers based in an EU member state can carry out insurance and/or reinsurance business in Italy under the freedom of establishment regime, ie, by opening a branch in Italy, or under the freedom to provide services regime, ie, by entering into insurance contracts in Italy without a branch, in accordance to EU legislation and national implementation rules.
Insurers with their registered office in a third country outside the EU wishing to carry out business in Italy cannot proceed under the passport rights and must:
For those foreign insurers, license is subject to compliance with the rules provided for under the CPI and license granted by the IVASS.
All the overseas insurers and reinsurers shall comply with the general good provisions and supervisory rules and are subject to the local supervisory authority (for EU bodies this is a concurrent supervision with the home country body).
With regard to Brexit, on the 31st December 2020 the United Kingdom's withdrawal from the EU will be completed, therefore, from the 1st January 2021 UK (United Kingdom and Gibraltar) insurance companies and insurance intermediaries will no longer be allowed to operate in Italy unless they are authorised by IVASS as operators from a non-EU country.
Notably, from the 1 January 2021 UK insurance companies will no longer be able to conclude new contracts or renew existing ones. IVASS, with a communication to Italian insureds on 10 November 2020, clarified that UK insurers will, however, be obliged to ensure, even after the aforementioned date of the January 1st, the proper performance of existing insurance contracts, guaranteeing the performance of contractual obligations, including the management of claims, payments and recessions. Furthermore, UK insurance intermediaries will cease all insurance distribution activities.
In order to ensure service continuity, IVASS has already requested UK insurance companies and intermediaries to adopt, by the 31 December 2020, all necessary measures to mitigate the impact of Brexit on their contractual positions and to provide Italian policyholders with timely and adequate information on the effects of Brexit on existing contractual agreements.
In Italy, there are no particular requirements/restrictions regarding reinsurance treaties and the amount of the ceded portion. In this perspective, the decision depends upon the capacity of the reinsured as well as, inter alia, its margin of solvency. Theoretically, policies may be 100% reinsured, however, it is usual for a fronting company retain a portion of the risk up to 5%.
Mergers and acquisition (M&A) activities relating to insurance companies in Italy are subject to prior IVASS authorisation. However, the authorisation of the Italian Antitrust Authority might also be required depending on the circumstances.
In recent years there have been a significant number of transactions in the insurance market. In most cases these operations were aiming at business reorganisation or, following the trend in the mid-size acquisition, at strengthening the position on the market.
Strengthening Positions in the Market
As an indirect consequence of Brexit, AmTrust strengthened its presence in the Italian market through the acquisition from UBI Banca S.p.A of Banca Assurance Popolare Danni S.p.A.; after the acquisition, the company was renamed as AmTrust Assicurazioni S.p.A and, on 29 July 2020, obtained authorisation from IVASS to acquire the AmTrust Europe Limited company's Medmal insurance portfolio, as well as of the technical reserves.
Generali continues its commitment to further strengthen its role also as a player in collective asset management, sustainable investment and development (eg, Generali launched the first green bond on the European market). Among Generali’s most recent operations, it has become a major shareholder with a 24.4% stake in Cattolica Assicurazioni S.p.A through the purchase of a reserved capital increase, conditional on the transformation Cattolica from a mutual company to a joint-stock company.
Another significant operation that should be noted is represented by the agreement stipulated by HDI Assicurazioni S.p.A (100% owned by Talanx Group) for the acquisition of the entire shareholding of Amissima Assicurazioni, thereby strengthening the position of the Talanx Group in the Italian insurance market. The acquisition has yet to be authorised by IVASS and, therefore, the agreement is conditioned to such authorisation by the regulator.
The insurtech trend is also playing a significant role in M&A activities relating to insurance companies, who are investing in capabilities to improve product development, sales and distribution, policyholder services, underwriting and claims management.
The distribution of insurance products has been completely re-ruled by the implementation of EU Directive No 97/2016 (ie, IDD Directive). In this respect, IVASS issued, on 2 August 2018, three regulations: No 39, 40 and 41.
Regulation No 40 provides insurance and reinsurance distribution discipline, setting the principles regarding the access to the market, the exercise of the activity, also in the case of distance promotion and placement, the training and professional updating of (re)insurance operators. The distribution of insurance products in Italy is done through intermediaries or by the insurer directly. Insurance and reinsurance intermediaries are entities or individuals that must be recorded in a specific register held by IVASS (the Register of Insurance and Reinsurance Intermediaries).
