Review of the year - General insurance: Regulatory dramas

With Europe delaying the implementation of Solvency II, the Test Achats ruling barring gender as a rating factor and the Jackson Review given the green light for cost reform implementation, 2011 has not been for the fainthearted.

Before the ruling in the Test Achats case was handed down by the European Court of Justice in March, the insurance industry had begun preparing itself for the worst. In February, the Association of British Insurers issued guidance urging insurers to prepare for the outcome.

Acting director general Maggie Craig said: “Our firm advice is that member companies should make the necessary preparations for a judgment by the ECJ that, as a general principle, differences in premiums and benefits in insurance contracts based on gender are illegal.”

The ruling itself is not only likely to increase the cost of motor insurance for women but has sparked fears that a similar ban may be passed for age.

“The gender ruling will potentially have significant implications for both the insurance industry and the general public,” Karl Murphy, UK property and casualty director at Towers Watson, says. “One unintended consequence will be the increase of female motor rates — especially at the younger end — to match those of their male counterparts.”

He adds: “Far more significantly, however, is a concern from insurers that the ruling may be extended to other rating factors, and in particular to age.”

Axa personal lines chief executive Steve Hardy adds: “We were disappointed with the judgment from the ECJ in March, which we believe is unfair to UK consumers and another example of how factors outside our control are necessitating a rise in premiums.”

Rising premiums
Rising motor premiums became one of the 
biggest issues of the year, with the government stepping up its battle against the rising costs, particularly those faced by young drivers.

The Transport Select Committee reopened its investigation on motor premiums in July to focus on the issue of referral fees, after publishing its initial report in March, where, among a raft of recommendations, it called for a dedicated police unit to tackle fraud.

Simultaneously, the government spent much of the year mulling over Lord Justice Jackson’s Review of Civil Litigation Costs, with a ban on referral fees announced by the Ministry of Justice in September.

As part of the implementation of the Jackson Review, the government also pledged to end the recoverability of success fees in 
no-win no-fee cases and the bar on 
recovering after-the-event premiums, both of which affect the cost of insurance.

“The use of referral fees and the associated high legal costs have been a major contributor to the increases in motor insurance premiums,” says Paul Geddes, CEO of RBS Insurance.

“While banning referral fees is a step in the right direction, to ensure consumers benefit from this decision it is important that lawyers’ fixed costs are reduced accordingly, otherwise insurers and their policyholders will continue to foot the bill. Without the income from referral fees, claims costs will not be able to be subsidised.”

Axa itself moved to end receipt of referral fees in June and Hardy adds: “Our campaign for a ban on referral fees has helped highlight the dangers of drifting further into a compensation culture, which has been instrumental in inflating motor insurance premiums.”

Further regulatory drama was in store for the industry in the shape of Solvency II. Insurers had spent much of 2011 preparing for the incoming capital adequacy regime 
ahead of the January 2013 implementation date, only for the Financial Services Authority to push the deadline back by a year.

The decision was met by a mixed response. John O’Neill, head of insurance consulting practice at Barnett Waddingham, claimed the decision would have “massive implications” for consultancy and in-house costs and would lead to uncertainty. However, Gareth Haslip, head of risk and capital strategy for EMEA at Aon Benfield Analytics, said smaller insurers would “breath a sigh of relief” at the decision.

Mark Stephen, UK insurance leader at PwC, believes that insurers should push ahead with implementation despite the delay: “Even with a delay in start date insurers cannot afford to be complacent with their plans as they will still be required to file Solvency II information over the course of 2013 to prove their readiness.

“Insurers will still need to have the appropriate systems and processes in place by the end of the year.”

However, Simon Sheaf, general insurance practice leader at Grant Thornton, suggests 
that some insurers will be irked by the 
decision. “Clearly, the winners are those insurers who are not as ready as they could be – they now have a further 12 months to prepare. In addition, any insurers who are going to need to raise additional capital will now have more time to 
arrange this.

“By contrast, those who have invested heavily in preparing for the new regime in terms of time, resources and money and are – as a result – on schedule, are probably less than impressed by this delay.”

Outside the world of regulation, major catastrophes in New Zealand, Japan and Thailand gave the insurance industry plenty of food for thought. However, it was events closer to home that proved to be more harmful to the industry’s reputation.

Insurers were criticised for the response to the winter freeze, with Lorega chairman Malcolm Harvey suggesting insurance cutbacks were behind a lack of co-ordinated claims response; while MP for Tottenham David Lammy slammed the insurance industry following the August riots, singling out Zurich for its “woeful” response.

