Insurance 2018 Forecast v6IP 1 PDF

INSURANCE SECTOR TRENDS:
2017 YEAR END REVIEW AND

FORECAST FOR 2018
INTRODUCTION
In just the last year:
•P
resident Trump was inaugurated
•T
he US and EU signed an unprecedented “covered agreement”
• E urope faced several critical national elections, emerged largely intact, but more to come
•B
rexit started to bite
•M
ore than 3,500 insurance and technology people gathered at InsureTech Connect
•T
here were $306 billion in economic losses from natural and man-made disasters.
Only a third of these disaster losses were insured – an industry indictment/opportunity
•A
IG and MetLife ceased to be non-bank SIFIs
•R
egulators pivoted from entity-based to activities-based assessments of systemic risk
•C
VS signed to acquire Aetna in a $69 billion game-changing pending transaction
• L ife and non-life companies continued to shed non-core or under-performing business
•T
he IAIS appointed a new Secretary General
•A
possible endgame was announced for ICS
•T
he NAIC appointed a new CEO
•T
he US got 19 new insurance commissioners
• F IO got a new Director (Acting)
•N
FIP was attacked and tested while waiting for a long-term extension
•T
he US passed a landmark tax bill
These and other developments reflect a volatile, challenging time for the insurance industry.
As we do every year, this Year End Review and Forecast assesses the impact and implications of
major developments around the globe and, after looking into our crystal ball, we offer some
thoughts on what 2018 might bring.
02 | INSUR ANCE SECTOR TRENDS: 2017 YEAR END REVIEW AND FORECAST FOR 2018
TABLE OF CONTENTS
INTRODUCTION 02
GLOBAL DEVELOPMENTS DRIVING OPPORTUNITIES AND CHALLENGES 06

Brexit 07
Political Developments in 2017 07
Impact on Insurance Groups 07
Brexit Reorganizations 08
EU to Move against “Third Country” Outsourcing and Risk Transfer; and Regulatory Arbitrage? 08
Statements Concerning UK Regulators’ Approach 09
The EU-US Covered Agreement 09
Systemic Risk Analyses 11
Activities Based Approach 11
G-SII/SIFI Developments 11
De-designation of SIFIs 12
Increasing Protectionism 13
COMMERCIAL AND TRANSACTIONAL ISSUES AND TRENDS 14

Global Trends in Insurance M&A in 2017 and a Look Ahead 15
2017 in Brief 15
Key Trends 2017 15
Predictions for 2018 16
2017 Trends in Warranty and Indemnity Insurance 17
Buy-side vs. Sell-side 17
Making a Difference in a Competitive Market 17
Brexit Impact (or Lack Thereof ) 18
Tax Updates 18
Federal Tax Reform 18
Antitrust Issues 21
INNOVATION AND TECHNOLOGY IN INSURANCE 22

InsurTech/FinTech 23
Insurance Industry Adapting to InsurTech Disruption 23
The Global Regulatory Expermentation: Regulatory Sandboxes 24
NAIC’s Serious Look into InsurTech Regulatory “Sandboxes” and Fur ther Par tnership with the Tech Industry 24
Technology Company Entrants to Insurance 25
Data Security 25
FSB Summary Repor t on Financial Sector Cybersecurity Regulations, Guidance, and Supervisory Practices 25
Cyber Risk Addressed in the United Kingdom 25
The NAIC Data Security Model Law 26
State Cybersecurity and Data Breach Notice Requirements 26
Big Data 27
The NAIC Shifts Focus to Regulatory Review Standard-setting Versus Restricting Use of Big Data 27
Upcoming NYDFS Cybersecurity Rule Deadlines 27
Digitalization and Big Data – the European Perspective 28
Blockchain and Other Decentralized Technology 29
The Insurance Industry Demystifies Blockchain 29
Smar t Contracts – the New Horizon of the Blockchain Network 29
THE INTERNATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS 31

The Saga of ICS – The Push for Global Capital Standards 32
ComFrame and the ICPs 32
The NAIC’s Macroprudential Initiative 33
New IAIS Direction 33
US FEDERAL UPDATE: ELECTIONS; AND LEGISLATIVE AND REGULATORY DEVELOPMENTS 34

What the 2017 Elections Mean for Insurance 35
The Trump Regulatory Doctrine 35
The Affordable Care Act 35
Congressional and Federal Agencies Initiatives and Outlook 36
Depar tment of Treasury: FSOC and FIO 36
National Flood Insurance Program Reauthorization 38
The DOL Fiduciary Rule Flatlined, but Revived 38
HUD Derails Disparate Impact Rule 38
NAIC AND STATE REGULATORY DEVELOPMENTS 39

2017 State Elections, New Insurance Commissioners and NAIC Leadership 40
Elections, Resignations and Appointments – Commissioners and the NAIC 40
NAIC Leadership 40
Group Capital Calculation Tool 40
Long-Term Care and Receivership Issues 41
EUROPEAN REGULATORY AND LEGISLATIVE DEVELOPMENTS 42

European Union 43
Insurance Distribution Directive Implementation 43
United Kingdom 43
UK Treasury Select Committee’s Repor t on Solvency II 43
Financial Conduct Authority’s Wholesale Insurance Broker Market Study 45
France 46
Increased Powers for the High Council for Financial Stability (HCSF) 46
Poland 46
Activity of the Polish Financial Supervision Authority in 2017 46
Italy 47
Public Consultation 3/2017 on the Simplification of Non-Life Pre-Contractual Information 47
Belgium 47
Regulatory Changes 47
LATIN AMERICA AND SOUTH AMERICA DEVELOPMENTS 48

Brazil 49
Regulatory and Legislative Developments 49
Mergers and Acquisitions 49
Chile 49
Future and Current Challenges 49
Colombia 50
Mexico 50
ASIA REGULATORY DEVELOPMENTS 51

Hong Kong 52
The Insurance Companies (Amendment) Ordinance 2015 – Update 52
The Rise of Domestications and a Road Map to Success 52
China 53
Restrictions on Foreign Insurers Operating or Expanding in China 53
Domestication of Foreign Insurers – Getting a Smaller Piece of a Bigger Pie 54
Bucking Regulatory Restrictions through an Online Approach 54
Non-Life Business: The Chinese Motor Industry and its Pitfalls 54
Indonesia 55
Product Approvals 55
Digital and Liberalization of Distribution 55
Governance 55
Change in Ownership Requirements 55
Single Presence Policy 55
Singapore 56
Banks’ Long-term Deals with a Single Insurer 56
Simplification of Digital Processes 57
Vietnam 57
Foreign Ownership Restrictions and Requirements 57
Additional Restrictions 57
AUSTRALIA AND NEW ZEALAND DEVELOPMENTS 58

Australia 59
Sale of Add-on Insurance 59
Consumer Credit Insurance Sales Process 59
Life Insurance Conflicted Remuneration Reforms 59
Life Insurance Code of Practice 60
Royal Commission to Investigate Financial Services Sector 60
New Zealand 60
New Zealand Insurance Regulation Updates and Pending Reforms 60
Fire Service Levy Increases 61
CONCLUSION AND FORECAST 62
GLOBAL
DEVELOPMENTS
DRIVING
OPPORTUNITIES
AND CHALLENGES
Increasingly, developments at a global level are defining the support of the Northern Irish Democratic Unionist Party to stay
opportunities and challenges that face the insurance sector. This is in power.
true for purely domestic carriers and insurers who are actively in
multiple markets. These events are driven by post financial crisis In September, in a further major speech in Florence, Mrs. May
awareness that financial instability in one region can spread and confirmed that the UK would seek a “status quo” transition period
impact operations in another. But beyond this, developments in the of approximately two years, and indicated that the UK accepted
use of technology, increasing cybersecurity concerns, increasingly that it would need to make a very substantial payment to the EU as
global businesses creating insureds who need risk management part of a “divorce settlement.” In December, despite considerable
solutions crossing multiple national borders, and macro-economic difficulty over the status of the UK’s land border with the EU in
and political events that either stimulate or curtail market Ireland after Brexit, the EU heads of government confirmed that
developments are all shaping the opportunities and challenges sufficient progress had been made in respect of that and the other
for the insurance sector. In the midst of this, the IAIS continues two identified “separation issues” of the financial settlement,
to evolve, expand its agenda and is an increasing force driving the and citizens’ rights, for Brexit talks to proceed to the terms of a
global regulatory dialogue. In addition, bi-lateral or multi-lateral transition period and to the UK’s future trading relationship with
agreements between countries are beginning to re-shape market the EU, in 2018.
access and regulatory relationships.
In advance of trade talks, the UK government is expected to set
In 2017, we saw these trends play out in connection with the following: out its aspirations for that trading relationship, presumably including
more detail of what it will seek for the financial sector including the
insurance industry, early in 2018.
Brexit
Brexit dominated much of the political, economic and regulatory

Impact on Insurance Groups
dialogue. Progress has been slow and torturous and has continued to
be a hugely important issue for UK and European insurers in 2017. For the insurance sector, 2017 did little to eliminate the uncertainty
about both the “end state” for the UK’s trading relationship
with the EU in insurance services, and whether there will be
Political Developments in 2017 a transitional period before the end state is reached, including
The UK government served notice in March 2017 under Article what that transitional period will look like. Insurers will certainly
50 of the EU treaty for the UK to leave the EU. In January, in a be pleased that Brexit negotiations are now moving forward.
speech at Lancaster House in London, the UK Prime Minister However, the negotiations to date have already been difficult, and
Theresa May confirmed that her government’s intention was for there seems to be considerable distance between initial positions
the UK to leave the European single market as well as the EU. She taken by some on the EU side (that the UK will only be offered
confirmed that the government would seek an agreement on the a deal similar to the existing EU trade deal with Canada, which
future relationship between the UK and EU within the two-year covers goods but not financial or other services) and the UK
negotiating period triggered by serving notice under Article 50; government (which has suggested that it will seek a bespoke deal
and that the government intended to negotiate a phased, but time- covering services – presumably including insurance). Insurers should
limited, process of implementation to commence following the therefore expect continuing uncertainty over transition and the
expiry of the two-year period. trade end state well into 2018. The mantra of EU negotiations,
“nothing is agreed until everything is agreed,” means that
uncertainty is likely to continue until a final deal is done, and in the
Following a vote in Parliament, the UK government served notice
meantime, there can be no guarantee that a deal will be done at all.
under Article 50 on March 29, 2017. As a result, unless some other
agreement is reached between the UK and the EU, the UK will
leave the EU at 11:00 pm UK time on March 29, 2019. Insurers have therefore had to continue with Brexit contingency
plans on the worst case assumption that the UK will leave the
single market, ending reciprocal passporting of insurance services
In June, Theresa May saw her hand in Brexit negotiations with
between the UK and the EU, and without any transition period
the EU significantly weakened following an unexpectedly strong
having been agreed, at the end of March 2019 – ie there will be a
performance from the UK’s main opposition Labour party
cliff edge hard Brexit. This would mean that UK insurers currently
in a general election. Mrs. May had called the election in the
operating through branches and providing insurance services
expectation of increasing her government’s slim parliamentary
cross-border in Europe will no longer be able to rely on EU
majority; but she lost that majority, and has since had to rely on the
single market rights to underwrite policies and pay claims, and EU
insurers currently passporting in to the UK will no longer be able be seeking to obtain UK authorizations for existing branches, or to
to underwrite and pay claims in the UK; this includes paying claims establish separate UK subsidiaries; in which case they may need a
arising after Brexit on cross-border policies issued before Brexit. portfolio transfer so that existing policies written on a passported
Those insurance groups who want to continue doing business after basis can be carried out by the new entity.
a hard Brexit must plan to have a risk carrying entity or entities
independently licensed both in the UK and in a continuing EU
member state, when Brexit happens. 2017 has seen many insurers EU to Move against “Third Country” Outsourcing and
move into the implementation phase of their Brexit reorganization Risk Transfer; and Regulatory Arbitrage?
plans to achieve this. A number of insurers have proposals that are designed to minimize
disruption to their operations in Europe. UK-based insurance
groups restructuring because of Brexit seemingly would prefer to
Brexit Reorganizations
retain their headquarters in the UK. During the course of 2017,
Different strategies are being adopted. Many groups have however, the regulatory environment in Europe has become
chosen to incorporate new insurance companies in one of the 27 increasingly hostile to operating models that (i) depend on
continuing EU jurisdictions or have sought or are seeking to revive European insurers acting as a “front” for risk carriers in the UK
insurers currently in run off, or are planning to significantly expand or in other third country jurisdictions; and/or (ii) on substantial
the business of an existing UK or EU licensed insurance company in outsourcing of activity back to the UK post-Brexit or to other
their group. third countries. Steps may be taken at EU level to bring into line
EU member state regulators who are perceived to have taken a
Many insurers must now divide their portfolio of risks between more liberal approach to insurers applying for authorization in
a UK and an EU entity. If business is sufficiently short tail, and their jurisdictions.
their plans are sufficiently advanced, it has been possible for some
insurance groups to “run up” business in a new EU hub insurer and In July 2017, European Insurance and Occupational Pensions
“run down” the EU business previously underwritten by the same Authority (EIOPA), the European Supervisory Authority
group’s UK insurer, renewing EU risks in the insurer based in a responsible for the insurance sector, published its “Opinion
continuing EU country. on supervisory convergence in light of the United Kingdom
withdrawing from the European Union,” confirming EIOPA’s
Other insurance groups are undertaking portfolio transfer expectation that EU insurers show an appropriate level of
processes, to transfer EU risks to a continuing EU insurer, and UK corporate substance in their jurisdictions, and that a minimum level
risks to a UK insurer. of risks should be retained by insurers – 10 percent was suggested.
EIOPA also stressed that outsourcing by EU insurers should not be
A third strategy is seeking to redomicile a UK insurance company permitted if it would materially impair the quality of governance,
to a continuing EU jurisdiction. A number of insurance groups increase operational risk, or impair the ability of EU regulators to
are converting or have converted UK insurers into European monitor compliance. EIOPA stressed the importance in the light
companies (SEs) under the EU statute for a European company. of Brexit of ensuring a consistent supervisory approach across the
Under EU law, SEs are able to transfer from one EU jurisdiction to EU in particular to the relocation of insurers from the UK. The
another. While the UK remains in the EU, it is therefore possible clear theme was that member states and their regulators should
for UK insurers to convert to SEs and re-domicile to a continuing not engage in regulatory arbitrage to attract a larger share of
member state. Insurers taking this course will apply to have a UK business from the UK and that the flexibility allowed to member
branch of the insurer which is re-domiciling separately authorized state regulators under the EU Solvency II Directive should not
in the UK, on the basis that its new UK license will only take be a means for lowering standards or for disregarding prudential
effect at the point when the UK leaves the EU single market for requirements.
insurance. This structure has the advantage of avoiding the need
for separate insurance companies for the UK and the EU and for Post-Brexit trading relationships in financial services (including
lengthy and complex portfolio transfer processes. After Brexit the insurance) between the UK and the EU are likely to be at the
same insurance company will continue to be licensed in both the heart of the coming rounds of negotiations between the UK and
EU and the UK. the EU. So there is every chance that the relatively protectionist
approach suggested by this proposal will give way to a more open
EU insurers underwriting business cross-border and through relationship between the EU and UK insurance sectors, as part of
branches in the UK have also been considering and putting into a “Brexit deal” – but it is very hard to predict how these issues will
place Brexit plans. Some are looking to wind down their UK ultimately turn out.
business, or to transfer it to a UK authorized insurer. Others will
Statements Concerning UK
Regulators’ Approach
The Bank of England and PRA issued public
statements that they would extend the
broad approach already applied to banks
from “third countries” that they expect
to operate through subsidiaries rather
than branches if they have material UK
retail deposits. Insurers would be treated
as having material retail business if their
liabilities are protected by the UK Financial
Services Compensation Scheme – the UK’s
statutory Policyholder Protection Scheme,
which pays compensation to retail and
certain small business policyholders (and
Dominic Dudley / Shutterstock.com