Following the last amendments of Regulation No 40, the Register of Insurance and Reinsurance Intermediaries has six sections for (re)insurance intermediaries:
Foreign intermediaries performing business in Italy are registered in an annex to the Register, with no distinctions among agents, brokers, financial institutions, etc. To be registered, intermediaries must meet certain requirements set out in IVASS regulations and the Insurance Code and hold professional capabilities and qualifications, proven using specific tests. Moreover, IVASS has implemented the EIOPA's "Preparatory Guidelines on product oversight and governance (POG) arrangements by insurance undertakings and insurance distributors", issuing Regulation No 45/2020
When an insurance contract is negotiated, the insured has to provide all the information relating to the risk (these are sometime included within the proposal form submitted by insurers). Failure to provide such information (wilfully or with negligence) could lead to denial or limitation of coverage under Articles 1892 and 1893 of the CC. Relevant information to be provided in the pre-contractual phase by the insured is all those affecting the risk to be covered, irrespective of whether the insured is a consumer or a commercial company.
Consumer protection under Italian law is mostly regulated by the provisions set out under Legislative Decree No 206, dated 8 October 2005 (Consumer Code). Moreover, specific measures are set out in respect of insurance contracts to protect the insured customer's interests.
General protection measures that may affect the insurance sector include information obligations relating to negotiation of policies outside the insurance/intermediary trading premises and policies negotiated at a distance.
In addition to the regime governing unfair terms and conditions that apply to all kinds of contracts (Articles 1341 and 1342 CC), the Consumer Code additionally regulates vexatious clauses.
The remedies for misrepresentation and non-disclosure before inception are provided by Article 1892 and following of the Italian Civil Code. In general terms the remedies are for wilful or grossly negligent misrepresentation (termination or denial of indemnity) or “simply” negligent misrepresentation (typically reduction of coverage).
In short, when an omission/misrepresentation is wilful or made with gross negligence, then the contract can be voided/terminated by insurers – which must be done within three months from the knowledge of the misrepresentation – subject to certain conditions.
It is an established principle under Italian Law set by a number of Court of Cassation rulings, that when the event/circumstance triggering coverage and the relevant indemnity obligation materialises before the Insurers have knowledge of the misrepresentation/non-disclosure, then insurers can deny policy straightaway and avoid paying indemnity on the relevant loss (of course as long as the misrepresentation is relevant and meets the other statutory requirements), with no need to necessarily void/terminate the policy and to comply with the three months deadline.
When the omission/misrepresentation is “simply” (as opposed to “grossly”) negligent, then insurers can terminate/withdraw from the policy (again the term is three months from knowledge of the misrepresentation) and in case the triggering event arises before the knowledge of the misrepresentation by insurers, then indemnity is reduced.
CPI and IVASS No 40/2018
CPI and regulation IVASS No 40/2018 define different type of intermediaries.
Under Article 109, paragraph 2, lett a), agents are appointed by the (re)insurers and they act in the name (and sometime also and on behalf) of (re) insurers. Pursuant paragraph 2, lett b), brokers are professional independent intermediaries that could act on behalf of the insured without any power of representation of (re)insurers. Moreover, under Article 109, paragraph 2, there could also be further type of intermediaries such as direct producers, bank and financial intermediaries, collaborators of intermediaries and ancillary insurance intermediaries, which usually are on the insurers’ side.
Generally speaking, the intermediary has to comply with exhaustive information obligations imposed by Italian law. However, the scope and content of such information obligation varies depending on the specific nature and characteristics of the insurance product. The rationale of such pre-contractual information obligation is to inform the consumer of all characteristics and limitations of the particular insurance product giving him the opportunity to properly evaluate whether the product fits his needs.
IVASS No 41/2018
After the implementation of the IDD directive, the regulation IVASS No 41/2018 is aimed at the following purposes:
In line with the European system, according to the regulation IVASS No 41, the intermediary provides the potential policy-holder with the following:
With each standard document it is also provided the additional DIP (Pre-contractual Information Document), reporting additional information to the above-mentioned standard documents.
Finally, as mentioned above, IVASS has implemented IDD Directive on product oversight and governance (POG). Therefore, insurers and intermediaries, who prepare insurance products, should in particular activate a process of internal approval of each product, before marketing or distributing them to customers.