Jeremy Miles, UK and Ireland manager at Chubb, says insurers should learn from the experience, especially as such an event could reoccur. He adds: “It is always hard to predict the severity and impact of climate-related claims, but freezing conditions appear to be becoming more common. In surge situations created by a big freeze, speed of response is vital, as is speed of settlement.”

Reputational defence
While many insurers were quick to defend the industry’s reputation, Laurent Matras, managing director of Groupama Insurances, admits that performance has to be improved. “It seems that some lessons have been learned and at least part of the response has been promising,” he says. “However, recent feedback to the market following the summer riots has not been so good – so there’s clearly still work to do.”

Besides an acknowledgement that insurers must continue to improve in an ever-changing and more surge-prone industry, Geddes believes that the industry has to continue the fight against the compensation culture to thrive in 2012.

“We welcome the moves towards reform on referral fees and legal costs, but there is still plenty to do to tackle the compensation culture within the insurance industry,” he says.

However, Barry Smith, CEO of Ageas UK, believes that preparing for legislative changes will be crucial in the new year and beyond. He concludes: “It’s difficult to think of another period when there has been so much external focus on the insurance industry. Solvency II, gender legislation, the referral fee ban and the cost of motor insurance have all featured during the year and will present further challenges as we go into 2012.

“Influencing this agenda has never been more important and our view is that the industry should continue to work together to state its case and get the message across that, fundamentally, we are in business to protect our customers, their families and their businesses.”


General insurance review of the year timeline

January 2011
Claims from the winter freeze tipped to top £3bn

Scottish Courts reveal tenfold increase in pleural plaques cases

February
Amanda Blanc named chief executive of Axa Commercial Lines

RSA becomes embroiled in legal spat with Provident over subrogatedmotor repair costs.

Efforts to settle claims from the September Canterbury earthquake in New Zealand are set back by a new quake in the region

March
European Court of Justice bars insurers from using gender as a rating factor following the Test Achats case

RBSI reveals that the IPO of its insurance business is likely to be done in segments

Transport Select Committee publishes its report on the cost of motor insurance Otto Thoresen named as the new director general of the Association of British Insurers

Google acquires Beat that Quote for £37.7m

Ministry of Justice confirms that it will implement sections of Lord Justice Jacskon's Review of Civil Litigation Costs

April
Axa, Aviva, RSA and Zurich vow to fight on in the pleural plaques battle despite losing a judicial review in Inner Court of Session

Risk Management Solutions claims the Japan earthquake will be the largest insurance loss in five years

Axa places 114 London jobs under consultation

Equity Insurance Group puts 185 jobs within its underwriting and distribution divisions under consultation

Quinn sold to Liberty Mutual and Anglo Irish Bank

May
RSA completes the acquisition of Oak Underwriting

The British Banking Association rules out an appeal against the High Court's decision to reject a payment protection insurance judicial review

June
ABI confirms exercise Watermark, government emergency flood scenario, will run specifically for insurers in August

Former Motor Accident Solicitors Society chairman John Spencer claims that insurers could pocket £4.8bn from referral fees

The European Commission denies Solvency II could be implemented a year late in January 2014 but admits there might be a "transitional period"

Axa decides to stop accepting referral fees

Aviva sells RAC to the Carlyle Group for £1bn

July
Transport Select Committee calls motor insurers back to parliament for more questioning on referral fees

Insurers agree to invest £9m over three years on an insurance fraud police unit

August
The Financial Services Authority urges insurers to work towards January 2013 Solvency II deadline, despite proposals to delay regime implementation for 12 months

Riots hit London with a bill of £200m expected for the insurance industry

Travelers withdraws from private motor business in Ireland

Insurers extend riot notification period

September
Aviva launches internet-only brand Quote Me Happy

Aviva UK CEO Mark Hodges joins Towergate

RSA heads to High Court to defend subrogation claims

Ministry of Justice announces ban on referral fees

October
Ecclesiastical pulls out of New Zealand following earthquake losses

Anthony McErlean jailed for trying to claim £520 000 from Ace after faking his own death

Ecclesiastical seizes £7.6bn Crown Estate contract from RSA

Aviva announces 950 jobs at risk as it merges UK and Ireland unit

Financial Services Authority confirms that Solvency II requirements will come into play for UK firms in January 2014

November
Tottenham MP David Lammy blasts Zurich for its "woeful" response to the riots

China Re partners with Catlin granting it access to the Lloyd's market

ABI proposes a ban on night driving for young motorists

December
Brit Holdings reveals plans to sell UK arm for £150m

Thai flood loss estimates reach $20bn