larger policyholders with cover for UK
compulsory employer’s liability and motor
risks) in the event of insurer insolvency.
Where protected liabilities are likely to be
greater than £200 million, the PRA would
expect a European insurer that wishes to
continue doing business after Brexit to
establish a separate UK subsidiary. Insurers
with a lower level of or no protected
liabilities would not need to establish a
subsidiary and are encouraged to establish authorization now (the government’s promise of a temporary
a UK branch. permission regime should be treated only as a fallback position);
and the PRA’s own working assumption that regulatory equivalence
The PRA states that its willingness to allow incoming insurers and cooperation with the EU will continue after Brexit so it is able
to operate through a branch is dependent on its assessment to authorize and supervise UK branches of EU firms will remain
of whether the relevant home state regulatory regime meets under review as the UK/EU negotiations continue.
international standards, and, importantly, the level of cooperation
between the PRA and the home state supervisor. The PRA’s
presumption is that there will continue to be a high degree of The EU-US Covered Agreement
supervisory cooperation with the EU following Brexit, and that EU
The Dodd-Frank Act authorizes the Treasury, through the
regulatory regimes will continue to meet the PRA’s expectations
Federal Insurance Office and the Office of the US Trade
for regulatory equivalence, and assurance over how resolution of
Representative to jointly negotiate agreements with one or more
incoming European firms would take place, in the event of a failure.
foreign governments, authorities or regulatory entities, regarding
prudential measures with respect to insurance or reinsurance.
The UK government’s promise to legislate if necessary to mitigate
the consequences of a cliff edge for insurers doing business in the
On January 13, 2017, after many months of confidential
UK if an implementation period is not agreed between the UK
negotiations, the United States and the EU announced that they
and the EU, and the PRA’s clarification of its proposed approach
had completed negotiation of such an agreement, entitled the
to authorizations, does mean that EEA insurers can continue their
“Bilateral Agreement between the European Union and the United
Brexit planning with a clearer idea of how they will be able to
States of America on Prudential Measures Regarding Insurance
continue to operate in the UK as Brexit unfolds.
and Reinsurance” (Covered Agreement). The Covered Agreement
was signed by officials representing Treasury, the USTR, and the
However, the PRA’s recent communications have also made it EU on September 22, 2017; and following additional procedural
clear that: insurers must continue to proceed on the basis of requirements went into provisional effect on November 7, 2017,
“prudent planning assumptions” about Brexit; firms that will need pending final approval by the European Parliament. A Signing
to authorize a branch or a subsidiary should begin preparing for Statement that was issued in connection with the September 22,
2017 execution of the Covered Agreement expresses how the US According to the Signing Statement, these provisions mean “that
interprets some of the key provisions of the Covered Agreement. US insurers and reinsurers can operate in the EU without the US
parent being subject to the group level governance, solvency and
The Covered Agreement sets several new precedents regarding capital, and reporting requirements of Solvency II, and reinforces
mutual recognition of US state-based insurance standards and that the EU system of prudential insurance supervision is not the
supervision. It also establishes thresholds for potential federal system in the United States.”
preemption of state insurance law. The Covered Agreement
addresses two significant substantive issues: freedom of cross- The Covered Agreement has a somewhat controversial history. For
border reinsurance transactions from local presence and collateral many years the NAIC actively opposed the efforts by the Federal
requirements and recognition of the group supervision sovereignty Insurance Office to negotiate the Covered Agreement fearing
of both the US and the EU. that it would preempt state insurance laws. When the Covered
Agreement was finally signed and the Signing Statement issued,
With respect to reinsurance, the Covered Agreement significantly however, the NAIC appeared to cautiously support the agreement,
modifies both collateral and local presence requirements for US particularly because of the “affirmation of the primacy of state
and EU reinsurers operating on a cross-border basis that result in regulation” expressed in the Signing Statement, according to a
“less favorable” treatment of “Home Party Assuming Reinsurers” statement by NAIC then-President Ted Nickel.
than assuming reinsurers based in the territory of the “Host Party
Ceding Insurer.” The Covered Agreement uses the term “Home Considerable work is ahead, though, to ensure the Covered
Party” to refer to the territory (ie, the US or the EU) in which the Agreement is implemented. In particular, the Covered Agreement
worldwide parent of an insurance or reinsurance group has its establishes a five-year time frame within which the US states are
head office or is domiciled. The term “Host Party” is used to refer “encouraged” to reduce reinsurance collateral requirements by
to the territory in which an insurance or reinsurance group has 20 percent per year. The NAIC has said it plans to hold a day-long
operations, but is not where the group’s worldwide parent has its hearing on February 20, 2018, to solicit views as to how to do this
head office or is domiciled. and to address any other issues related to the Covered Agreement.
Also, the effectiveness of the terms of the Covered Agreement is
The collateral relief provided in the Covered Agreement is only mutually dependent. That is, for example, the collateral reduction
prospective, applying to reinsurance agreements entered into, provisions desired by the EU are effective only if the elimination
amended or renewed after the Covered Agreement takes effect of physical presence requirements and limitation on worldwide
and only with respect to losses incurred and reserves reported group supervision desired by the US are in place, and vice
from and after the effective date of the new, amended, or renewed versa. Accordingly, if a problem develops regarding one aspect
reinsurance agreement. The Covered Agreement also does not of the Covered Agreement, it could have a ripple effect on the
interfere with private agreements for reinsurance collateral. entire agreement.
It explicitly does not “limit or in any way alter the capacity of
parties to a reinsurance agreement to agree on requirements Two other aspects of the Covered Agreement bear watching as it
for collateral.” begins to go into effect:
With respect to group supervision, the Covered Agreement ■■ First, the Covered Agreement establishes a “Joint Committee”
provides ground rules for the exercise of group supervision by that is responsible for the implementation and administration
the EU and US over insurance holding companies from the other of the Covered Agreement. It is supposed to meet within
jurisdiction by establishing two fundamental precepts: 180 days after the provisional application of the Covered
Agreement, which as previously noted occurred on November
■■ First, an EU or US Home Par ty insurance or reinsurance group 7, 2017. However, the Covered Agreement does not spell
is subject to worldwide prudential insurance group supervision out the number and identity of the representatives to the
only by its Home supervisory authority and is not subject Joint Committee, nor is there a clearly defined role for state
to group supervision at the level of the worldwide parent regulators or for EU national regulators. It will be interesting to
under taking of the insurance or reinsurance group by any Host see how the Joint Committee is organized and what, exactly,
supervisory authority; and it does.
■■ Second, the Host supervisor “may exercise group supervision, ■■ Second, either par ty may terminate the Covered Agreement
where appropriate, with regard to a Home Par ty insurance with relative ease, which makes it potentially vulnerable to
or reinsurance group at the level of the parent under taking in political exigencies. And, in 2018, there are ample sources for
its territory.” political exigencies to occur.
Systemic Risk Analyses activity. Similarly, early concerns have been expressed that any new
mitigation powers must be cost-effective and proportional to the
Throughout 2017, there were a number of developments that perceived risk presented by any activity.
called into question the continued focus on and special regulation
of insurers who have been designated as systemically important. This topic will likely receive considerable attention in 2018,
beginning with a stakeholder session on February 1, 2018 at the
Bank of England in London.
Activities Based Approach
The Financial Stability Board, in consultation with the IAIS, issued
a press release on November 21, 2017, announcing that it had G-SII/SIFI Developments
decided not to publish a new list of G-SIIs for 2017. The press The Financial Stability Oversight Council (FSOC) met in September,
release notes the IAIS’s work on the Activities-Based Approach October and November. During the September meeting, AIG’s
to systemic risk (ABA) may have significant implications for the designation as a non-bank systemically important financial institution
assessment of system risk and therefore identification of G-SIIs and was rescinded. The decision acknowledged developments and
G-SII policy measures. Nevertheless, the FSB stated that current enhancements to state insurance regulation since the original
G-SII policy measures would continue to apply to the nine firms on designation, including the work that is being done by the NAIC’s
the 2016 G-SII list (including three US companies). Financial Stability Task Force through the Macroprudential Initiative,
discussed in further detail below.
The nine G-SIIs are: Aegon N.V.; Allianz SE; American Systemic risk, however, continues to remain a major concern of
International Group, Inc.; Aviva plc; Axa S.A.; MetLife, virtually every financial services regulator. Lessons learned from
Inc.; Ping An Insurance (Group) Company of China, Ltd.; the financial crisis are still a matter of principal focus of regulators
Prudential Financial, Inc.; and Prudential plc. around the world. The threat has not receded that the entire
financial system or the financial markets may collapse as a result of
On December 8, 2017, the IAIS issued a consultation document a combination of factors such as counterparties failing to meet their
seeking comments on its plans to develop the ABA, which if and obligations causing a domino effect, a fire sale of assets causing an
when adopted will replace the current entity-based approach. extreme drop in values, a contagion effect that spreads throughout
the market, the inability to isolate the contagion because of the
The IAIS is not rushing into this change, though, because the interdependence and interconnectedness of the financial firms, the
current consultation is characterized as an “interim” document discontinuation of a critical function in the financial system where
which is “intended to provide an opportunity for stakeholders no other entity can be substituted to perform that function, and an
to provide feedback on the development of the approach extreme loss of confidence by market participants so that liquidity
and structure” of the IAIS’s work on this topic. As such, the dries up and the market participants hold on to assets creating a
consultation does not include “conclusive proposals.” Nevertheless, “seizing-up” of the market.
the document provides a conceptual framework showing the IAIS’s
current assumption that there likely are activities that insurers Although the insurance industry was not a direct cause of the
engage in which could potentially threaten global financial stability financial crisis, insurance markets have become increasingly global
and which may not be sufficiently monitored and/or mitigated by and their activities have become interconnected with the financial
current supervisory tools and authority. markets. Therefore, regulators both in the US and overseas are
still trying to find the right mix and degree of regulation to provide
In any event, the interim consultation will result in a more formal for the necessary resilience of the financial system to withstand
consultation in 2018, followed by additional analysis and stakeholder another severe adverse shock.
input before the ABA is adopted. The IAIS’s objective is to adopt the
ABA in 2019 for implementation in 2020. In 2017, the regulatory environment seemed to take a different
direction to address systemic risk 10 years after the worst part
Many in the industry have given their initial support to the ABA, of the crisis. Previously, under the Dodd-Frank Act, bank holding
particularly those in the current cohort of companies which are companies with US$50 billion or more in consolidated assets
considered to be G-SIIs under the existing entity based approach. would be treated as systemically important financial institutions
However, some concerns have already been expressed that and subject to enhanced prudential regulation and oversight. FSOC
companies which are not currently systemically important will was also empowered to identify systemically important nonbank
come under more intense scrutiny under an ABA as supervisors financial companies which would be subject to enhanced regulatory
assess whether an insurer engages in systemically important oversight. In addition, FSOC had the power to recommend
heightened prudential standards to apply to any “activity” that more firms still may pose risks to financial stability, FSOC should
FSOC identified as contributing to systemic risk. consider an entity-based designation at that time. Treasury
also recommended that there be a clear off-ramp process for
With the election of President Trump and a global reaction to designated nonbank financial companies. The Treasury report
less regulation as the pendulum of regulation began to swing back endorsed many positions advocated by state insurance regulators.
from stringent regulatory oversight established in a time of crisis,
both the US and the EU reevaluated whether designating nonbank
financial companies was an appropriate way to deal with systemic
De-designation of SIFIs
risk. In the November 17, 2017 Treasury report, Financial Stability As a practical matter, much of this reprioritization has already
Oversight Counsel Designations, Treasury reviewed and addressed happened in the US. Originally, between 2013-2014, FSOC
the numerous and significant criticisms of the designation process. designated four nonbank financial entities: GE Capital, AIG,
While the report did not recommend the elimination of FSOC’s MetLife and Prudential. The current status of each original SIFI is
designation authority, it highlighted the need to make every effort as follows:
for FSOC to be rigorous, clear and comprehensible to firms and
to the public, and to take actions of designation only when the ■■ AIG. In September 2017, AIG was de-designated as it
expected benefits to financial stability exceed the costs imposed convinced FSOC that it had dramatically changed its business
on the designated firm. Treasury concluded that designating by significantly de-risking its businesses, substantially reducing
companies was a “blunt instrument” for addressing potential risks its leverage, its debt, its derivative positions, its securities
to financial stability and instead recommended that FSOC prioritize lending and its repurchase agreements, and drastically shrinking
its efforts to address risks to financial stability through a process in size. In making its final determination, FSOC evaluated
that emphasizes an activities-based or industry-wide approach and the extent to which material financial distress at AIG could
work with primary regulators to address any systemic concerns. be transmitted to other financial firms and the markets and
If, after such an approach is utilized, it is determined that one or thereby pose a threat to US financial stability through three
main channels: (1) exposure to creditors,
counterpar ties, investors and other market
par ticipants to AIG (interconnectedness);
(2) the liquidation of assets by AIG
which could trigger disruption to the key
markets and market par ticipants; and (3)
the inability of AIG to provide a critical
function or service relied upon by market
par ticipants and for which there are no
ready substitutes. FSOC concluded that
any impact through the three transmission
channels would be minimal. FSOC said
that “AIG is notably different from the
company as it existed leading up to the
financial crisis.”
FSOC needed a majority vote of its 10

members in order to rescind the AIG
designation. The SEC Chairman had to
recuse himself and did not par ticipate
in the vote. Three FSOC members,
Cordoray of the CFPB, Gruenberg of the
FDIC and Watt of the FHFA, opposed
rescinding the designation which left six
out of nine FSOC members voting in favor,
which was a majority. It is interesting to
note that legislation was passed in 2017
to extend the term of Roy Woodall, the
Independent Member with Insurance
Exper tise, to remain a member of FSOC. However, in share than market promotion. The impact, of course, is that these
November 2017, Tom Workman (a longtime president of the restrictions prevent the deployment of capital, risk capacity and
Life Insurance Council of New York, Inc., a leading New York technical underwriting and insurance operational knowledge – to
trade group for the life-insurance industry) was repor ted to the detriment of the subject country. Emerging risk – whether the
be nominated by President Trump and appointed to serve as growing (in frequency and severity) risks of natural disasters or
the independent member. If confirmed, he would be one of 10 hard to underwrite risks (such as cybersecurity) – are often best
voting members and will serve a six-year term. underwritten, or only underwritten by the global insurance and
reinsurance industry.
■■ MetLife. MetLife sued FSOC in the cour ts to have its
designation rescinded and received a favorable opinion in We fear this trend will continue, but we hope that governments,
March 2016 at the district cour t level, but Treasury appealed to regulators and the industry will take steps to reverse this direction.
the appellate cour t. Even though the appellate cour t had not
rendered a decision, on January 18, 2018, MetLife and FSOC
settled and agreed to end an appeal of a judge’s order releasing
the insurer from its status as a SIFI, effectively ending the fight.
■■ GE. In 2016, GE Capital was de-designated as a result of selling

off most of its financial assets.
■■ Prudential. Prudential has not yet been de-designated, but it is

pursuing to have its designation rescinded.
Similarly on the international stage, the FSB did not publish a list
of G-SIIs in 2017. It is unclear whether the FSB will pursue entity-
based designation. The IAIS has indicated that the preferred
approach should be activities-based designation and is devising
potential guidelines on that approach.
Increasing Protectionism
Although there are pronounced trends regarding the globalization

of the insurance industry and increasing risks that call out
for global insurance capacity, there is also a rising trend in
protectionism. This is seen in restrictions in many countries
regarding equity ownership caps, restrictions on cross-border
reinsurance, mandatory cessions to local reinsurers, restrictions
on granting licenses, local presence requirement, tax policies
and other provisions. By design, these laws and regulations
are blocking or cur tailing the expansion of global insurers and,
inevitably, having profound impacts on a number of local markets.
Examples of problematic countries include G20 behemoths
such as India, China and Brazil, but also a number of emerging
economies. Moreover, many are watching the unfolding drama
surrounding Brexit and can see hints that policyholder protection
and secure and stable markets may not be the only goals in
establishing the new regulatory rules.
Although, in some cases, restrictive laws are put in place for