Insurance contracts must be evidenced in writing pursuant to Article 1888 CC and the contract conditions should be clearly and exhaustively drafted as per Article 166 CPI.
According to IVASS's letter to the market on 14 March 2018, insures have been requested by the local supervisory authority to comply with the ANIA’s (the Italian Insurance Company Association) guidelines in order to “simplify” the policy wordings.
The insurance contract is void if there is no actual risk at policy inception. In other words, pursuant to Article 1895 CC not only there must be an insurable interest of the insured, but it is required that the risk to be covered exists and has not already materialised (and may materialise in the future).
On top of the pre-contractual documentation, as set forth under Regulation IVASS 41/2018, policies do normally (or must) include terms and details as to:
Certain kinds of clauses – which are defined as “vexatious”, ie, particularly burdensome for the insured – must in most cases be specifically approved in writing (essentially through a “second signature” by the insured).
Articles 1890 and 1891 CC provide specific rules governing policies issued in the name of a third party and policies issued on behalf of a third party which is already determined or undetermined.
In particular, in the case of policies issued in the name of a third party, the CC clarifies that the beneficiary is entitled to ratify the policy (and obtain coverage) also after the policy expiry or after the insured risk has occurred; in the case of policies issued on behalf of a third party, the policyholder is subject to all the obligations set forth in the policy (such as informative duties and payment of premiums) but the beneficiaries/insureds (whether identified or not at policy inception) are those entitled to insurance indemnity and to further rights arising from the insurance contract.
In relation to consumer contracts, they are subject to the Consumer Law provisions (which do not affect the type of coverage), whereas reinsurance contracts are not heavily regulated under Italian law. They are usually subject to analogic principles applicable to insurance contract. According to our experience, however, it is market standard and quite common that reinsurance treaties contain specific clauses such as claims notification/control clauses, loss settlement clauses, follow the form and/or follow the fortune clauses or "sunset" clauses.
ART solutions have been implemented in Italy in connections with companies’ risk management plans. Especially, in those areas where it is difficult to find adequate coverages for specific risks or at affordable costs, captive structures have been often implemented.
Furthermore, ART solutions have been also used with the aim of solving problems connected with moral hazard, adverse selection or insolvency risks by means of finite risk reinsurances or integrated risk management solutions.
Most ART transactions are treated as reinsurance contracts.
In Italy, insurance contracts are interpreted according to the same rules applied to any other contract. In particular, the main and guiding principle is that interpretation (when necessary) must first and foremost investigate the common intention of the parties.
However, with regards to policies which have been drafted by the insurer in the form of general terms and conditions to be approved by the insured, according to Article 1370 CC, the clauses – if unclear – are interpreted in favour of the insured, under a principle similar to the contra proferentem rule. Moreover, any cancellation or amendment to the original policy wording, that was not negotiated between the insured and insurers, would prevail over conflicting policy terms pursuant to Article 1342 CC. The behaviour, good faith and common interest of the parties in the pre-contractual phase are criteria that can be used in case of uncertainty.
Insurance contracts are meticulously regulated by the Civil Code, by the CPI and the IVASS secondary regulations which apply whether or not the parties refer to them in the agreement. These dispositions are in fact implied terms and implied conditions dealing with matters such as regulations of premium, risk aggravation or risk reduction, non-existence of risk, mitigation, claims reporting, damages caused by wilful action of the insured, damages arising from defects of the insured property, co-insurance, insured value and over/under-insurance, subrogation, defence costs in civil liability matters and several others.
According to Article 1932 CC, a number of these provisions/implied terms cannot be derogated by the parties in a way less favourable to the insured. This frequently results in the possibility for the policy to establish additional remedies or protection for insurers (or the consequences of breaches by the insured) being somehow limited.
In recent years, new legislation established compulsory civil liability coverage in areas such as medical and professional liability. This is a relatively new phenomenon in our jurisdiction and the new legislation resulted, in certain cases, in “minimum terms” to be strictly applied to the relevant policy, which also reduces the scope for the parties’ ability to include in the policy tools for insurers’ protection and limits to liability.
As a consequence, although it is unusual to introduce warranties in an insurance contract, under a general point of view it cannot be excluded that warranties can be included in any insurance contracts and they are not treated differently to other contractual terms and are subject to the same limits (including the impossibility to derogate, to the insurers’ advantage, a number of statutory implied terms).
As per previous comments, according to Article 1932 CC, a number of provisions/implied terms cannot be derogated by the parties in a way less favourable to the insured. This frequently results in the possibility for the policy to establish additional remedies or protection for insurers (or the consequences of breaches by the insured) being somehow limited.
In light of the above (eg, subject to the compliance with the limitation under Article 1932 CC), although it is unusual to introduce condition precedent in an insurance contract, under a general point of view it cannot be excluded that they can be included in any insurance contracts and they are not treated differently to other contractual terms and are subject to the same limits (including the impossibility to derogate, to the insurers’ advantage, a number of statutory implied terms).
Typically, in relation to third-party liability insurance, dispute over coverage occur before Ordinary Courts when the insured is sued for damages. What usually happens is that the insured joins insurers in the same litigation where the claimant is seeking compensation for damages against the insured: this almost invariably happens when the insurer denies coverage, but also frequently when it has not done so. In suchthat case, courts are requested to decide simultaneously on the underlying claim and also on the coverage claim/dispute (eg, ascertain whether the claim is covered and insurers should indemnify the insured).
In relation to car insurance, the damaged party may seek damages directly from insurers under the policy (ie, the damaged party has direct action against insurers, which is not normally the case otherwise).
With reference to first party loss coverage or life insurance, disputes on coverage are also frequently dealt with before ordinary courts, subject to any different term of the policy (eg, providing for arbitration).
Pre-litigation mediation procedure is mandatory, and a constitutes a requirement to commence litigation over insurance contracts.
Unless there is any arbitration clause (which is very common in reinsurance treaties), also disputes on reinsurance contracts are brought before ordinary courts and there are not peculiar rules applicable to those litigations.
Pursuant to Article 2952 of the Civil Code entitlement to the payment of premium instalments is subject to a one-year statute of limitation from the individual due dates.
For non-life insurance contracts and reinsurance contracts, the time bar for filing claims to insurance undertaking is normally two years. For general non-life insurance, the limitation period runs from the date on which the event on which the claim is based occurred. In the case of third-party liability insurance, the period begins on the day on which the third party has claimed compensation from the insured or has brought an action against the insured.
Notification to the insurer of the claim of the injured third party or of the action brought by the injured party shall suspend the limitation period until the injured party's claim has become liquid and enforceable or the injured third party's claim is time-barred.
With regards to life insurance contract, the time bar is ten years.
The choice of law is determined in accordance with EU Regulation No 593/2008, Rome I, and the jurisdiction is regulated under the provisions set by EU Regulation No 44/2001, as amended by EU Regulation Bruxelles I-BIS No 1215/2012.
Insurance disputes on coverage (and in general to obtain indemnity under a policy) are subject to a preliminary mediation proceeding (which is a requirement in order to bring a legal action before a court). Disputes are then held before the ordinary courts (unless an arbitration clause is set forth in the contract).
Proceedings start with a writ of summon by the plaintiff/insured and the defendant/insurer has an adequate term to file its defence pleading. During the proceedings, parties are granted with further terms to clarify/amend their defensive arguments, to request and file further evidences (in line with the burden of proofs principles) and to object to the counter-party request for evidence. It is important to know that – in general and broad terms – there is no formal discovery.
Normally, proceedings in the first instance may last from three to five years and the appeal proceeding may last from two to three years. Judgments issued by the Court of Appeal can be then appealed before the Court of Cassation exclusively on specific grounds of law.
Foreign (non-EU) judgments can be enforced subject to a declaration of enforceability by the Court of Appeal. In particular, the court shall ascertain that the judgment complies with mandatory rules under Italian law, that it does not infringe general public rules and that the ruling is enforceable in Italy.
Judgments issued by EU Courts are immediately enforceable within Italian territory according to EU Regulation Bruxelles I bis No 1215/2012.
In general terms arbitration clauses are enforceable in Italy. However, in third-party liability claims, insureds who are sued by a damaged party/claimant have the unrestricted right to join insurers in the same litigation, which may occasionally prevent the application or enforcement of arbitral jurisdiction on coverage disputes.
Italy is part of the New York Convention and the arbitration award can be enforced subject to the enforceability order issued by the competent Court of Appeal pursuant to Articles 825 and 839 of the Italian Code of Civil Procedure.
Mediation proceedings have been a requirement in order to commence any litigation involving insurance contracts since 2010. Unfortunately, experience shows, for several reasons, that mandatory alternative dispute resolution (ADR) proceedings have not always been effective and it has not been able to prevent or reduce the number of litigations before the courts involving insurance contracts.