the stated goal of helping to build a domestic industry, in many
countries the goals seem much more basic. As many of these
laws and restrictions may have now been in place for years, if not
decades, the goals seem to be more about just protecting market
COMMERCIAL AND
TRANSACTIONAL
ISSUES AND TRENDS
Global Trends in Insurance M&A in 2017 and a mean large-scale market consolidations of previous years have
Look Ahead given way to more strategic moves with a view to brand strength
and innovation.
We reported in 2017 that M&A activity would continue to be
strong in 2017 but with smaller-scale transactions than in prior
Key Trends 2017
years. While deal-flow has been very good, the insurance M&A
market has indeed continued to slow throughout 2017, in a trend M&A slowdown. It is clear just from looking at the numbers that
that started in 2016, with a trend towards smaller-scale sales and M&A in the insurance sector is slower than recent years, and
acquisitions. However, given market forces and stated corporate indeed two potential megamergers were blocked by US judges
intentions (such as those by AIG, Zurich and others), we could see on antitrust grounds: Anthem’s bid for Cigna (US$48 billion)
a return to larger, transformative transactions in 2018. and Aetna’s bid for Humana (US$37 billion). At the lower end of
the market, deal volumes have also been relatively lower due to
Insurers also continue to reflect on their core activities and markets
geopolitical uncertainty caused by ongoing uncertainty related to
and are seeking to align their business structures accordingly.
Brexit in the UK and Europe, the Trump administration’s difficulties
Insurers are also responding to innovation and disruption from
in pursuing its legislative agenda and Chinese capital controls. It
industry newcomers and InsurTech, seeking out opportunities to
is worth noting, however, that M&A in the Americas has been
grow new product and technology channels as they work to keep
notably active over 2017 when compared with the rest of the
pace with technological developments in the industry.
world. This is considered in the “Latin America Developments”
In this section of the Year End Review, we look back at 2017 section of this Year End Review.
outlining some of our observations of the insurance M&A market
Asian developments. Along with relatively good GDP growth
from the last year. We also look to the year ahead and consider
momentum, aging demographics are also spurring demand for
how insurers’ transactional appetites are likely to play out in 2018.
insurance in Asia, in particular, in view of still low insurance density
and penetration rates in most Asian economies. Long-term
2017 in Brief demand for life insurance will also be driven by Asia’s (especially in
China, India and Indonesia) sheer population size, rising income and
As mentioned, 2017 saw the continuation of the insurance M&A
wealth, and the existing significant protection gap. These macro-
slowdown that started in 2016. The first half of 2017 saw 170 deals
economic factors combined with the scarcity of good targets in
compared with 186 in the six months prior, which represents a 24
Asia generally and the inability in certain Asia jurisdictions (like
percent drop from the highs of H1 2015. Europe and Asia were
Malaysia) to obtain new licenses, will continue driving an active Asia
hit particularly hard yet the Americas remained notably buoyant.
insurance M&A market (where, in our experience, every sale is run
However, as we note later in this Year End Review, although the
as a competitive auction process) for not only the international US
numbers are down from their peak, there have been significant
and European headquartered insurers, but also the increasingly
strategic plays by a number of global insurance groups in 2017,
active Asia headquartered insurers from Mainland China, Hong
demonstrating that, while there have been significant consolidation
Kong, Japan, Singapore and South Korea. While we will continue to
in the market over the past 12 – 24 months, there are still key
see high valuations on these deals, especially for targets with highly
strategic growth opportunities.
sought after bancassurance or agency distribution channels, the
2017 did nonetheless see several significant transactions globally: dominance of Mainland Chinese bidders willing to pay the highest
KB Financial Group’s acquisition of KB Insurance (US$1 billion); price (often times with very light touch due diligence) should be
China Development Financial Holdings’ acquisition of China Life giving way to a greater diversity of winning bidders from Asia and
Insurance (US$1 billion); AXIS Capital Holdings’ acquisition of elsewhere as the sellers and their financial advisers become more
Novae Group (US$618 million); Banco Bpm Gruppo Bancario’s worried about China’s execution risks given the continuing foreign
acquisition of Popolare Vita from UnipolSai Assicurazioni exchange controls affecting Mainland Chinese bidders without
(US$612 million); Santalucia Seguros’ acquisition of three Spanish offshore funding sources.
entities from Aviva (US$517 million); Zurich Insurance’s proposed
Deeper adoption of technology is changing the industry’s business
acquisition of ANZ’s life insurance business (US$2.2 billion); and
model and operations, as well as the delivery of insurance
MetLife’s spin off of Brighthouse Financial. We have also seen
products. We are seeing this not only in the increasing automation
significant activity in the health insurance space with Aetna’s
of existing business processes (eg, the underwriting and claims
merger with CVS (US$77 billion), which we anticipate will drive
processes), but also in traditional insurers establishing completely
further similar deals in the year ahead.
online/digital business divisions to distribute insurance products
These deals demonstrate that there is still appetite within the and provide robo-advice, which is part of a disintermediation
market globally to pursue significant transactions, albeit there are trend among an increasing number of international insurers.
other factors now driving their M&A and corporate strategies that The increasing business potential of big data and data-analytics
is also producing a number of ground-breaking non-traditional books in 2017 amid Brexit-related concerns and the fall in the value
JVs between traditional insurers (like Aviva, Ping An and Allianz) of sterling – such assets are appearing more risky and less lucrative
and many of the Chinese technology giants (Alibaba, Baidu and than previously considered. This trend started in 2016 with AXA
Tencent) to set up/grow online only insurers in Mainland China and Deutsche Bank selling their UK portfolios and has not abated
and Hong Kong. The big prize for these JVs is clearly the massive in 2017. A number of strategic acquirers of run-off business, such
Chinese insurance market with its ever increasing middle-class as Athene, have been on the lookout for opportunities to take
and mass affluent populations (some of the tier 2 and tier 3 cities advantage of the pressure on life insurance companies that has
have more than 10 million inhabitants) and low insurance density been caused in part by low interest rates. We expect this activity
and penetration rates. We would expect similar JVs to also start to continue into 2018, and indeed Munich Re indicated in October
emerging in other Asia jurisdictions, like India and Indonesia, 2017 that its primary insurance arm intended to offload up to six
which has high mobile phone/personal device penetration, similar million policies.
demographics and a growing acceptance of electronic payment
The run-off market generally has remained active over the
methods.
last year. Regulatory change and pressure on margins are now
Outside of traditional M&A and technology driven JVs, we are compounded by fears over Brexit and many industry players
also seeing an increase in group reorganizations through court seeking consolidation of their businesses. A recent example is
approved portfolio transfer schemes, driven by (among other key Athene Holdings’ US$2.36 billion equity raise to fund investments
commercial drivers) Solvency II and Solvency II equivalence regimes in the German and European guaranteed life insurance run-off
(like Bermuda), especially in Hong Kong for local branches of markets. Banks, private equity and pension funds have been more
European or Bermudan insurers. active in this space.
As we predicted in our 2017 Year End Review, Chinese outbound We have also seen significant transactions in the non-life space,
investment has decreased as a result of the government’s including RSA’s disposal of £834m in liabilities to Enstar in Q1 2017,
restrictions on capital outflows and crackdown on outbound and we expect to see further large non-life deals emerge in 2018
M&A. Chinese outbound non-financial investment fell by 40.9% in as market capacity frees up. In early 2017, Premia Holdings was
the first 10 months of 2017. This trend has been exacerbated by established with a significant capital raise of US$510 million focused
the Chinese government’s recent announcement of a tightening on the property and casualty run-off space. Deals in the run-off
of controls requiring regulatory approval for foreign acquisitions sector took up a greater share of the market in 2016 than in 2015
carried out through an offshore entity1 and, until calls for looser and this appears to have increased further in the last year, with
regulation in the Chinese market are answered, we expect this little sign of slowdown. 3
to continue.
Broker consolidation. Insurance brokers have been the most

Predictions for 2018
active deal acquirers in the insurance market this year. Brokers Brexit-related reorganizations. As the post-Brexit landscape
have sought to consolidate their businesses pulling out of higher- becomes clearer over the course of 2018, we expect to see
risk markets and refocusing their efforts elsewhere. This trend insurers conducting further reorganizations of their UK and
is underlined by Aon’s November sale of its stakes in employee European operations.
benefit, insurance and reinsurance brokerage operations in Kenya,
Lesotho, Malawi, Namibia, Uganda, and Zambia. Aon continues to This is likely to result in disposals, redistribution of assets and
operate in those countries via local correspondent arrangements. operations throughout Europe, and an increase in activity in the
In a significant strategic move in the UK market and as a sign of the run-off market (as mentioned below). A number of our significant
strength of opportunities still available, Aon’s UK business acquired international clients are in the process of restructuring their
the strong brand of Henderson Insurance Brokers in Q4 2017. European operations to transition into a post-Brexit environment
and we expect these activities to increase significantly over the
The more developed markets are not immune, however, to course of 2018, including new European branches being opened by
increased regulation and pressure on margins, which has driven a UK-based insurers hedging against the risks of losing passporting
number of disposals in the UK market 2, such as the merger of Lark rights in the event of a hard Brexit.
Group and Aston Scott in June and the acquisition of Carol Nash
by Ardonagh Group in October. Continued activity in the run-off space. As mentioned earlier
in this Year End Review, we are also expecting to see more of the
Buoyant Run-off Market and closed life insurance books sold. capital that is being injected into dedicated run-off players to drive
Insurers continued to dispose of their UK closed life insurance significant transactions in both the life and non-life space. We
1 https://www.ft.com/content/b88a3d48-d16e-3fb4-8781-1f49ae838698 3 http://www.emagcloud.com/NewtonMedia/Intelligent_Insurer__
2 http://www.insuranceinsider.com/-1267019/9 RunOff_2017/index.html#/12/
have seen and are anticipating continued interest in closed life and 2017 Trends in Warranty and Indemnity Insurance
annuities books in particular from private equity firms, as well as
from large Asian insurers looking to increase their international The warranty and indemnity insurance market, or representations
presence. and warranties insurance market, has gone from strength to
strength in the past year and is now more than ever a common
Run-off transactions will be driven in part by the Brexit-related facet of M&A deals in all regions other than Asia (outside of
reorganizations referred to above, as well as by insurers’ increased auction processes). This specialist insurance market has grown
focus on cost base and seeking additional capital efficiencies in geographically, particularly in the US, and continues to develop,
response to Solvency II. with greater flexibility on policy terms and more competitive
pricing. There is now a core set of specialist insurers dedicated
In Germany, for example, low interest rates are contributing to
to this market offering insurance tailored to individual M&A
increased market consolidation and we expect this to continue. In
transactions.
Italy, similar low economic growth prospects in the life insurance
market will require efficient management of life books and we
anticipate additional disposals. Further, in the UK, as we have Buy-side vs. Sell-side
already seen in 2017, we expect the specialist run-off players will
Warranty and indemnity insurance has been around for decades
continue to acquire life and annuities books and provide run-off
as a way of facilitating risk transfer in M&A transactions. However,
solutions to larger insurers in relation to liabilities they no longer
the structure has indeed changed. In recent years, there has been
want to keep on their balance sheets.
a clear move away from the traditional sell-side policy, where
InsurTech market to mature. InsurTech has been attracting ever the seller, as the insured entity, is insured for loss arising out of a
increasing amounts of investment, from US$1.7 billion in 2016 4 (successful) breach of warranty claim brought by the buyer.
to close to US$1 billion being invested in Q2 of 2017 alone5. As
Based on our 2017 M&A global intelligence report, buy-side
mentioned in the “Innovation and Technology in Insurance” section
policies dominated the 2017 market, with sellers using them to
below, insurers are looking increasingly to InsurTech in a drive to
achieve a “clean exit” on both auctions and non-auctions, while
keep up with customers’ demands for innovation. With greater
offering an appropriate level of post-closing protection for the
regulatory familiarity with the sector, as well as encouraging moves
buyer. Such a clean exit is difficult to achieve for sell-side policies,
by the regulators to increase innovation in the sector (see our
where the seller typically has to accept a high contractual cap
commentary in the “The Global Regulatory Experimentation:
on liability in the SPA. This is further supported by AIG’s “M&A
Regulatory Sandboxes” section below), we expect to see InsurTech
insurance comes of age” report, with the finding that fewer sell-side
entering a more mature stage in its sector lifespan. Investment
policies are taken out as buyers have become more comfortable
in the sector to date has been characterized by venture capital
with insurance and are more willing to rely on it, as opposed to
investment, and 2018 may see a number of these investments
direct recourse against the seller. Even more attractive to a seller is
pay off.
that insurers are increasingly willing to underwrite buy-side policies
We have also seen traditional insurers partnering with significant where the sellers have zero risk.
tech companies, most notably Aviva developed a “skill” for
Unsurprisingly, the move from buy-side to sell-side has been driven
Amazon’s Echo device. Now Alexa can answer questions about
primarily by private equity and other financial investors, where
insurance and insurance jargon. This is one sign of the maturation
achieving a clean exit is a top priority.
of insurers’ approach to the InsurTech scene, in particular the
opportunity to increase brand presence and customer contact
points through non-traditional channels, and we believe that
Making a Difference in a Competitive Market
insurers will be seeking out further opportunities for collaboration Buy-side policies are typically seen in deals starting around the
and technological growth, whether through partnerships, joint £25 million mark, when the deal size can more readily carry the
ventures or ultimately acquisitions. As well as at the lower end, insurance premium. However, policies have been placed on deals
with InsurTech becoming more strategically important to key worth in excess of £1 billion with excess layers of insurance,
players, we expect to see more valuable M&A activity in this space evidence of the competition in the market continuing to grow
in the coming years as early investors seek exits and acquisitions of and insurers becoming more comfortable with these risks,
mature businesses. presumably partly due to their own improved in-house legal
expertise. According to research carried out by brokerage firm
Lockton, premiums and deductibles continued to drop in 2017
while coverage positions are being enhanced as insurers aim to
4 https://home.kpmg.com/uk/en/home/insights/2017/08/venture-capital-funding-
differentiate themselves from the competition.
in-insur tech.html
5 https://www.insurancejournal.com/news/international/2017/07/24/458672.htm
of provisions of the Internal Revenue Code
affecting domestic insurance companies
and the contracts they write. Many of
these changes will necessitate Treasury’s
promulgation of regulations and/or technical
corrections by the Congress.
The following summary highlights some of

these changes:
Prevention of Base Erosion
The TCJA requires “applicable taxpayers”