According to the case-law, in the event of an unjustified delay or bad management of a claim by an insurer or in case of failure of the duty to act in good faith in the context of a claim, under certain circumstances, insurers could be liable also over and above the policy limit.
More specifically, insurers may be liable for an amount higher than the policy limit in case the unjustified denial of coverage and/or delay in settling the claim increases (over the policy limit) the insured’s liability.
Also, in case insurers violate regulatory provisions, they may be sanctioned by IVASS.
Insurer’s right of subrogation is specifically regulated under Article 1916 CC, which provides that the insurer who paid the indemnity is subrogated, up to the amount of the indemnity, in the insured's rights towards liable third parties.
The subrogation constitutes a sort of insurer’s sub-entry into the insured’s position (in particular in the right to compensation for damages), which the insured-victim acquires against the liable third party as a result of a wrongful act. The insurer thus assumes insured’s position towards the third party, both from a substantive standpoint as well as from a processual one and can act against the liable third party in order to obtain compensation.
This institute finds its purpose and function in the indemnity principle. When there is indeed a third party liable for the damage, the insured who receives the indemnity from the insurer cannot claim for the same compensation from the third party, otherwise acquiring a double indemnity. However, the third party cannot be released from its liability and cannot profit from the insurance contract.
The insurance industry is working on technology drivers such as blockchain, cybersecurity, internet of things, artificial intelligence. In particular, there are many investments on applications and automations in all the areas of underwriting and claims handling, in order to have faster and cost-effective procedures.
In 2018, the implementation of the GDPR had a great impact on insurance and reinsurance companies and the local regulator requested them to adopt adequate compliance policies. In this perspective, on the market side, increased attention is put on coverage of cyber risks that both individuals and corporate entities (whether private or public) are facing due to Regulation (EU) 679/2016 (GDPR), which entered into force on 25 May 2018. The mentioned regulation led many individuals and entities to look for adequate measures in order to prevent cyber-risks, which – in many cases and, in particular, with regards to small business that are not able to set up cybercompliance procedures – are found in insurance products. In this area, the real innovation, is that insurers are granting not only the usual and typical insurance coverage for damages suffered, but mainly services, such as forensic, legal and PR activities in order to allow the insured to comply with the GDPR.
Fintech and Insurtech
Recently, an IVASS report noticed the increasing development of the so-called micro-coverage, instant insurance, distributed through partnerships between insurtech start-ups and traditional insurers (eg, short travel coverage, electrical appliances coverage).
According to statistics, last year in Italy, 11 million people have used a fintech or insurtech service, ie, 25% of the population between 18 and 74 years of age, which is 54% more than in 2017. Moreover, the insurtech start-up market in Italy had a growth rate of 174% from 2017 to 2018. One of the most successful Italian insurtech start-ups is Yolo, that provides on-demand and ad hoc digital insurance brokerage services to consumers via a dedicated app. With Yolo, customers can use their smartphones to take out instant and pay per use products across a variety of regular insurance packages from major banks and insurance companies. Intesa Sanpaolo has recently led a EUR5 million funding round in Yolo.
For the time being, there has not been a clear and specific response of IVASS with regards to insurtech issues. However, the local regulator has strongly suggested the insurer to comply with the different regulations in force which might have an impact on insurtech business and namely:
Furthermore, IVASS invites also insurers:
Last but not least, under regulation IVASS No 40/18, the local regulator issued specific rules dealing with distance insurance contracts distribution (eg, internet selling).
As expected, the global pandemic brought about by the spread of COVID-19 represents one of the most relevant emerging risks of 2020. In fact, according to a recent report on the website of the Italian Insurance Company Association, COVID-19 appears to have significantly influenced the emerging risk landscape in 2020.
Among its most impactful effects the following should be addressed.
In addition to the aforementioned risk brought up by the well-known pandemic, not dissimilarly from the previous year, emerging risks are considered the clash between digital technology and legacy hardware, the spread of 5G mobile networks, the increasingly limited flexibility of fiscal and monetary policy, genetic testing and its effects on the insurance industry, as well as the effects of climate change on public health.
According to the recent reports on the insurance sector, recent years have shown a predominance of environmental risks (climate change, natural resources) and technology changes including the Internet of Things (IoT), Artificial Intelligence (AI) and cyber-risk, in addition to financial uncertainty.