to pay the excess of 10 percent (5 percent
for one taxable year beginning after
December 31, 2017, and 12.5 percent for
taxable years beginning after December 31,
2025) of “modified taxable income” for a
taxable year over an amount equal to its
regular corporate tax liability for that year
reduced by certain credits (base erosion
minimum tax amount).
■■ Modified taxable income generally is
Brexit Impact (or Lack Thereof) computed by adding back the base erosion
tax benefit derived from a base erosion payment, and base
Saving the best for last – what about Brexit? Despite the UK’s erosion payment includes, among other items, any amount
decision to the leave the EU causing (to put it lightly) quite a stir paid or accrued by an applicable taxpayer to a foreign related
in the insurance market, warranty and indemnity insurance is one person that is deductible to the payor and any reinsurance
area where Brexit has had little impact, there seemingly being premium paid to a foreign related person.
no significant decline in the number of enquiries or policies being
purchased for UK deals (based on the Marsh transactional risk ■■ Applicable taxpayers include corporations with average annual
report 2017). However, in light of Brexit and other economic gross receipts for the three-taxable-year period ending with
headwinds, the mix of target businesses being shown to the the preceding taxable year of at least $500 million (subject
market has shifted with a greater interest in financial technology, to aggregation rules for cer tain groups) with a “base erosion
healthcare and renewables and so we may see the knock-on-effect percentage” (aggregate amount of base erosion tax benefits
of this in the warranty and indemnity market in the year to come. for the taxable year divided by the aggregate amount of
deductions for such year) of at least 3 percent.
Tax Updates ■■ A foreign person is related to the applicable taxpayer if either
(i) it owns 25 percent or more of the taxpayer; (ii) it is related
Federal Tax Reform to the taxpayer or any 25 percent owner of the taxpayer under
cer tain existing tax law attribution rules; or (iii) it is related to
Both chambers of the US Congress passed their own drafts of
the taxpayer under the transfer pricing rules.
tax reform legislation at the end of 20176 . On December 15,
2017, Congress released its final compromise tax package, The Insurance and reinsurance groups that engage in significant off-
Tax Cuts and Jobs Act of 2017 (TCJA). On December 22, 2017, shore affiliate reinsurance arrangements will need to assess the
the President signed the TCJA into law. In addition to the general structure of such arrangements to determine whether to continue
changes affecting corporations (for example, elimination of the such arrangements in their current form, including considering the
alternative minimum tax, the reduction in top rate from 35 percent possibility of establishing a Section 953(d) reinsurer if the nontax
to 21 percent, the availability of net operating losses (NOLs) and benefits warrant the continuation of such arrangements.
the deductibility of interest expense), the Act modifies a number
6 The House bill was passed on November 16, 2017, while the Senate bill was
passed on December 2, 2017.
Controlled Foreign Corporation (CFC) Rules the New Test does not require that at least 50 percent of the
corporation’s assets produce passive income. Instead, the New
The TCJA modifies to the definition of “US shareholder” for CFC
Test requires that the corporation’s “applicable insurance liabilities”
purposes, expanding the definition to include US persons owning
constitute more than 25 percent of its total assets as reported
10 percent or more of the value of the CFC’s shares (pre-TCJA
on its “applicable financial statement” for the year ending with or
law only looked to voting power). The TCJA also expanded
within the taxable year.
constructive ownership rules for stock, causing foreign subsidiaries
in a foreign-parented group that includes a US subsidiary to be Applicable insurance liabilities mean, with respect to any property
treated as CFCs. Finally, under the TCJA, a US shareholder is and casualty or life insurance business, (1) loss and loss adjustment
subject to current US tax on a CFC’s subpart F income even if the expenses and (2) reserves (other than deficiency, contingency, or
US parent does not own stock in the CFC for an uninterrupted unearned premium reserves) for life and health insurance risks and
period of 30 days or more during the year. life and health insurance claims with respect to contracts providing
coverage for mortality or morbidity risks. Applicable insurance
Changes to Passive Foreign Investment Company Tax liabilities thus include loss reserves for property and casualty, life,
Treatment and health insurance contracts and annuity contracts, but not
unearned premium reserves with respect to any type of risk. For
US investors in non-US corporations may face draconian anti- purposes of the New Test, the amount of any applicable insurance
deferral rules if such a corporation is classified as a passive foreign liability may not exceed the lesser of such amount (1) as reported
investment company (PFIC) for US federal income tax purposes. to the applicable insurance regulatory body in the applicable
An exception to the PFIC rules applies to active insurance or financial statement (or, if less, the amount required by applicable
reinsurance companies. The TCJA narrows this exception, tracking law or regulation) or (2) as determined under regulations
prior legislative proposals aimed at addressing a perceived abuse prescribed by the Treasury Secretary.
whereby some insurance activities were used to shelter large
investments. The TCJA may, however, unintentionally, ensnare If a corporation fails to qualify solely because its applicable
offshore reinsurers that reinsure long-tail and catastrophic risks insurance liabilities constitute 25 percent or less of its total assets,
where significant reserves for losses are not recorded until a a mitigation provision allows a US person who owns stock of the
catastrophic event actually occurs as well as life reinsurers that corporation may elect in such manner as the Secretary prescribes
provide insurance on a modified coinsurance basis. to treat the stock as stock of a qualifying insurance corporation if
(1) the corporation’s applicable insurance liabilities constitute at
A PFIC is any foreign corporation if (1) 75 percent or more of its least 10 percent of its total assets, and (2) based on the applicable
gross income is passive income or (2) at least 50 percent of its facts and circumstances, the corporation is predominantly engaged
assets produce passive income.7 In general, passive income is any in an insurance business, and its failure to qualify under the 25
income which is of a kind that would be foreign personal holding percent threshold is due solely to runoff-related or rating-related
company income as defined in Section 954(c). 8 Under pre-2018 circumstances involving such insurance business.
law, however, passive income did not include any income derived
in the active conduct of an insurance business by a corporation Facts and circumstances that tend to show the firm may not be
which is predominantly engaged in an insurance business and which predominantly engaged in an insurance business include a small
would be subject to tax under subchapter L if it were a domestic number of insured risks with low likelihood and large potential
corporation (Insurance Business Exception). costs; workers focused to a greater degree on investment activities
than underwriting activities; and low loss exposure. Additional
The TCJA narrows the Insurance Business Exception for tax years relevant facts for determining whether the firm is predominantly
beginning after December 31, 2017, by replacing the pre-2018 law engaged in an insurance business include claims payment patterns
test, which is based on whether a corporation is predominantly for the current and prior years; the firm’s loss exposure as
engaged in an insurance business, with a new test based on calculated for a regulator such as the SEC or for a rating agency,
the corporation’s insurance liabilities (New Test). As with the or if those are not calculated, for internal pricing purposes; the
pre-2018 law test, the New Test requires that the corporation percentage of gross receipts constituting premiums for the current
seeking to take advantage of the Insurance Business Exception and prior years; and the number and size of insurance contracts
would be subject to tax under subchapter L if it were a domestic issued or taken on through reinsurance by the firm. The fact that
corporation. In contrast to the pre-2018 law test, however, a firm has been holding itself out as an insurer for a long period
is not determinative either way. Runoff-related or rating-related
7 I.R.C. § 1297(a).
circumstances include, for example, the fact that the company is
8 I.R.C. § 1297(b)(1). Foreign personal holding company income includes
in runoff, that is, it is not taking on new insurance business (and
dividends, interest, rents, royalties and capital gains.
consequently has little or no premium income), and is using its insurance company losses are not allowed to offset the amount of
remaining assets to pay off claims with respect to pre-existing the policyholders surplus account balance subject to tax.
insurance risks on its books. Such circumstances also include, for
example, the application to the company of specific requirements Modification of Proration Rules for Property and Casualty
with respect to capital and surplus relating to insurance liabilities Insurance Companies
imposed by a rating agency as a condition of obtaining a rating
necessary to write new insurance business for the current year. To reflect the lowered corporate tax rate, the TCJA modified
the proration rules replacing the 15 percent reduction under pre-
TCJA law with a reduction equal to 5.25 percent divided by the
Modification of NOL Deduction
top corporate tax rate. For 2018 the top corporate tax rate is 21
Pre-TCJA, life insurance companies were subject to special rules percent, so the percentage reduction for property and casualty
on the deductibility of NOLs.9 The TCJA repeals these rules companies is 25 percent. The provision would be effective for tax
and subjects life insurance company NOLs (arising in tax years years beginning after 2017.
beginning after December 31, 2017) to the same treatment as
other non-insurance corporations; these rules disallow carrybacks Modification of Discounting Rules for Property and Casualty
and permit indefinite carryforwards (though limited to 80 percent Companies
of taxable income). With respect to property and casualty
insurers, the TCJA preserves the pre-TCJA NOL regime applicable The TCJA requires proper ty and casualty insurance companies
to property and casualty insurers, which provides a two-year to use a higher rate (the 60-month average corporate bond
carryback and 20-year carryforward for NOLs. yield curve, as specified by Treasury) to discount their unpaid
losses instead of using the applicable mid-term federal rate.
Additionally, proper ty and casualty insurers may no longer elect
Repeal of the Small Life Insurance Company Deduction
to use company-specific, rather than industry-wide, historical
Pre-TCJA, small life insurance companies were able to deduct 60 loss payment patterns. Ten-year lines will be discounted over a
percent of their tentative life insurance company taxable income. maximum of 25 years; and 4 years for 2-year lines. The provision
The TCJA repeals this provision, effective for tax years beginning generally would be effective for tax years beginning after 2017,
after December 31, 2017. with a transition rule that would spread adjustments relating to
pre-effective date losses and expenses over eight years.
Adjustment for Change in Computing Reserves
Modification of Computational Rules for Life Insurance Tax
A change in the method of computing reserves may require
Reserves
income inclusions or deductions. Pre-TCJA, these items of
income or deduction were required to be spread ratably over a The TCJA modifies the computation of life insurance reserves to
10-year period starting the taxable year after which the change limit the amount of the life insurance reserves for a contract (other
takes place. The TCJA repeals the special 10-year period in favor than certain variable contracts) to the greater of the net surrender
the general rule for tax accounting method adjustments, which value of the contract or 92.81 percent of the amount determined
requires an adjustment to be includable ratably over a four-year using the tax reserve method otherwise applicable to the contract
period. The provision applies to taxable years beginning after as of the date the reserve is determined. An eight-year spread of
December 31, 2017. the difference in reserves as of December 31, 2017, resulting from
the modification is permitted.
Repeal of Special Rule for Distribution to Shareholders from
pre-1984 Policyholders Surplus Accounts Capitalization of Certain Policy Acquisition Expenses
Pre-TCJA, amounts held in a life insurance company’s pre-1984 Pre-TCJA law provided for the capitalization of specified policy
policyholder surplus account were untaxed unless treated as acquisition expenses over a 120-month period, beginning with the
distributed to shareholders or subtracted from the policyholder first month in the second half of the taxable year based on certain
surplus account. The TCJA repeals this special rule and requires percentages of net premiums, depending on the nature of the
the inclusion in income of amounts from pre-1984 policyholders insurance contract. The TCJA increases the capitalization period to
surplus accounts ratably over an 8-year period starting in 2018. Life 180 months and increases the percentage of net premiums for each
type of insurance contract.
9 Previously, life insurance companies carried back loss deductions three years
and forward fifteen.
Tax Reporting for Life Settlement Transactions’ Exception to in the year, on December 5, 2017, CVS announced its proposed
Transfer for Value Rules acquisition of Aetna for approximately $68 billion, the year’s largest
corporate merger. The regulatory review of the transaction is likely
Amounts received under a life insurance contract paid by reason
to be one meaningful bellwether of the Trump Administration’s
of the death of the insured generally are excludable from gross
antitrust policies, but as of this writing it remains difficult to tell
income. If a life insurance contract is sold or transferred for
which direction those policies may take.
valuable consideration, the amount paid by reason of the death of
the insured that is excludable generally is limited. This exception to Except for a relatively small potential overlap in Medicare drug
the transfer for value rules does not apply in the case of a transfer benefits administration, the CVS/Aetna merger is primarily a
of a life insurance contract, or any interest in a life insurance “vertical” transaction, in that it generally involves the combination
contract, in a reportable policy sale. Thus, some portion of the of businesses at different levels of the distribution chain. By and
death benefit ultimately payable under such a contract may be large, Aetna’s health insurance, drug benefits plans, and healthcare
includable in income. This rule is effective for transfers occurring provider networks will be combined with CVS’s retail pharmacies
after December 31, 2017. Additionally, the TCJA imposes new and walk-in clinics. Traditionally, vertical mergers do not raise
reporting requirements (i) in the case of the purchase of an serious concerns with US antitrust agencies and, when they do,
existing life insurance contract in a reportable policy sale and (ii) on those concerns can frequently be resolved through conduct
the payor in the case of the payment of reportable death benefits. remedies (such as compulsory access or licensing arrangements) as
These reporting requirements are effective for sales and payments opposed to structural divestitures. Contrary to this general trend,
after December 31, 2017. however, one of the Antitrust Division’s first significant steps in
2017 under the leadership of Makan Delrahim was to file a lawsuit
Clarification of Tax Basis of Life Insurance Contracts to block the vertical merger between AT&T and Time Warner,
which is scheduled to be tried in March 2018. Mr. Delrahim has
Pre-TCJA, it was not entirely clear whether the contract holder’s criticized conduct remedies for their tendency to turn enforcers
basis can be adjusted for mortality, expense or other reasonable into regulators because they require ongoing compliance
changes incurred under an annuity or life insurance contract. The monitoring. From this, one could infer a greater willingness by
TCJA clarifies that no adjustments to basis are made for mortality, Mr. Delrahim to challenge outright, rather than resolve through
expense, or other reasonable charges incurred under an annuity or remedies, vertical mergers like the CVS/Aetna combination. The
life insurance contract. The provision is effective for transactions Federal Trade Commission has not expressed similar misgivings
entered into after August 25, 2009. about resolving vertical merger issues through conduct remedies;
but in early January 2018, CVS announced that the transaction
Antitrust Issues would be reviewed by the Antitrust Division. The Antitrust
Division generally reviews mergers in the insurance industry, but
As in many other areas, 2017 was a transition year for the FTC is typically responsible for pharmacy mergers, as when it
antitrust issues affecting the US insurance industry. The Trump approved (subject to divestitures) the combination of Walgreen’s
Administration has been slow to make political appointments and Rite Aid in September 2017.
at the helm of each of the Federal Trade Commission and the
Antitrust Division of the Justice Department, and, to the extent On the business side, 2017 saw a continuing increase in corporate
that it has done so, signs of a precise regulatory policy have been buyers’ use of insurance policies to cover the risk of antitrust
elusive. The beginning of 2017 thus saw the dramatic conclusion remedies being imposed on M&A deals. Underwriting such
of efforts begun during the Obama presidency and, by the end of a policy generally requires not only an understanding of the
the year, a few significant matters have been commenced by the substantive antitrust risk presented by the subject combination
Trump Administration in a number of industries. As with most (ie, the likelihood that a regulator will have antitrust concerns), but
past political transitions, the work of the investigative career staff also a detailed understanding of the procedures and mechanisms
at each of the antitrust agencies is unlikely to change significantly, for the imposition of remedies, and of strategies for the advance
but it is too early to tell whether the new administration’s political measurement of the financial magnitude of likely remedies in order
appointments will bring dramatic change at the policy level. to define the policy’s scope. These efforts and considerations must
also be coordinated with the buyer’s likely desire to avoid signaling
By mid-February 2017, prior to the appointment of new Assistant to a reviewing agency that significant antitrust concerns may be
Attorney General Makan Delrahim, the Antitrust Division had present. As a result, M&A deals where such policies may be used
obtained federal court orders blocking two health-insurer mega- have seen increasing involvement by antitrust specialists, not only
mergers (Anthem/Cigna and Aetna/Humana), thus bringing to a on behalf of the parties, but also and importantly on behalf of third
close significant enforcement efforts of the Obama Administration. party insurers and reinsurers.
We discussed those matters in our previous year end report. Late
INNOVATION AND
TECHNOLOGY IN
INSURANCE
InsurTech/FinTech On the other side, new market entrants continue to disrupt and
drastically change the traditional way of purchasing insurance. The
The insurance sector is faced with a rapidly changing environment continued growth of peer-to-peer insurance and the internet of
driven by technology and other innovations. Insurers launching things devices provide ample opportunities for non-traditional
corporate venture capital strategies are in a race to exploit digital players to enter the insurance market. In 2018, learning from
initiatives, and are seeking to use technology to drive their business the missteps of startup companies that hit regulatory or other
and enhance their product and service offerings. Insurers need to hurdles, startup companies will continue their strategic growth and
innovate, both to stay ahead of legacy competitors and to preempt expansion. For example, California-based Hippo which launched
the erosion and disruption of established business models by in April 2017, announced in early 2018 that it formed a strategic
ambitious and nimble digital startups. partnership with Spinnaker Insurance Co. to expand its product
offering into new states.
Insurance Industry Adapting to InsurTech Disruption
Various industry analysts consider London to be the global hub for
We reported in Q4 2016 that, while many players in the insurance European InsurTech investment, with 30 percent of all deals in the
sector are becoming increasingly aware of the need to focus their continent taking place in London. Landmark InsurTech deals, such
business strategies on digital output, the sector as a whole is still as the £180 million investment in life insurance startup Gryphon,
digitally immature; less than half of insurers have the mobile digital have meant that 2017 was a bumper year for InsurTech. In the first
functionality to provide a quote and only 23 percent are able to half of the year alone, £218 million was invested into InsurTech
submit and process claims digitally. We reported that some of businesses, (according to an analysis of figures from venture
the reasons behind the relative tech immaturity and subsequent capital tracking company CB Insights) representing a 2,695 percent
sluggish digital growth in the industry compared with other increase from 2016.
business sectors were the cost of initial investment to transform
Despite the surge of investment, bringing InsurTech products
legacy technology systems, fluctuating regulatory requirements and
to market can be unpalatable given the demands of regulatory
internal cultural constraints.
compliance. New product development in a heavily regulated
Despite these hurdles, we predicted in our publication last year environment faces uncertainty, cost, and delay of authorization and
that 2017 would see: approval processes and the fact that regulation in many countries
imposes consumer protection rules on the sale of insurance
■■ increased activity and investment in InsurTech, as insurers seek
products which are arguably not suited to distribution in a fast-
to use technology to support new product offerings, improve
moving digital environment. Enhanced data protection and privacy
internal operations and customer service and as disrupters
laws in the form of the successor legislation to the European Data
continue to try and introduce game changers to the industry and
Protection Directive, the GDPR, briefly mentioned initially in the
■■ significant further evolution in the regulatory standards and “Data Security” section above, restrict how data can be used in an
regulatory structures applicable to insurers. industry where marketing and successful underwriting is dependent
on understanding the customer’s individual features, and the risk he
Sure enough, 2017 saw the insurance industry taking the plunge or she represents, as further discussed below.
into the InsurTech pool, experimenting with new InsurTech
products themselves via regulator-backed innovation hubs and InsurTech companies have historically taken a more liberal
partnering with tech innovators via venture capital initiatives. For approach to regulatory and data compliance, relying on the viral
example Allianz (as well as Aviva and Munich Re) set up significant potential of big data economies and the fact that the tech sector is
venture funds to invest in early stage technology companies not a traditionally regulated area, to slip products into the market
which will keep them abreast of innovation and drive their digital quickly. This means that, often, when larger companies acquire
strategies. In 2017, borrowing ideas from some InsurTech startups, InsurTech innovators without a regulator-friendly tried and tested
Allianz launched AllianGo, a site that serves the small business product, their concerns can be that they are acquiring an unruly
segment operating in the business owners policy, commercial teenager with no respect for regulatory boundaries. Bringing such
auto and workers’ compensation space in a range of industries. innovators under the auspices of parental and regulatory guidance
Allianz was not alone among carriers looking to compete in the requires significant outlay to make sure they are fit for purpose in
online space. Launching its own platform in 2016, Starr Companies a regulated environment. If they are not, the financial penalties can
purchased a minority stake in CoverWallet in 2017, stating its be high, and the reputational implications potentially much higher.
intention to work together to develop new digital-based products. To balance the need to encourage innovative new products
MetLife also recently announced that it is starting an insurance with ensuring that they are implemented in a safe and compliant
startup training program that will offer the startups accepted up to manner, regulators in certain jurisdictions have taken steps
$120,000 in seed money each for an equity stake in each startup. to provide a platform to road-test InsurTech innovation in a
controlled environment (reported on below in relation to only put their innovative business models on the market once they
regulatory sandboxes). have obtained the necessary permissions. It is noted that BaFin’s
position is consistent with the fact that it has no authority to allow
The Global Regulatory Expermentation: Regulatory exceptions to the mandatory requirements of financial regulatory
Sandboxes law and has not been authorized by the legislator to promote
individual undertakings.
We reported earlier this year that some regulators (including
notably the UK’s FCA, ASIC in Australia and the Singapore It is not only the German regulator that remains unconvinced
Monetary Authority) have encouraged innovation and international by the benefits of a regulatory sandbox. A number of German
competition to attract or retain tech businesses. In the UK, the FinTech representatives have voiced concerns over following the
FCA has been seen as a global frontrunner in developing an FCA’s model, rejecting the notion that InsurTech products should
innovation-friendly regulatory environment, while regulators be granted any kind of “regulatory honeymoon”. More seasoned
elsewhere have shown varying levels of enthusiasm as they FinTech players believe that encouraging a lenient attitude toward
balance the desire for a benign supervisory environment in which startups could undermine public trust in the regulator and unsettle
to facilitate the development of InsurTech with the risks of a clients and investors.
regulatory free-for-all.
NAIC’s Serious Look into InsurTech Regulatory
The FCA started its promotional program “Regulatory Sandbox”
“Sandboxes” and Further Partnership with the
at the beginning of 2015. The Sandbox was pioneered as a way
Tech Industry
for FinTech businesses to test new products under the eyes of
regulatory scrutiny, without fear of being penalized if they fall short. Although regulatory sandboxes have existed outside of the US
This facilitated quick and honest feedback on both the products for some time, state regulators have been slow to embrace the
and on the impact of regulation on technological advancement. regulatory sandbox concept, which could be a tool to support
innovation and technological advancements in the insurance industry.
In 2017, the FCA chose three InsurTech firms for its Sandbox:
In 2017, however, the NAIC moved towards to normalizing and
Wrisk, Etherisc, and Sherpa. Wrisk is a start-up that offers usage-
acceptance of such concepts. The NAIC Innovation and Technology
based contents insurance products on a smart phone. Etherisc
(EX) Task Force invited the American Insurance Association and the
offers fully automated and decentralized flight insurance using
American Family Insurance Company to make a formal presentation
blockchain. Sherpa offers an automated personal lines advisory
on regulatory sandbox concepts. The AIA additionally presented
broker, with no human interaction. Customers provide their details
a proposed draft model law designed to allow for “sandboxes”
via their smartphone or computer, and Sherpa creates a customer
– authorizing state insurance regulators to exercise flexibility
risk profile and makes product recommendations.
in working with startups and incumbent insurers working on
The Hong Kong Insurance Authority has followed the FCA’s lead, innovative products and services. Several interested parties provided
launching its InsurTech Sandbox and “Fast Track”. The Sandbox comments on the issue, with commenters generally expressing that
allows existing authorized insurers to undergo a trial run in the they were not opposed to “sandboxes” in principle so long as they
Sandbox, during which they can collect data to show the Insurance are fair to current market participants and consumers. The concern
Authority that the product broadly meets necessary regulatory was centered on the fact that such companies would have relaxed
and supervisory requirements. Fast Track is an expedited process regulatory requirements to experiment with new business models
of obtaining authorization to carry on insurance business wholly and products that may not align with current regulatory standards
through digital distribution channels. The applicant must plan to imposed by other insurance and insurance related companies.
own and operate their proprietary distribution channels, and Further, Independent Insurance Agents & Brokers of America said
traditional bancassurance, agency or broker channels are not it would oppose the proposals as vesting excessive discretion in
allowed. Both of these initiatives are currently in their pilot phase. regulators to the detriment of policyholders and producers.
Other regulators have been more cautious in their approach to In 2017, the NAIC also participated in a number of InsurTech
InsurTech. Despite Berlin being considered by a number of industry gatherings. The NAIC sponsored 25 regulators to attend InsureTech
experts as the next biggest hub for InsurTech investment behind Connect and held a series of programs following the conference.
London, Felix Hufeid, President of the German Federal Financial The programs included:
Supervisory Authority (BaFin) explicitly stated at the beginning ■■ a half-day workshop where 22 regulators sat down with
of 2017 that it will not be introducing such a sandbox initiative.
20 star tups to discuss business models and regulatory
BaFin’s stance remains that InsurTech organizations operating in
considerations
an area subject to mandatory authorization must comply with the
same regulations as established institutions. Therefore, they can ■■ a day of presentations from InsurTech star tups
■■ an event with Google focused on public policy considerations March 2017 meeting based on the entity’s increased concern
around autonomous vehicles and about the potential for disruption caused to financial institutions
due to cyberattacks, as well as an aim to enhance cross-border
■■ a day-long cybersecurity conference at Stanford University.
cooperation. The repor t was informed by the responses of
FSB member jurisdictions and international bodies to a survey
Technology Company Entrants to Insurance conducted by the FSB. The summary repor t also set out key
themes raised in an FSB workshop in September 2017 that
While adjusting to startup technology-based insurance disruptors,
brought together public and private sector par ticipants to discuss
the insurance industry must prepare for the next tsunami of
cybersecurity in the financial sector.
new market entrants – large technology disruptors. With more
sophisticated data and software, as well as the integration of
technology into customers’ lives and the imagination that comes A summary of the FSB survey concluded that all 25 member
with the technology sector, it is extremely likely that massive jurisdictions have been actively addressing cybersecurity in
technology platforms like Google, Amazon, and Facebook will play the financial sector, including the public release of regulations,
a significant role as disruptor of the industry in the near future. guidance and supervisory practices that address cybersecurity.
However, supervisory practices that are in use, but that have not
There have been rumors that Amazon is opening a new division in been publicly released, were not covered by the G20 request or
London targeting the insurance market. A large technology company the FSB survey and were not reflected in the repor t.
like Amazon could leverage the in-depth knowledge of its customers
that it has gained over the last two decades in the insurance market. The 10 international bodies that responded to the FSB survey
While most traditional insurers are moving toward modernizing their suggests that jurisdictions have found existing guidance and
organizational, technical and cultural legacy systems, Amazon has standards to be useful and that there is some degree of
already built a leading tech company that currently uses algorithms to international convergence in cybersecurity regulation. Private
analyze consumer behavior and has mastered the art of cross- and sector par ticipants stressed the impor tance of a globally
upselling. The popularity of products like the Alexa voice assistant consistent approach necessary to avoid conflicting requirements.
may mean effortless searches for insurance policies across different Par ticipants also expressed concern about regulators’ ability to
providers, presenting a competitive threat to insurance brokers. protect confidential firm information, the high costs associated
It remains to be seen how the recently announced partnership with cybersecurity examinations, and the need for better
among Amazon, Berkshire Hathaway and JPMorgan Chase & Co. examiner training. Both public and private sector par ticipants
to reduce healthcare costs and improve satisfaction will affect their identified cross-border information sharing as a challenge that
US employees as well as the broader healthcare market. should be addressed as a par t of improving overall cybersecurity.
Data Security Cyber Risk Addressed in the United Kingdom

Data security remained a hot topic in 2017 as additional large- Last year, we repor ted on the PRA’s draft supervisory statement
scale cybersecurity breaches made global headlines. Regulators setting out its expectations of firms regarding cyber underwriting
around the world responded with new or updated cybersecurity risks. The central expectation was that firms must be able to
requirements and standards. Internationally, the FSB conducted a identify, quantify and manage such underwriting risks. In 2017,
survey to analyze global cybersecurity regulations and practices the PRA worked closely with firms across the insurance sector,
and the UK issued guidance concerning cyber risk management. focusing on the underwriting risks from both “affirmative” (ie,
Domestically, the NAIC adopted a Data Security Model Law, dedicated) cyber insurance policies, and other “non-affirmative”
modeled after New York’s “first in the nation” cybersecurity final liability insurance policies that do not exclude cyber risk. The PRA
regulation applicable to all insurance industry licensees. found that exposure to cyber losses was almost universal among
industry par ticipants surveyed, as firms do not currently have
These effor ts are discussed in fur ther detail below. clear strategies for managing cyber risk.
FSB Summary Report on Financial Sector Cybersecurity The PRA issued a new supervisory statement in light of its
Regulations, Guidance, and Supervisory Practices concern regarding cyber losses. It stated that its key expectations
for all Solvency II firms in this regard fell into the following
On October 14, 2017, the FSB delivered a summary repor t and key categories:
detailed analysis of the results of a stocktake on cybersecurity
regulations, guidance and supervisory practices at the G20 ■■ Non-affirmative cyber risk. Firms are expected to put in place
meeting. The repor t came at the request of the G20 during its measures to reduce their exposure to cyber risk. Proposed
options include considering premium adjustments to reflect of Financial Services in that both require a company to adopt
the nature of cyber risk and any additional/extended cover a security program based upon the company’s risk assessment,
provided; the introduction of robust exclusions; and attaching which is the responsibility of and overseen by the board
specific limits of cover. If a firm decides to offer cyber cover of directors. The security program must have appropriate
without implementing such measures or at no additional administrative, technical, and physical protections of information
premium, the PRA would expect to see board confirmation systems and nonpublic information, protect against unauthorized
that a full assessment of potential resultant losses has access or use of nonpublic information, and include a data
been conducted. retention and destruction policy. NAIC intends that any insurer
in compliance with the NYDFS Cybersecurity Regulation will be
■■ Cyber risk strategy and risk appetite. Cyber underwriting
in compliance with the Model Law, although this is not an explicit
specifically should form par t of firms’ strategy and risk appetite
exception in the text of the Model Law.
statements. Such statements should be reviewed by the board
on a regular basis (at least annually for non-affirmative policies
The Model Law allows for a tailored approach based upon the
and more regularly for affirmative policies). Management
nature and scope of a licensee’s activities, including its use of third
information should, at a minimum, include a clear statement of
par ty service providers, the sensitivity of the information under
the firm’s risk appetite, aggregate cyber underwriting exposure
the licensee’s control, in addition to the licensee’s risk assessment.
metrics and risk stress tests.
A licensee is required to submit an information security program
■■ Cyber expertise. Firms should understand the ever changing cer tification to its state insurance regulator on an annual basis,
landscape and continue to develop knowledge of the risk. repor t on any cybersecurity events, and retain information
Responsibility for the risk remains with the firm regardless of security related records for five years.
any external input.
The Model Law also includes requirements for a licensee to
The impending implementation of the General Data Protection
investigate cybersecurity events and repor t events to the state
Regulation (GDPR) in Europe (see below for more details) poses
insurance commissioner that have a reasonable likelihood of
interesting questions for cyber cover, in par ticular in respect of
harming a consumer residing in the state. The Model Law
the insurability of regulatory fines which may be imposed, under
formalizes a requirement to stay informed of emerging threats
the GDPR, on a policyholder which has suffered a cybersecurity
and vulnerabilities. Licensees should also provide employees with
breach. In the UK, the principle of ex turpi causa and the leading
cybersecurity awareness training and require third par ty service
case of Safeway v Twigger have led most to conclude that
providers to implement appropriate protections for information
policyholders will not be able to recover for regulatory fines
systems and nonpublic information.
imposed following a breach. However, we will not have cer tainty
on this point until it has been tested under the new regime.
There is a chance that NAIC may elect to make the Model
Law an accreditation standard, which would require all states,
The increased frequency of large-scale cybersecurity breaches in
DC and the territories to adopt the Model Law after a cer tain
2017, coupled with the evolving regulatory landscape, mean that
period of time. The accreditation process can typically take three
we expect to see firms looking more closely at their underwriting
months to one year (which includes public comment periods
guidelines and risk appetite in this area, with a view to ensuring
and determining the criteria for meeting the accreditation
robust risk and control measures are in place to enable them to
standard). Once adopted as an accreditation standard, there is
fully understand, price and assume any cyber risks going forward.
one additional year of exposure for public comment and then
states have at least four years to adopt a model law to meet the
The NAIC Data Security Model Law accreditation deadline. At this juncture, we have not seen strong
indications that NAIC will take this approach on the Model Law
The National Association of Insurance Commissioners adopted the and instead is likely to allow for state-by-state adoption and
final version of its Insurance Data Security Model Law (Model Law) implementation, keeping in place the current diverse range of
in October. While it will take a number of years for this Model Law sector information security and data breach notice obligations.
to be enacted in states or adopted as a rule by the state insurance
regulator depending on state law, a handful of states have already
said they will submit the Model Law to their state legislatures, State Cybersecurity and Data Breach Notice
including Rhode Island, South Carolina and Vermont. Requirements
In 2017, New York issued its long anticipated cybersecurity final
The Model Law has similar foundations as the New York rule, which went into effect on March 1. After multiple hearings
Cybersecurity Regulation issued by the New York Depar tment and rounds of proposals, it was the most specific cybersecurity
regulation in the country to apply to all
companies licensed by the NYDFS that
were not critical infrastructure operators.
The NYDFS issued FAQs and a timeline of Upcoming NYDFS Cybersecurity Rule Deadlines
key deadlines through March 2019 to assist
industry’s compliance with the rule. The ■■ February 15, 2018: All "Covered Entities" are required to submit their
FAQs addressed the types of entities that first annual certifications
fall within the scope of the rule, the notice ■■ March 1, 2018: CISO reporting to the board of directors (500.04(b)),
requirements triggered by a Cybersecurity Penetration testing and vulnerability assessments (500.05), Risk
Event, the annual cer tification assessments (500.09), Multi-factor authentication (500.12), and
requirement, and other technical elements Cybersecurity awareness training (500.14(a)(2))
of the rule. Notably, New York clarified
that the annual cer tification is only ■■ September 3, 2018: Audit trails (500.06), Application security (500.08),
acceptable in full (rather than par tial) Data retention (500.13), Policies and procedures to monitor the activity
compliance of the rule. of authorized users (500.14(a)(1)), and Encryption (500.15)
■■ March 1, 2019: Third party service provider security policy (500.11)

The New York cybersecurity rule and the
NYDFS guidance regarding compliance
and scope must be continuously
monitored in 2018. In 2017, the NYDFS,
through its FAQs, expanded its scope to ■■ review of regulatory frameworks for the oversight of insurers’
include branches of foreign insurance companies and banks. After use of consumer data
the widely-publicized Equifax breach, the NYDFS issued a new
■■ data tools and models used by regulators to monitor the
proposed rule to include all consumer credit repor ting agencies in
marketplace and
the cybersecurity rule framework – expanding its scope 10 days
after the massive breach was made public. In 2017, the NYDFS ■■ review of structures to facilitate regulatory review of big data
demonstrated its ability to be nimble, but has used its powers to use in underwriting and other insurance related processes (ie,
expand the scope of the cybersecurity rule. To the extent there statutory authority, speed to market models).
are more large scale cybersecurity breaches in 2018, we expect
the NYDFS to widen the scope of its authority to regulate the By the end of 2017, the Big Data Working group developed a list
cybersecurity programs of companies that do not clearly fall of regulatory issues related to the use of consumer and non-
within the scope of the final rule. insurance data (ie, data not historically used or rooted in insurance
underwriting). The list included a variety of issues raised by
In 2017, Connecticut, Arkansas, Delaware, Maryland, New Mexico consumers, industry, and regulators. The list of regulatory issues
Tennessee and Virginia amended their data breach notification was not completed, as it was open for public comment until
laws. The states expanded the types of data breach that trigger January 12, 2018. The group also conducted a survey regarding
a notification; expanded the types of companies required to whether states currently have specific prohibitions regarding
provide a notification; and/or set timelines in which a company the use of certain data elements used in underwriting and
must notify specific government agencies and/or customers of rating private passenger automobile insurance and homeowners
a data breach. Much more activity is very likely this year in the insurance. This survey is expected to expand to address life
wake of several highly publicized breaches that came to light in insurance products in the future. Finally, the Big Data Working
the second half of 2017. Group reported work behind the scenes on analyzing the data
and tools needed by regulators to monitor the use of big data to
ultimately develop and propose resource-sharing mechanisms for
Big Data state insurance regulators to regulate its use in underwriting and
other insurance related processes.
The NAIC Shifts Focus to Regulatory Review Standard- The Big Data Working Group is poised to be active in 2018. The
setting Versus Restricting Use of Big Data group is wrapping up a number of its initiatives to develop issues
lists, survey state insurance laws that address such and assess the
Reflecting the Big Data (EX) Working Group’s updated charges,
tools and competency of insurance regulators to analyze products
the Working Group moved forward with the following three key
that use big data for the purpose of strengthening insurance
initiatives in 2017:
regulatory expertise in the area. The Big Data Working Group will
start issuing recommendations of modifications to model laws and/ on customer type) will necessarily involve the re-purposing of
or regulations regarding marketing, rating, underwriting and claims, data originally collected for other reasons. Additional challenges
regulation of data vendors and brokers, regulatory reporting posed by GDPR include the substantially increased transparency
requirements, and consumer disclosure requirements. Depending obligations to inform all par ticipants in the insurance lifecycle
on the extent of the final findings and proposed modifications, about how their personal data is used, and the extended range of
there is a possibility that wholesale new model laws or regulations rights afforded to those data subjects to access, amend, restrict
may come out of the Big Data Working Group in 2018. and in some cases compel the erasure of their data (the so-called
“right to be forgotten”).
As an example, by the end of 2017, the Casualty Actuarial and
Statistical (C) Task Force requested that the Big Data Working It is not all bad news though. We predict that the increased
Group add an additional charge to draft potential changes to the complexities in the regulatory landscape will incentivize insurers
Product Filing Examiners Handbook to address best practices to explore new technologies and products that enable big
for the regulatory review of predictive analytics and models used data usage within the new regulatory parameters. This fur ther
by insurance companies to justify rates as well as increase and opens up the lines of communication between insurers and tech
standardize training of regulators and NAIC staff (and identify innovators, encouraging even more investment in InsurTech in
products to assist) in analyzing predictive models. order to drive big data strategies. In addition, complying with
these strengthened regulatory standards also has the potential
We expect a lot of continued activity in the regulation of the use
to enhance the customer experience through more relevant
of big data in underwriting and other insurance related processes
engagement and increased transparency, engendering increased
as the Big Data Working Group begins to take concrete actions
trust in a society which is increasingly aler t to issues of privacy
to accomplish goals set for th in the NAIC Work Plan.
and data protection.
Digitalization and Big Data – the