In relation to the environmental risk, given that the climate change trend is unbroken in the last five warmest years since 2010, there are chances of occurrence of intense heat waves to increase within the next ten years. The same is true for storm surges and high-water levels on the coasts, as the well-known events in Venice in November 2019 have shown.
Alongside environmental risks, cyber-risks and risks connected to the sharing economy and sustainable mobility are also playing more and more a major role. Indeed, the massive use of big data and cloud computing, increases exposure to cyber-risks and therefore demand new solutions. At the same time, sustainable mobility solution, while introducing many significant and positive improvements contribute to the creation of new types of risks.
Private sector companies can also contribute in limiting the impact of these risks. According to researchers, regulating construction in flood zones is one of the best examples of how companies and public authorities can work together for change.
In relation to cyber-risks, the cybercrime or information war may affect the broad range of stakeholders – individuals, States and companies. Moreover, this multifaceted risk category touches on several different issues, from advances in artificial intelligence to the development of robotics and the rising number of connected objects (Internet of Things, IoT).
The Italian Institute for the Supervision of Insurance (IVASS) has issued regulations requesting insurers to strengthen their IT systems’ security, data quality and resilience to cyber-risk. Moreover, the Regulator has submitted a questionnaire to monitor the initiative taken by insurance companies.
The Bank of Italy and IVASS set up, in 2017, a Group for cyber-risk co-ordination (ie, Gcsc), in order to ensure their own IT security and the security of the financial system as a whole.
Insurance companies are responding to the increasing request for cyber-risk insurance coverage in Italy (as well as in other Countries) with the implementation of new policy wordings to satisfy the growing market needs and in line with the features of the local legal environment.
In relation to financial risks, the financial system, after the last recession, is still in recovery mode. Financial regulation and macro-prudential policies are key to limit risks in the financial system.
With regard to the COVID-19 pandemic, at the moment very few specific products have been placed on the market during 2020 in order to deal with the emergency, with the exception of a few attempts that were, in any case, promptly withdrawn between February and March 2020 and of some new health insurances granting coverage for COVID-19 related hospitalisation and recovery (for family members and employees).
Nevertheless, the companies have adopted various initiatives to protect their policyholders to deal with the consequences of the pandemic, such as: extensions to the expiry of insurance cover, equating quarantine with hospitalisation, suspension of debt collection activities, and free extensions of cover.
IVASS Regulation No 45/2020
One of the main new dispositions is represented by IVASS Regulation No 45/2020 on the governance and control requirements for insurance products (POG). This regulation, issued on the 4 August 2020, has been adopted in order to complete the regulations on the subject and to implement what has already been established at the national and European primary legislation level. Furthermore, with the adoption of this provision, IVASS wishes to ensure uniformity in the discipline applicable to insurance investment products regardless of the distribution channel, to ensure consistency and effectiveness in supervisory systems, namely for insurance investment products, and to safeguard the interests of final consumers.
The regulation, whose entry into force is scheduled for the 31 March 2021, regulates in detail the approval procedure for new insurance products or existing products that undergo significant changes before being marketed and/or distributed. With this provision, IVASS imposes specific obligations on manufacturers (including de facto manufacturers), such as, in particular, the identification of the target market of the product, the identification of the categories of persons to whom the product should not be distributed and the adoption of appropriate measures to ensure the correct distribution of the product to the target market.
Order No 97/2020
Another notable regulatory development can be found in Order No 97/2020, issued by IVASS on the 4 August 2020. This provision implements important changes to several other previous IVASS regulations and is set to enter into force on the 31 March 2021, with the exception of certain parts whose entry into force is deferred until the 1 January 2022 and the 31 March 2022.
Among the most relevant amendments made by the Order, the provisions on IBIPs (insurance investment products) cannot be overlooked. In this respect, the Order provides specific disclosure requirements with regard to aspects relevant of the purchase of these products such as their nature, risks, costs and charges. Furthermore, the new provision allows, though at certain conditions, both intermediaries and insurance companies to pay or receive incentives if the latter are aimed to enhance the quality of the insurance distribution business, while at the same time not undermining the obligation to act honestly, fairly and professionally in the best interests of the customer.