European Perspective
Insurance companies are increasingly
maximizing their digital strategies in order
to stay ahead of competition and achieve
sustainable success. However, expanding
their big data capabilities uncover a new
and demanding legislative landscape.
Within the EU, the legal framework
governing the processing of personal
data is undergoing its biggest change in a
generation, with the introduction of the
GDPR. This will present challenges to big
data operations and the digitalization and
innovation demanded of the insurance
industry by consumers. For example,
the GDPR requires that data controllers
(including insurance firms) use personal
data only for the “specified, explicit and
legitimate purposes” for which it was
collected, and requires that personal
data must be “adequate, relevant and not
excessive” in relation to the purposes
for which they are collected. In contrast,
organizations looking to make best use of
big data will want to collect the broadest
amount of information about a subject or
group of subjects from the widest range of
sources, and the performance of big data
analytics (for example in developing or
refining home insurance products based
Blockchain and Other Decentralized Technology Smart Contracts – the New Horizon of the Blockchain
Network
The Insurance Industry Demystifies Blockchain The phrase “smart contracts” was coined by computer scientist
Each year seems to have its buzzword. Although not a new term, Nick Szabo in 1995, to describe what he calls the “highly evolved”
“blockchain” was on the industry’s mind in 2017, if not at the tip practice of using “computerized transaction protocol that executes
of everyone’s tongue. In fact, voicing the term “blockchain” in the terms of a contract.” In essence, a smart contract is software
the halls of conference networking events might have resulted code that automates the execution and enforcement of obligations
in looks of excitement, interest, fear, or perhaps disengaged in commercial transactions.
skepticism. Blockchain, however, is gaining momentum and serious The applications of blockchain-based smar t contracts can
consideration for utilization in (re)insurance markets. assist insurance companies in a number of areas such as
Blockchain, in its simplest description, is a form of decentralized managing complex pools of risks in proper ty and casualty and
tamper-proof distributed ledger technology. While the ledger is industrial ver ticals which are usually shared by multiple par ties,
simultaneously communicated publicly to all par ticipants, security implementation of parametric risk insurance and the processing
is provided via cryptography. Blockchain is based on a system or of claims and payment more generally. In par ticular, insurance
network that effectively self-verifies transactions that are then companies are considering the automation of policy underwriting
recorded in “blocks” as the transactions are completed and and handling customer’s claims for claims that have clear
confirmed chronologically. This structure results in par ticipants parameters: smar t contracts provide a reliable and transparent
having access to the same, immutable data. In other words, the mechanism to fairly handle claims in accordance to contract-
process can be securely and effectively applied so that large specific rules.
numbers of par ticipants may access the same recorded data in Blockchain technology and smart contracts offer a significant
respect of all transactions to date in a given market space with opportunity for the insurance industry to develop new insurance
accuracy and confidence. To put it still another way, everyone can products and more efficient processes for providing existing
be on the same page. products. This opportunity should assist insurance companies to
Blockchain and distributed ledger technology offers significant and address two of their major challenges: limited growth in mature
scalable processing power, high accuracy rates, and high levels of markets and the pressure to reduce costs.
security at a significantly reduced cost compared to the traditional
systems the technology could replace, such as contracts, tracking
and record keeping. The most visible current use of blockchain
technology is to run the Bitcoin cryptocurrency, but blockchain
technology can form the basis for “smar t contracts,” which could
be par ticularly impor tant for the insurance industry. The Harvard
Business Review noted in a 2017 ar ticle: “For an industry that
invented the concept of mutualizing and coopetition, insurance
can gain enormously from the foundational technology of
blockchain. Failure to act may consign many large players to
the continuing trust deficit or, worse, irrelevance.” A group of
major insurance and reinsurance companies, including Aegon,
Allianz, Munich Re, Swiss Re and Zurich, launched the Blockchain
Insurance Industry Initiative, B3i, in 2016 to explore the potential
of distributed ledger technologies in the insurance industry. The
group of par ticipants increased in 2017, and market testing with a
developed prototype is proceeding. While the technology is being
utilized in cer tain industry segments already to gain in efficiencies,
2018 may see a broader adoption of the distributed ledger
technology, assuming testing leads to satisfactory results.
HOW BLOCKCHAIN WORKS
Transaction 1 Transaction 2 Transaction 3
Transaction
broadcast Transaction Transaction Transaction
to nodes. request request request
Nodes verify
the transaction
authenticity.
NODES NODES NODES

All the nodes in the network All the nodes in the network All the nodes in the network
Transaction Valid? Transaction Valid? Transaction Valid?
Yes No Yes
Transaction Confirmed Transaction Rejected Transaction Confirmed
Confirmed transactions are collected in a candidate block
Transaction, Transaction
‘Miner’ nodes compete to find a hash of the candidate block.

This involves solving a highly complex algorithm.
The miner (or pool of miners) which solves the algorithm is rewarded.
New block is shared with all the nodes

in the network for verification. If and
when it is verified, it is added to the rest of the
blocks in the chain
Block
Block
30 | INSUR ANCE

06 SECTOR TRENDS: 2017 YEAR END REVIEW AND FORECAST FOR 2018
| Blockchain
THE INTERNATIONAL
ASSOCIATION
OF INSURANCE
COMMISSIONERS
The IAIS has continued to work on multiple work streams as group-wide supervisors, but the ICS will not be used as a basis to
reported below. It also has a new Secretary General, reorganized trigger supervisory action.
some committees and new member regulators are seeking to
However, during the monitoring period, the IAIS will also collect
establish a five-year strategic plan.
data from interested jurisdictions relevant to the development of
the aggregation method. To many US supervisors and interested
The Saga of ICS – The Push for Global Capital parties this concession by the IAIS was viewed as a major step
Standards forward as it constitutes the first time many IAIS members have
The International Association of Insurance Supervisors continued been willing to acknowledge the aggregated approach might be a
its push to develop an International Capital Standard (ICS), with viable alternative to the methodology contained in the current ICS.
an important agreement occurring in November 2017 regarding The second phase of the ICS implementation, scheduled to occur
what the IAIS characterized in a press release as a “unified path to now in 2025, will be the implementation of the ICS for supervisory
convergence of group capital standards.” purposes (ie, as a “Prescribed Capital Requirement”). It remains
The ICS, as defined by the IAIS, is intended to be a risk-based to be seen whether the aggregated approach will be accepted
global insurance capital standard for internationally active insurance at that time, as some observers are skeptical that the IAIS staff
groups. The ICS is intended to be a single common methodology who have been working on the ICS are open-minded about the
that achieves comparable (ie, substantially the same) outcomes aggregated capital approach and whether it could ever provide the
across jurisdictions. “comparable” result that the IAIS insists is the essential element of
any ICS.
The year began with the IAIS continuing to assess the results of its
initial rounds of field testing, which led to the release in July 2017 of It also remains to be seen how many internationally active
“ICS Version 1.0 for Extended Field Testing.” insurance groups decide to voluntarily participate in the
“monitoring period” exercise given the cost and time commitment
In releasing this version of the ICS, the IAIS made clear that it was that will require and the limits on what regulators could do to
deliberately not addressing many of the objections stakeholders pressure participation in the absence of a legal requirement.
have expressed regarding the political challenges that the IAIS
will surely face in trying to persuade its members to adopt the It is also subject to doubt as to whether the Kuala Lumpur
ICS as currently proposed. Instead, the version maintained many Agreement really changes anything that was not going to occur,
of the features of the ICS that have been previously exposed inevitably, because as a practical matter, jurisdictions around the
and criticized by many, such as the use of a new valuation system world would not have been ready to start accepting the ICS as
(referred to by the IAIS as Market-Adjusted Valuation or MAV), a a formal legal standard beginning in 2020. Indeed, the ICS in all
prescribed Margin Over Current Estimate, and qualifying capital likelihood will not be ready for that in any case. Moreover, the
resource rules that exclude senior debt and surplus notes. sheer political impact of the US going ahead and developing its
aggregation approach would have been a factor the IAIS could
Moreover, the IAIS reiterated its commitment to its previously not have simply ignored in trying to get other countries to adopt
established timetable which many have argued is way too ambitious the ICS.
to be realistic. Under this time frame, after field testing the current
ICS version, the IAIS will release Version 2.0 of the ICS in the ComFrame and the ICPs
summer of 2018. This will be followed by another round of field
testing and then the adoption of the ICS as part of ComFrame at The IAIS continued its work on ComFrame and the Insurance
the IAIS’s 2019 annual meeting. In pursuing this agenda, the IAIS Core Principles (ICPs), while shifting directions; and developing
had showed no interest in accommodating the development of an new initiatives such as an activities-based approach to systemic
aggregated approach to assessing group capital needs such as those risk, triggering the NAIC to develop its own ABA standard. The
being developed by the NAIC and the US Federal Reserve as an IAIS activities that directly impact the US regulatory systems are
alternative to the approaches already in ICS Version 1.0. discussed below.
That position changed at the IAIS’s 2017 Annual Meeting in Kuala Throughout 2017 the IAIS worked on revising and modernizing
Lumpur in November, with an announcement that instead of many of its ICPs. The ICPs are important to the IAIS because,
adopting the ICS for implementation in 2019, the implementation in its words, they “provide a globally acceptable framework for
of ICS Version 2.0 will be conducted in two phases. the insurance sector.” On a more practical level for insurers and
intermediaries, the ICPs provide the standards used by the IMF
The first phase is a five-year “monitoring period” beginning in 2020
when it reviews a jurisdiction’s regulatory system as part of the
in which a “reference ICS” will be used for confidential reporting to
Financial Sector Assessment Program (FSAP). A poor FSAP result
can provide the impetus for a jurisdiction to change its laws and The NAIC’s Macroprudential Initiative
administrative processes to conform more closely to the ICPs.
Closely related to the IAIS’s plans to develop the ABA, the NAIC’s
The following ICPs were the subject of consultations that were Financial Stability Task Force announced in 2017 that it was
completed during 2017: launching a “Macroprudential Initiative” in which it will “analyze
existing post-financial crisis regulatory reforms for their application
■■ ICP 1 (Objectives, Powers, and Responsibilities of the Supervisor)
in identifying macro-economic trends, including identifying possible
■■ ICP 2 (Supervisor) areas of improvement or gaps.”
■■ ICP 3 (Information Sharing and Confidentiality) As an initial project, the MPI will focus on liquidity issues
by reviewing existing public and regulator-only data related
■■ ICP 5 (Suitability of Persons)
to liquidity risk, identifying any gaps based upon regulatory
■■ ICP 7 (Corporate Governance) needs, and proposing the universe of companies to which any
recommendations may apply. A Liquidity Assessment subgroup
■■ ICP 9 (Supervisory Review and Repor ting) has been formed, which is expected to develop a liquidity stress
testing framework for large life insurers by the NAIC’s 2018 Spring
■■ ICP 10 (Preventive Measures, Corrective Measures and Sanctions)
Meeting, followed by potential enhancements or disclosures to
■■ ICP 13 (Reinsurance and Risk Transfer) implement the framework by the 2018 Summer Meeting. The life
insurers at which this project is aimed thus far have welcomed the
■■ ICP 18 (Intermediaries)
NAIC’s interest.
■■ ICP 19 (Conduct of Business)
Property and casualty insurers’ initial reactions have been
■■ ICP 24 (Macro-prudential Surveillance and Insurance Supervision) somewhat more reserved. In particular, leading trade associations
have expressed concern about the next topic the MPI intends to
■■ ICP 25 (Supervisory Cooperation and Coordination) review, which is recovery and resolution.
■■ Open consultations initiated in 2017, with comments due in
February 2018, address the following ICPs: New IAIS Direction
■■ ICP 8 (Risk Management and Internal Controls) During 2017 the IAIS was and, for much of 2018, will be focused on
continuing to develop new standards, especially regarding capital,
■■ ICP 15 (Investments)
which as noted elsewhere will be subject to further development
■■ ICP 16 (Enterprise Risk Management for Solvency Purposes) until at least 2025. However, new IAIS Secretary General Jonathan
Dixson stated in remarks he made during the NAIC’s Fall 2017
Additional consultations are planned in 2018 regarding ICP 6 meeting that the IAIS plans to move away from standard setting,
(Changes in Control and Portfolio Transfers) and ICP 22 (Anti- because that is almost done, and into “implementation and
money Laundering and Combatting the Financing of Terrorism). assessment” of those standards. The IAIS has also revised its
committee structure under three main working committees (ie,
A key feature of these consultations is that the revised ICPs
“Policy Development”, “Macroprudential”, and “Implementation
incorporate text which applies only to IAIGs as part of the IAIS’s
and Assessment”).
ComFrame project. Prior to these revisions, ComFrame was a
separate document from the ICPs. Indeed, in the case of several This change coincides with the development by the IAIS of a
of the consultations, the sole purpose of the consultation was new five-year strategic plan to be adopted in 2019, taking effect
to incorporate ComFrame text into the ICP and not to solicit in 2020. Seeking early input from stakeholders, the IAIS issued a
comments on the underlying ICPs at all. press release in late December asking stakeholders to share their
“thoughts and perspectives” on macro trends and developments
For the most part, interested parties seemed generally satisfied
that may impact the IAIS and its mission and on what strategic
with the revised ICPs. However, similar to the issues that arise in
objectives the IAIS should pursue in light of these trends and
connection with most IAIS proposals, concerns exist regarding the
developments.
extent to which the ICPs do not adhere sufficiently to the IAIS’s
professed goals of developing principles based standards (versus The IAIS asks commenters to consider social, technological,
standards that are prescriptive) and proportionality. Similarly, economic, environmental, and political issues in formulating
the introduction of the ComFrame text into the ICPs raises the their thoughts.
specter that eventually ComFrame standards will seep into the
ICPs themselves. Comments in any format are requested by February 20, 2018.
US FEDERAL
UPDATE: ELECTIONS;
AND LEGISLATIVE
AND REGULATORY
DEVELOPMENTS
What the 2017 Elections Mean for Insurance ■■ the Executive Order on Core Principles for Regulating the
United States Financial System sets Core Principles of financial
With the balance of power at the federal level squarely in the regulation of the administration, including preventing taxpayer
hands of the Republican Party, it remains to be seen whether bailouts, rigorously analyzing regulatory impact to address
promises that the Republicans have made that will impact systemic risk and market failures, empowering Americans
the insurance industry will be carried out. Adding to the mix, to make independent financial decisions. Although the
President Trump has demonstrated a propensity to take executive Executive Order was widely characterized as commencing
action where he deems necessary. Therefore, every avenue of a roll-back of financial regulations, including the Dodd-Frank
policymaking at the federal level must be monitored. Particularly, Act and the DOL fiduciary rule, it did not have immediate
insurance policy will be set by the House Financial Services impact on financial regulation and the President drafted a
Committees and the Senate Banking Committee of the 115th Presidential Memorandum addressed to the DOL regarding the
Congress; as well as Treasury and other federal agencies (not to fiduciary rule. The Executive Orders also directed Treasury,
mention President Trump, directly). in consultation with the heads of the member agencies of
the FSOC, to repor t to the President within 120 days (from
There are 51 Republicans in the Senate and 49 in the Democratic
February 3, 2017), and periodically thereafter, on the extent to
caucus (including two Independents). Democrats gained 6 seats
which existing laws, treaties, regulations, guidance, repor ting
in the House; however, the Republicans still control a comfortably
and recordkeeping requirements, and other government
large majority.
policies, as well as what actions have been taken to promote
Senator Mitch McConnell (R-KY) and Representative Paul Ryan or inhibit the Core Principles. Treasury released its repor t on
(R-WI) remain Senate Majority Leader and Speaker of the House, October 26, 2017 (as discussed below).
respectively.
Despite Republicans controlling both the House and Senate, they

The Affordable Care Act
continue to lack a filibuster or veto-proof majority in the Senate, The Trump Administration and the Republican-led Congress
which will affect what legislation can both pass Congress and be continued to pursue one of the primary pillars in the party’s
signed into law. President Trump has been up front about his intent platform – repealing and replacing the ACA. While the Congress
to use his position of influence in the legislative process and his had repeal and replace as the first priority on their agenda in 2017
ability to take executive action. under the then newly seated Trump Administration, the multiple
attempts to pass repeal and replace legislation through both
The Trump Regulatory Doctrine chambers of Congress were ultimately unsuccessful. Furthermore,
the failure to pass the legislation under Republican’s watch only
President Donald Trump was sworn into office on January further indicated the growing awareness that there are parts of
20, 2017, with an aggressive agenda for his first 100 days. The the law that have been successful at garnering public support,
President spent the year signing a number of Executive Orders while other parts remain highly unpopular, making full repeal of
to move forward with his de-regulation proposals. While many the ACA no longer politically viable. Although full repeal of the
of his promises will ultimately require congressional action, the ACA lost significant momentum, Republicans in Congress and the
Executive Orders were nevertheless legally binding directives Administration were ultimately able to declare a significant victory
issued to federal administrative agencies. In his very first order, at the end of 2017 by successfully including repeal of the individual
President Trump gave relevant agencies authority to grant waivers, mandate penalty in the Tax Cuts and Jobs Act of 2017, which
exemptions and delays of provisions in the Affordable Care Act. essentially revised federal law to apply a zero percentage rate
His reasoning is that it would minimize the economic burden of the penalty on those who failed to maintain health insurance coverage.
ACA pending congressional repeal, which did not occur in 2017.
Despite the legislative failure of Congress to repeal and replace
Other Executive Orders impacting the insurance industry included: the ACA in full throughout 2017, President Trump released an
Executive Order in October 2017 aimed at essentially weakening
■■ the Executive Order Reducing Regulation and Controlling
the law at some of its most critical points. Executive Order
Regulatory Costs requires the executive branch to get rid
No. 13813 directed officials in HHS, the DOL, and Treasury,
of two regulations for every new one that is put into effect,
to make certain regulatory changes. The following sets forth
arguing it will reduce a major burden on small businesses
those regulatory change directives and, as noted, some have had
in America. In the past few years multiple federal agencies
proposed regulations released to date, while others await the
directly or indirectly issued regulations that impact the
same action:
insurance industry. With the President’s agenda to repeal or
reduce the burden of the Dodd-Frank Act and the ACA, some
insurance regulations may be rescinded.
■■ Decision Regarding Continuation (or lack thereof ) of framework, have the potential to destabilize health insurance
Cost-Sharing Reduction (CSR) Payments to those Insurers markets, particularly the individual market, with the outstanding
Sponsoring Health Plan Coverage for Low-Income Americans. question of whether any destabilization that occurs would be
Bipar tisan discussion is currently under way following a temporary or could deal a fatal blow to the health insurance
preliminary agreement with Senator McConnell to move two markets.
pieces of legislation to stabilize insurance markets, including
We expect the ongoing policy and regulatory changes being
legislation authorizing CSR payments to insurers
contemplated through 2018 will continue to impact the evolution
■■ Expansion and Qualification for use of Health Reimbursement of the ACA and, therefore, its impact on the healthcare market, in
Arrangements by Small Employers: Proposed Regulations have ways that are both expected and unexpected. More specifically, it
yet to be released is very difficult for lawmakers and regulators alike to predict how
various policy changes will ultimately translate with respect to
■■ Expansion of Shor t-Term Health Plans: Proposed Regulations
influencing retention, or lack thereof, of healthy individuals within
have yet to be released
the health insurance risk pools; most notably, any change that leads
The directives set forth in Executive Order No. 13813, began numerous healthy individuals to exit the individual market will have
impacting the health insurance markets in 2017 and will certainly amplified effects, where premium increases are concerned, which
continue to cause an evolution of the health insurance markets could also serve to destabilize an already fragile market.
through 2018 and beyond.
Following the definitive failure of the 2017 effort to repeal and
The major medical market will have to withstand and adjust to replace the ACA in full, it remains highly unpredictable how
sudden and arguably drastic changes on the federal level in 2018, Republicans and Democrats with move forward on healthcare
particularly regarding CSRs. following any move to address market stabilization. What has
become clear is that Republicans have heard the message loud
Since August 2017, Senators Lamar Alexander (R-TN) and and clear that certain portions of the ACA are wildly popular and
Patty Murray (D-WA) had been working toward a bipartisan successful, while other aspects must be addressed and corrected;
compromise to address health insurance market stabilization however, any attempt to do so during the highly contentious 2018
via authorization of funding for an additional two years for CSR mid-term election year, would be a risk neither Republicans nor
payments to insurers, however, this legislation failed to move Democrats are likely to take.
through Congress by the end of 2017. Since then, Senator Susan
Collins (R-ME) has reached a preliminary agreement with Senator At this juncture, what is clear is the willingness of certain members
McConnell to make good on the GOP’s 2017 promise to shore of Congress, in both houses and on both sides of the aisle, to gain
up and secure health insurance markets by promising to pass two a very intimate and thorough understanding of the potential pitfalls
specific bills by the end of 2018. that can be expected as the ACA continues to evolve, and how
constituencies will react to that evolution. Moreover, President
The two pieces of legislation encompassing the Collins-McConnell Trump has at times made comments that were viewed as negative
agreement would include the aforementioned Alexander-Murray toward the health insurance industry, while later walking back
legislation that would formally authorize federal CSR payments those comments.
to insurers. The second piece of legislation in this agreement is
sponsored by Senator Collins, and would include $5.5 billion in
Congressional and Federal Agencies Initiatives
federal funding for 2018 – 2020 to help states set up a reinsurance
and Outlook
or high-risk pool mechanism for older, sicker individuals to mitigate
the premium increases that otherwise would be seen across the
board as a result of more costly beneficiaries. Department of Treasury: FSOC and FIO
According to Senator Collins, her goal is to ensure this legislation On October 26, 2017, the Department of Treasury released a
is passed successfully through Congress and signed into law in report that examined the regulatory framework for the asset
advance of the deadline later this year by which time insurers management and insurance industries as required by President
must set their 2019 health insurance premium rates. The growing Trump’s Executive Order No. 13772 (February 3, 2017), which
comfort among lawmakers on both sides of the aisle to ensure instructed the Treasury Secretary to report to the President the
stable health insurance markets lends to the belief that with some extent to which the existing financial regulatory system promotes
discussion and compromise, these bills will pass successfully at the Administration’s “Core Principles” of financial regulation.
some point this year. The focus of the report was in four areas: the proper evaluation
of systemic risk; ensuring effective regulation and government
Federal changes to the ACA are currently being undertaken on a processes; rationalizing international engagement; and promoting
piecemeal basis, but in the context of the ACA’s comprehensive economic growth and informed choices.
The report, identified ways to improve the regulatory framework Additionally, the repor t recommended different approaches to
for insurance companies, and the products and services they improve the efficiency of existing regulations and government
offer, including: processes, including:
■■ Suppor ting activities-based evaluations of systemic risk in the ■■ Realigning the role of the FIO around five pillars of focus, and
asset management and insurance industries improving its coordination with state insurance regulators and
transparency with the insurance industry
■■ Improving coordination between the FIO and state insurance
regulators ■■ Reducing duplicative and inefficient oversight of savings and loan
holding companies that own insurance companies, by improving
■■ Continuing engagement in international forums to promote
coordination and collaboration between the Board of Governors
the US asset management and insurance industries and the US
of the Federal Reserve System and state insurance regulators
regulatory framework
■■ Reconsidering the HUD disparate impact rule and its impact on
■■ Increasing transparency of the international standard-setting
the availability of insurance
processes
■■ Adopting uniform state data security standards and breach
■■ Promoting strong liquidity risk management programs for asset
notification requirements based of the NAIC Insurance Data
managers and insurance companies
Security Model Law
■■ Modernizing fund shareholder repor ts to permit the use of ■■ Convening a federal agency-wide task force to focus on policies
implied consent for electronic disclosures
related to long-term care insurance
■■ Delaying the implementation of the DOL fiduciary rule, ■■ Coordinating insurance regulations to reduce or eliminate
pending fur ther evaluation by the DOL, the Securities and
inconsistencies between existing data calls on terrorism risk
Exchange Commission, and the states and
insurance and
■■ Promoting infrastructure investment by insurers through ■■ Improving information sharing within the insurance industry.
appropriately calibrated capital requirements.
National Flood Insurance Program Reauthorization The day after the DOL issued the final rule delaying the DOL
enforcement of the fiduciary rule, SEC Chairman Jay Clayton
In 2012, Congress passed the Biggert-Waters Flood Insurance announced that the SEC will make a fiduciary standard for brokers
Reform Act which reauthorized the NFIP through September 30, a priority. Nevertheless, consistent with the February 3, 2017
2017. Despite expectations that the passage of Biggert-Waters Executive Order and the October 26, 2017 Treasury report
would help shore up the fiscal condition of the NFIP and improve (both discussed above), the heads of the SEC and DOL have both
its administration, the Program remains in significant debt. There pledged to work together on fiduciary rulemakings.
are many reasons the fiscal condition of the Program has remained
bleak, including the impact of the 2017 catastrophic storms and the
HUD Derails Disparate Impact Rule
passage of the Homeowner Flood Insurance Affordability Act of
2014, which repealed many of the rate and underwriting reforms In 2013, HUD issued a final rule to formalize the national standard
mandated by Biggert-Waters. for determining whether a housing practice violates the Fair
Housing Act as the result of unlawful discrimination. The rule
The NFIP was temporarily extended until January 19, 2018;
codifies the use of “disparate impact” analysis to prove allegations
however, the NFIP lapsed with Congress’s failure to reach a
of unlawful discrimination with regards to homeowners’ insurance.
deal to prevent the federal shutdown. On January 22, 2018, the
On June 25, 2015, the Supreme Court upheld the application of
NFIP was temporarily reauthorized again until February 8, 2018.
disparate impact under the Fair Housing Act in a surprise five-
The legislation also authorized FEMA to honor all policy-related
to-four decision. After confirmation as HUD Secretary, Dr. Ben
transactions inadvertently accepted between January 20, 2018,
Carson publicly opposed the use of the disparate impact theory
and January 22, 2018. The NFIP had lapsed four times in its history,
to bridge the gaps in income and racial disparity. Additionally,
but Congress reauthorized it retroactively. It remains to be seen if
the October 2017 Treasury report recommended that HUD
Congress will reauthorize the NFIP for a significant period of time
reconsider its use of the disparate impact rule, especially the
on February 8, 2018.
rule’s application in the homeowner’s insurance market. Treasury
argued that the rule may violate the McCarran–Ferguson Act
The DOL Fiduciary Rule Flatlined, but Revived of 1945, in that state laws governing the business of insurance
In February 2017, President Trump signed a memorandum to roll should not be “invalidated, impaired, or superseded by any federal
back the DOL fiduciary rule by asking the DOL to review the law unless the federal law specifically relates to the business of
rule again and likely to delay its April 10, 2017, implementation. insurance.” By January of 2018, as we predicted, HUD began the
Critics contend that the DOL proposed rule would restrict access process to rescind or significantly change the rule by suspending its
to information and education about annuities. The life insurance implementation until 2020.
industry has reacted strongly against the rule and filed voluminous
comments in response to the DOL rule making procedures.
Their concern is that disclosure requirements and the heightened
prospect of private litigation against advisors could force advisors
away from marketing annuities altogether.
In May 2017, DOL Secretary Alexander Acosta announced in a

Wall Street Journal op-ed that he was going to allow the fiduciary
rule to take effect as planned on June 9; however, the DOL had
previously announced that it would not actually enforce the rule
until January 1, 2018. Only a part of the rule, which requires
financial advisers to act in the best interests of their clients, took
effect on June 9. By August of 2017, the DOL revealed in a court
filing that it had sent the fiduciary rule to the Office of Management
and Budget (ie, the White House) for review, which would delay
full implementation of the rule (most importantly, the enforcement
provisions of the rule) until July 1, 2019. The delay was formalized
in a final rule issued by DOL on November 29, 2017. This delay
would provide enough time for the DOL to consider additional
substantive changes to the fiduciary rule prior to implementation
or rescind the rule altogether.
NAIC AND STATE
REGULATORY
DEVELOPMENTS
2017 State Elections, New Insurance ■■ Texas – Kent Sullivan, Commissioner (appointed Sept. 21, 2017)
Commissioners and NAIC Leadership
■■ Virginia – Scott A. White, Commissioner (assumed Jan. 1, 2018)
Elections in 2017 yielded few new insurance commissioners and ■■ West Virginia – Allan L. Mcvey, Commissioner (appointed Mar.
therefore did not significantly impact the ranks of the NAIC.
21, 2017)
Elections, Resignations and Appointments – NAIC Leadership

Commissioners and the NAIC
NAIC 2018 OFFICERS
As observers of US insurance regulation know, most
commissioners are appointed by governors, so elections can Julie Mix McPeak, Tennessee Insurance
President
change the make-up of US insurance policy-making bodies, Commissioner
including the NAIC. In addition, influential commissioners did Eric A. Cioppa, Maine Superintendent of the
President-Elect
not succeed in being reelected or resigned for reasons unrelated Bureau of Insurance
to election results. Both scenarios resulted in the following new Raymond G. Farmer, South Carolina
state insurance commissioners: Vice President
Insurance Director
■■ American Samoa – Peter Fuimaono, Commissioner (appointed Secretary
Gordon Ito, Hawaii Insurance Commissioner
Jan. 16, 2017) – Treasurer
■■ Colorado – Michael Conway, Interim Commissioner (selected

Jan. 1, 2018)
Group Capital Calculation Tool
■■ Delaware – Trinidad Navarro, Commissioner (elected 2016, In 2016, the IAIS began to develop a group capital calculation
sworn in on Jan. 3, 2017) (GCC) tool, which many have welcomed as a more reasonable
alternative to the much criticized ICS the IAIS is working on.
■■ Illinois – Jennifer Hammer, Director (appointed Jan. 17, 2017) The GCC adopts an aggregation approach, which many in the
US prefer as simpler and just as accurate as the consolidated
■■ Iowa – Doug Ommen, Commissioner (appointed Jan. 30, 2017)
approach used by the ICS.
■■ Kentucky – Nancy G. Atkins, Commissioner (appointed
The NAIC’s work took on greater significance with the adoption
May 1, 2017)
of the Covered Agreement, given that the accompanying signing
■■ Massachusetts – Gary Anderson, Commissioner (appointed statement issued by US officials expressly provides that it is
Oct. 31, 2017) the understanding of the US that the group capital calculation
tool will satisfy the conditions in Ar ticle IV(h) of the Covered
■■ Minnesota – Jessica Looman, Commissioner (appointed Nov. 2017)
Agreement that require the development of an enforceable
■■ Missouri – Chlora Lindley-Myers, Director (appointed Mar. 6, 2017) capital assessment. This impor tance was fur ther enhanced with
the agreement the IAIS reached regarding the development of
■■ Montana – Matthew Rosendale, Commissioner (elected 2016, the ICS to specifically consider an aggregated capital approach
sworn in on Jan. 2, 2017) if it is comparable to the reference ICS. Clearly, the GCC could
become that alternative.
■■ New Jersey – Marlene Caride, Acting Commissioner
(appointed Jan. 16, 2017) Unfor tunately, to some observers, work on the development
of the GCC has progressed more slowly than desirable and too
■■ Nor th Carolina – Mike Causey, Commissioner (elected 2016;
much focus has been directed at relatively minor details, given
sworn in on Jan. 1, 2017)
that time is of the essence in light of the relationship between
■■ Ohio – Jillian Froment, Director (appointed Mar. 31, 2017) the development of the GCC and the Covered Agreement and
the ICS.
■■ Oregon – Cameron Smith, Acting Director (appointed
Dec. 13, 2017) The NAIC seems well aware of this timing concern. The 2018
charges for the working group that is developing the GCC state
■■ Pennsylvania – Jessica Altman, Acting Commissioner (appointed
the GCC will be ready for field testing by the NAIC’s summer
Aug. 19, 2017)
meeting in July.
■■ Puer to Rico – Javier Rivera Rios, Commissioner (appointed
Given that a draft of the full GCC has still not been provided the
Jan. 17, 2017)
NAIC has much work to do in 2018 on this matter.
Long-Term Care and Receivership Issues
On December 21, 2017, the NAIC amended its Life and

Health Guaranty Association Model Act to address mounting
concern over potential receiverships of insurers that re/insure
long-term care business. The Model Act generally protects
insurance policyholders against their insurer’s failure to perform
its policy obligations. The amendment would: (i) expand the
assessment base for long-term care insurer insolvencies to
include both of insurers’ life and annuity account and their health
account; and (ii) allocate assessments equally to life and health
insurers and add health maintenance organizations as guaranty
association members.
The impetus for the amendments was the conjoined multibillion-

dollar receiverships of Penn Treaty and its affiliate, American
Network. The NAIC acted quickly in 2017, first proposing the
changes at the Spring National Meeting, but has been criticized
for acting too quickly and for including HMOs and other health
only insurers that do not write or hold long-term care insurance.
Proponents insisted that the amendments would not become
an accreditation standard, and so states could independently
determine whether to adopt the amendments. It remains to
be seen whether fur ther insolvencies in the long-term care
market will push the NAIC in making these amendments an
accreditation standard.
EUROPEAN
REGULATORY
AND LEGISLATIVE
DEVELOPMENTS
Botond Horvath / Shutterstock.com