Order No 97/2020
Last but not least, new rules are laid down in Order No 97/2020 regarding the assessment of adequacy and appropriateness required in the case of distribution both with and without advice. In fact, for products deemed “other than non-complex” (ie, those that guarantee the recovery of the premiums paid), a compulsory advice has been established. It is worth noting that such advice remains optional for non-IBIP products. For such sales with advice, the information necessarily required in order to perform the so called “assessment of adequacy” is also specified in detail in the regulation. The obligation to assess needs and requests remains, subject to certain differences, even in the case of sales without advice.
In addition to the aforementioned disposition on IBIPs, Order No 97/2020 establishes important novelties also in relation to combined sale, information to clients (namely with regard to pre-contractual information) and horizontal collaborations.
Two other new pieces of secondary legislation issued by the Regulator during 2020 are also worth mentioning, namely Provision No 95/2020 providing new dispositions on the mandatory car third party liability and IVASS Regulation No 46/2020 on the matter of transparency of the commitment policy and of the investment strategy of insurance or reinsurance undertakings.
Amongst the emergency measures enacted by the Italian Government in order to respond to the COVID-19 pandemic, the Decree No 23 of 8 April 2020 (so called Decreto Liquidità) includes measures providing for significant changes to certain corporate and insolvency rules (and a mitigation of certain previously stringent requirements) that may have a significant impact on the liability of directors and officers, on claims under Italian D&O (and professional indemnity) policies and on underwriting the relevant risks.
In the next three to five years, Italian insurance industry is expected to face a number of substantial changes. As in the last decades, some of them are due to the development of the legal and regulatory framework, while other changes will emerge as a consequence of the development into new technologies and market practices.
The article that follows focuses on the impact of the expected changes over the insurance market, and provides an overview of the main legal and commercial problems envisaged by the author.
The Impact of Product Oversight and Governance (POG) Legislation
Insurance Distribution Directive enhanced the customer-centric approach insurers shall have when conducting their business. With specific regard to the introduction of the POG legislation, the interests of customers shall now take primary importance for the insurer when designing or marketing insurance policies and throughout the life cycle of a product, through specific testing and monitoring activities over both the product and its distribution.
The new set of rules has, thus far, been perceived as yet another bureaucratic step to be complied with by both the insurer and its distributors, circling back to the approval of an internal policy document. A careful reading of the guidelines so far provided by the authorities suggests, however, a disruptive impact of the POG legislation on the market, from multiple points of view.
As announced by the European Insurance and Occupational Pensions Authority (EIOPA) thematic review on travel insurance, the value for money principle will allow the insurance authority to contest a high level of commission paid to intermediaries when such remuneration is not adequately justified (eg, with regard to the services rendered by the distributor to the benefit of the insurer or the customer), and/or when the loss ratio is particularly low. This principle will also apply to the fees that distributors are directly charging to customers, especially in certain retail markets.
The POG legislation requires a consistent exchange of information between insurers and intermediaries, on target markets, features of the products and outcome of the sales’ process; distributors should also alert insurers if they believe that the product is no longer meeting needs, objectives and characteristics of the targeted customers. A constant stream of information between multiple parties (including second and third levels’ intermediaries) will hopefully stimulate the creation of new (digital) channels of communication.
With the continuous exchange of information between parties, the duty for the insurer to oversight its distribution network and the obligation for the distributor to provide advice to customers falling outside positive target market will increasingly integrate insurers and distributors with each other. This is certainly new for the Italian market, particularly with regard to brokers, which were traditionally considered to be independent of the insurer and therefore not subject to its binding instructions.
Because of the POG, the maintenance of insurance products is becoming increasingly burdensome for insurers, who are already required to produce a number of documents (including the additional PID) and to ensure they can be clearly understood by customers. As a reaction to this, managing general agents (MGAs) are expected to become more common on the Italian market (due to their ability to provide a full set of services to the insurers) and white-label products are likely to have a more significant presence than in the past. The recognition of the “manufacturer-de-facto” role, together with a levelled playing-field for all intermediaries, may incentivise insurance brokers to claim the paternity of their products.
Insurers will have to pay due attention to the granularity of their target markets, which shall be more accurate and detailed for particularly complex products. With regard to insurance-based investment products (IBIPs), one size fits all products will therefore be more difficult to be designed and insurers will have to differentiate products based on the age and/or the saving or investment needs of the envisaged target customer.
Loss ratios will have to be constantly monitored, to verify whether a value is effectively transferred to customers, the product is fairly priced and managed in a cost-efficient way. As stressed by EIOPA, this is not aimed at interfering with key business decisions of the insurer, but rather at creating a process which is testing the value brought to the target market, balancing profitability aspects with fairness and with the services offered to customers.
Insurers will have to focus on the need to provide documentary evidence of the design, test and monitoring activities performed in order to provide prompt response to the requests of the authority, and legal and compliance functions will need to have a deeper involvement into the design process, which is currently entirely delegated to underwriters.
Digitalisation of the Insurance Market
The COVID-19 pandemic and the subsequent lockdowns led the Italian government to introduce specific measures allowing the use of information technology – in particular the exchange of emails – for the conclusion of the insurance contracts, to the extent that an ID document is sent to the insurer together with the consent to purchase. Despite the fact that this simplification was introduced as a result of the emergency caused by the pandemic and was “temporary” by definition, the market is lobbying and hoping for the change to become permanent.
This would be a significant boost for the insurance market, considering that the current version of the Italian Civil Code – which requires handwritten evidence of the consent and a second signature for the approval of certain specific clauses (eg, the tacit renewal clause) – is significantly in slowing down the attempts of the market to utilise digital channels (eg, apps and smartphones) for the marketing of (on-demand) insurance products, while (even pre-COVID-19) the insurance authority had already accepted the principle that, in case of distance marketing, the insurer could decide not to collect a signed document.
Similar to other jurisdictions, the digitalisation of the insurance market involves a debate over the possibility of using artificial intelligence (AI) at different stages of the insurance activity, particularly with regard to the underwriting of risks. A concern generally raised is that the use of AI for the assessment of risks and the tailoring of the contract (particularly with regard to the premium amount) would conflict with the risk pooling principle.
Despite being a completely new subject, whose implications should probably be considered case by case on the basis of the utilised technologies, there is, in principle, no reason why automated underwriting – focusing on the specific features/conducts of the insured in order to determine the appropriate pricing – should not be allowed.
In the last few years, Italian law has incentivised the use of technological tools, such as the black-box, in order to monitor the style of the insured drivers and to determine the appropriate level of premium, thus, in principle, admitting consistency of the risk-pooling principle with tailor-made premiums, even when tailoring is linked to the post-contractual conduct of the insured (“pay as-you-live”).
Rather, the greater challenge for the insurers will be the choice of AI, ie, those which do not generate any unfair-bias against certain categories of customers, even on an involuntary basis (ie, on the basis of age, gender or race). At the same time, market authorities are likely to be involved in a completely new kind of supervision, which involves the ability to detect the actual functioning of technologies and to identify suitable mechanisms for the protection of categories (eg, persons with disabilities) which should not be penalised by the offer of “pay-as-you-live” insurance covers.
Insurance players have long been competing with pure service companies, which are exploiting certain specific exemptions granted by the Code of Insurance in order to propose their protection solutions (for example, with regard to the extended-warranties offered to retail customers, or with regard to assistance services provided by sanitary funds).
A future trend is possibly going to be the opposite: the evolution of the IT sector is already generating a number of devices which are able to integrate the insurance offer, and which can be used both for the purposes of monitoring the conduct of the insured and for providing further services. For example, a device such as a smart watch can monitor the fitness activity of the insured, and also provide an alert if a health problem is detected.
Insurers are considering how to further expand their non-insurance services and to market those prevention services (eg, a fire prevention alarm or a theft alarm system) which can be offered to customers, either together with an insurance offer or on a stand-alone basis.
This is a significant change for the insurance market, moving insurers from the management of claims and underwritten contracts, to a more active management of risks (even before the occurrence of a claim or the underwriting of a risk). This is clearly a new frontier to be further explored, particularly regarding the tax implications and for the impact it may have in the context of the relationships with the distribution network, despite the limits applicable to the activities which may be exercised by insurance companies.
Insurance-Based Investment Products (IBIPs)
Recently, Italy implemented the part of the Insurance Distribution Directive applicable to IBIPs via two regulations issued in August.
While this, in principle, harmonised the IBIPs Italian market with other European jurisdictions, European insurers and distributors will still have to manage a few peculiarities:
It remains to be seen the actual impact of new rules on manufacturing and distribution of IBIPs. On the one hand, the partial alignment between the insurance distribution directive (IDD) implementing legislation and MiFID-derived regulations support the level playing field, particularly between distributors. On the other hand, such regulatory approach would require distributors to get to grip with new requirements (eg, a portfolio approach to the advice for insurance intermediaries and the demand and needs test for "financial" intermediaries).