European Union Timeline
The IDD entered into force on February 23, 2016 and must be
Insurance Distribution Directive Implementation incorporated into national laws by EU member states by February
23, 2018. That said, in late 2017, the European Parliament’s
The IDD entered into force on February 23, 2016, and EU member
Economic and Financial Affairs Committee called for the European
states were to have until February 23, 2018, to transpose its
Commission to delay the application of the IDD until October
provisions into national law, and apply them to insurers and insurance
1, 2018. This is a recommendation that was welcomed by many
intermediaries operating in their jurisdictions. In September 2017,
of those affected, particularly in the UK and France. Indeed, in
Delegated Regulations supplementing IDD with regard to product
response to the second of three consultation papers published
oversight and governance, and the distribution of insurance-based
during 2017 on the implementation of the IDD in the UK (CP17/7
investment products, were adopted by the European Commission.
in March, CP17/23 in July and CP17/33 in September), many
During the scrutiny period, the European Parliament noted that the
respondents expressed concern about the lack of time left for firms
industry might need more time to implement changes required to
to implement the IDD requirements – particularly with regard to
comply with the delegated regulations, and asked the Commission
the new Insurance Product Information Document. Additionally, in
to adopt a legislative proposal for a delayed date of application of
France, the French Insurance Federation (in coordination with the
October 1, 2018. Sixteen member states supported the European
European Insurance Federation) requested a postponement to the
Parliament’s proposal and also requested an extension of the period
implementation of the IDD. Nonetheless, unless further action is
for transposition into national law, until at least October 1, 2018.
taken by the European Parliament, firms affected by the IDD still
On December 20, 2017, the European Commission announced need to ensure compliance with the IDD from February 23, 2018.
that it would act on the request from the European Parliament
and member states to extend the date from which IDD would be Implementation
applied in member states until October 1, 2018 (although member
states will still be required to transpose IDD into national law by The IDD is aimed at minimum harmonization, meaning that for
February 23, 2018). The European Parliament and Council will certain areas it is at the discretion of member states to retain or
now need to agree on the new application date in an accelerated introduce more stringent standards.
legislative procedure. If this is agreed, member states will still need
In the UK, the implementation of the IDD will not affect UK firms
to have national legislation in place by February 23, 2018, but
as much as firms in other EU member states as the IDD replicates
insurers and intermediaries will at least have a little more time to
many provisions currently in force in the UK, thanks to the UK’s
prepare for those laws actually coming into force.
“gold-plating” of the IMD. There will, however, be further instances
of going “above and beyond” in the UK in its implementation of
Background the IDD. For example, where the IDD only requires insurance
and reinsurance undertakings to establish, maintain and keep
The IDD replaces the Insurance Mediation Directive and has been
appropriate records to demonstrate compliance with knowledge
introduced in an effort to enhance consumer protection and to
and ability requirements, the FCA proposes extending this
support competition among insurance distributors. As set out in
requirement to insurance intermediaries. Further, when setting out
our previous Reviews, notable provisions of the IDD that work
the demands and needs of a customer, the IDD does not require
toward protecting the consumer include:
firms to set out which needs have not been met, yet the FCA does
■■ strengthening of pre-contractual information requirements as it believes that including this in its rules will lead to any unmet
− customers to be provided with clear information before needs being highlighted.
purchasing products
■■ product oversight and governance requirements − insurance

United Kingdom
producers and distributors to implement product monitoring
processes in order to ensure that all products meet consumers’ UK Treasury Select Committee’s Report on Solvency II
interests and needs
Less than two years after the coming into force of Solvency II,
■■ prevention of conflicts of interest and remuneration and with Brexit negotiations underway, the UK’s Treasury Select
transparency − remuneration policies applicable to employees Committee published its report on the impact of Solvency II on
of intermediaries, insurers and reinsurers not to conflict with the UK Insurance Industry. The report provides a remarkably harsh
their duty to act in the best interests of customers and assessment of many aspects of Solvency II and the manner in which
the Solvency II regime has been implemented in the UK.
■■ continuous professional training − employees of insurance
companies and intermediaries to have at least 15 hours of
professional training per year.
Treasury Select Committee’s Report Directive text, the level 2 text and the EIOPA Guidelines run to
over 3,200 pages), and the Directive’s staggering implementation
The Report is an essential read for anyone interested in or
and continuing costs for the UK industry (£2.6 billion to implement
impacted by the current status of UK insurance regulation, and
and running at a further £196 million each year).
how it may develop against the background of Brexit.
However, the Committee has stopped short of recommending that
The Committee investigated Solvency II as part of its function
Solvency II be replaced after Brexit. The Committee recognized
to scrutinize the activity of HM Treasury and related public
that Solvency II’s implementation has been very costly, and
bodies, including the PRA. It received evidence from the PRA,
although there are areas which are defective, it is thought possible
the Association of British Insurers, and individual insurers and
to improve its implementation without abandoning it altogether.
service providers, including AXA, Lloyd’s, Prudential, PwC, KPMG,
However, this would need a new approach from the regulator. The
and representatives of the UK actuarial profession. The report
PRA needs to explain its thinking on the industry’s suggestions for
makes stark reading for the PRA. Those who gave evidence to the
improvement, and it needs to consider its responses with more
Committee found fault with many aspects of the PRA’s regulation
of a post-Brexit mentality. The Committee was concerned that
of insurance and implementation of Solvency II. Their testimony
the PRA’s excessively strict interpretation of the requirements of
has been broadly accepted, and the Committee is calling for a sea
Solvency II, and of its own obligations, has limited its thinking in a
change from the PRA.
way which could be detrimental to UK plc.
Excessive Focus on Solvency The Committee noted that during the inquiry, the Association of
British Insurers had provided a list of 23 areas where the PRA’s
The Committee found the PRA’s approach to be overly implementation of Solvency II could be improved, but the PRA
focused on solvency, at the expense of competition, and of the accepted just five of those 23 suggestions. The PRA should make
competitiveness of the UK insurance industry. Although the substantive progress on those it does agree with and take a fresh
Committee acknowledged that insurers’ solvency is important, it look at the other 18 in the context of the greater freedom of
views insurers as much less of a solvency risk than the UK banks, regulation that Brexit might bring.
also regulated by the PRA (the Committee noted that there
have only been two significant failures of UK insurers in the last
Detailed Recommendations
40 years). A central finding was that the PRA should be given a
primary objective to promote competition in the UK insurance The Treasury Committee made a number of specific
market, which should carry as much weight as its statutory recommendations. These included that the PRA should:
objectives in relation to solvency.
■■ provide a solution for the risk margin to improve its calibration,
preventing over sensitivity to low interest rates in the
Better Understanding of and Communication with the Industry
calculation of insurers’ capital requirements
The Committee is clear that there needs to be a better and more ■■ develop proposals for the introduction of regulatory
productive dialogue between the PRA and the industry on issues
forbearance at the national level to deal with procyclicality – so
like Solvency II. The Committee questioned whether the PRA has
insurers will not be required immediately to divest assets in a
the skills necessary for effective insurance regulation, particularly at
falling market, exacerbating an emerging economic crisis
the most senior supervisory and policy levels. The PRA needed to
consider whether its insurance directorate has a genuine “feel” for ■■ develop proposals for the matching adjustment and the
the insurance industry. The Committee found a disconcerting level volatility adjustment to accommodate more flexibility and a
of disconnect between the PRA’s views and those of the industry. more principles-based approach, and reduce the requirement
Their view was that better communication might have resolved for insurers to develop complex structures to achieve the
current difficulties at an earlier stage, for example in the annuity regulatory treatment that they warrant
market where issues relating to the risk margin and the matching
■■ agree with the industry on an approach to the treatment of
adjustment have led some firms to exit the market, and others to
illiquid assets, balancing prudential concerns with the desire not
reinsure significant business overseas.
to create unreasonable barriers to insurers investing in long
term assets
Should Solvency II be Scrapped for the UK, or Improved?
■■ set out proposals which reduce the amount of data required
The Committee has a pretty skeptical view of Solvency II; the
from firms to a level that the PRA can clearly demonstrate is
report notes both the sheer extent of Solvency II regulation (the
propor tionate and necessary for prudential safety
■■ consider whether UK regulation post-Brexit can be better The FCA has published a Terms of Reference document setting out
aligned with new international financial repor ting standards, its initial thinking and the specific topics it plans to investigate in
IFRS17 2018, including:
■■ develop proposals to remove limitations in the standard ■■ Market power – whether any individual broker firms have
formula, and improve the sophistication and usefulness of significant market power and, if so, what effect does this have
internal models and on competition
■■ develop a solution for firms who will lose the legal validity of ■■ Conflicts of Interest – conflicts of interest may arise if, for
their contracts after Brexit (when it may be impossible for example, a broker chooses an insurer or product for a client
insurers to pay claims if EEA passpor ting rights to carry out on the basis of the remuneration the broker will receive, rather
insurance contracts cross-border between the UK and Europe than what is in the client’s best interests and
have been lost).
■■ Broker conduct – whether there is evidence of collusion or
coordination between broker firms and whether any broker
What Next …?
practices lead to a reduction in competition; for example,
The general tone of the Report is one of support for the UK when risks are placed through facilities rather than in the open
insurance industry, and skepticism about current regulatory market, does this exclude cer tain types of insurers.
approaches and attitudes. The PRA has been told to take a hard
The market study will involve the FCA taking an in-depth look
look at itself, with regard to its implementation of Solvency II and
at how businesses and clients operate. The FCA is expected to
its interaction with, and regulation of, the UK insurance industry, to
undertake an extensive information gathering exercise, which will
address the specifics of how Solvency II can be improved, and to
inform its assessment of the market. At the end of the market
consider how it should respond to Brexit. The Committee is clearly
study, the FCA will produce a detailed final report which will set
serious about pursuing changes and has directed the PRA to begin
out its findings and intended course of action. The FCA has wide-
to take action immediately and to report back on its progress by
ranging powers to impose any remedies it considers necessary to
March 31, 2018. The industry is very interested to see what the
address any competition problems identified, and these can have a
PRA does next.
significant impact on the affected businesses.
Financial Conduct Authority’s Wholesale Insurance Businesses which may be directly or indirectly affected by the
Broker Market Study FCA’s market study into the wholesale insurance broker market
have the opportunity to provide input and so influence both the
On November 8, 2017, the FCA launched a competition market scope of the market study and the FCA’s emerging thinking. The
study into the wholesale insurance broker market, which forms FCA’s Terms of Reference were open for comments until January
part of the FCA’s objective of ensuring transparency in the 19, 2018, and the FCA listed a number of questions on which views
wholesale markets, in view of their impact on the broader were invited. The FCA will also send market players questionnaires
economy. as part of its information gathering exercise.
The FCA’s stated mission is to “ensure that wholesale markets We will expect its findings later in 2018, together with any
demonstrate transparency, open access, integrity and competition consequential legislative or regulatory changes. Given that the
on the merits.” The London insurance market is large and complex FCA’s powers are wide-ranging, it is possible that its review could
with around $91 billion in annual gross written premiums. If have a significant impact on the wholesale insurance broker market.
competition in this market is not functioning as it should, this will A previous competition market study into payment protection
have a negative impact on the broader economy. In simple terms, insurance (separate to the mis-selling investigation) resulted in a
if businesses are not getting the most appropriate coverage, or if ban on the sale of payment protection insurance at the point of
they pay for more risk services than they should, or overpay for sale of the underlying credit product. This had a major impact on
those services, that will affect their profitability and so their ability many financial services businesses and some ceased to be viable as
to operate, innovate, and grow. a result. A further possible outcome is that if the FCA uncovers any
conduct it suspects is an unlawful breach of competition law, for
As part of its role as the regulator for the financial services
example, if it finds evidence of collusion, it may bring enforcement
industry, the FCA has the power to enforce UK competition
action against the businesses concerned which would mean an
law, including by conducting market studies, which look at how
investigation and possible fine.
competition is working in a particular market and assess whether it
could work more effectively.
France
Increased Powers for the High

Council for Financial Stability (HCSF)
This year has seen the implementation
of Law No. 2016 of December 9, 2016
on transparency, anti-corruption and
modernization of the economy, which is
referred to as the “Sapin 2 Law.” The Sapin
2 Law introduced several important new
measures regarding life insurance, which
include the strengthening of the powers of
the macro-prudential authority to exercise
oversight of the financial system as a whole,
namely the new HCSF.
The HCSF is a continuation of the Financial

Regulatory and Systemic Risk Council, ■■ Information relating to the work of the Compensation
which aims to put in place more rigorous macro-prudential
Forum. This repor t looked at the possibility of increasing the
supervision, which was established in the wake of the financial
stability and reliability of compensation by creating legislative
crisis. The Sapin 2 Law has given the HCSF more extensive
proceedings to calculate the amount of compensation to
binding insurance powers, particularly with regard to life insurance
be paid out, eg, based on fixed compensation tables. The
policies. Such measures can include temporarily prohibiting certain
Compensation Forum conducted research on compensation
operations or activities, including disposal of assets or limiting the
sums paid out during the last year and found that the
payment of cash surrender values.
compensation due can be precisely calculated based on big
data research.
Poland
The KNF has noted that the rapid growth of the FinTech sector is
a challenge for the market supervisory entities and that challenge
Activity of the Polish Financial Supervision Authority
should be addressed. The KNF has decided that the growth
in 2017
of innovative finance technologies should be supported by
supervisory entities, and to do so, the practice of “gold-plating”
Financial Supervision Authority Reports and Recommendations should be eliminated.
Throughout 2017, the Polish Financial Supervision Authority (KNF)
has published a number of reports on the insurance market. Two Financial Ombudsman
reports of note are set out below:
The Polish Financial Ombudsman issued two important reports for
■■ Information on mandatory civil liability insurance for vehicle the Polish insurance market in 2017:
owners, the amount of indemnity and the value of insurance
■■ Financial Ombudsman’s repor t on school insurance.
premiums. This repor t considered (i) the influence of changes
in insurance law, and (ii) the rulings of the Polish Supreme ■■ Supervisory guidelines in a scope of loss adjustments in
Cour t on insurance companies’ scope of liability and the communication damages and the practice of insurance
quantum of insurance premiums. The KNF also repor ted companies in that subject.
on the fact that there is a visible correlation between the
Supreme Cour t’s rulings on the topic of due compensations, Ownership Changes in the Polish Insurance Market
and the average value of insurance premiums and their
latest increase. The repor t also considered the average On May 4, 2017, Poland’s largest insurance company and one of the
amount of compensation given for the death of a relative in a largest financial institutions in Poland, PZU Group, together with
communication accident, and the Supreme Cour t’s rulings on the Polish Development Fund, PFR, received the KNF’s permission
the same. to acquire a 32.8 percent shareholding in Pekao Bank for a total
value of €2,517 billion. As a result of the transaction, PZU Group is
now the largest financial group in Eastern Europe.
Italy Belgium
Public Consultation 3/2017 on the Simplification of Non- Regulatory Changes

Life Pre-Contractual Information
The Belgian insurance sector has adapted to various regulatory
On August 30, 2017, IVASS, the Italian insurance regulator, published changes in 2017. The national legislator, urged by the sector’s
Consultation Document 3/2017 on the disclosure duties for proposers prudential supervisor, the Financial Services and Markets Authority
of insurance policies and the advertising of insurance products. (FSMA), undertook legislative initiatives to introduce a new
regulatory framework, which is increasingly focused toward
The consultation document’s publication followed the approval of
policyholder protection.
EU Regulation 2017/1469 and set out a standardized presentation
format for insurance product information documents (IPIDs). The Belgian Act of July 30, 2013 on the empowering of the
protection of buyers of financial products and services and on the
An IPID must include the following content:
scope of authority of the FSMA increased information transparency
■■ The risks covered by the policy and protection of the buyers of insurance products. It expanded
the scope of the MiFID rules to the insurance sector. The Act
■■ Who and what is not covered by the policy imposed similar “know your customer” obligations on insurance
companies as the ones already existing for banking institutions. The
■■ Coverage limits
FSMA issued two separate sets of guidelines providing for more
■■ Territorial scope of the policy elaborate information requirements for the insurance sector. The
new legislation is expected to be coupled with increased market
■■ The insured’s obligations
scrutiny over insurers in Belgium.
■■ How and when will the premium be paid
This increased consumer protection is also evidenced by the
■■ The policy’s duration obligation under IDD to offer non-professional clients with a
brief summary of the main features of a non-life product in a
■■ How withdrawal from the policy can be exercised one-page document.
No amendments to the standard format set out above are allowed,
but under the new proposal, undertakings can submit to proposers
a supplemental IPID containing additional information on the
insurer and the policy, including: (i) the undertaking’s financial data;
(ii) the policy limits; (iii) the consequences of non-disclosure; and
(iv) how a claim should be made.
The information in the supplemental IPID must be consistent with

that contained in the standard document, and neither the IPID nor
the supplemental IPID can refer to policy clauses. Further, reference
to legal provisions cannot go beyond what is strictly necessary.
No exemptions are provided other than with regard to large risks,

for which an IPID is not required.
Pre-contractual documents should be submitted via email or

through the insurer’s website, subject to the proposer’s prior
consent. The insurer must also (i) send the potential policyholder a
link via email to the webpage where the documents can be found,
and (ii) ensure that the documents are accessible for the period in
which they may be used by the policyholder and until the expiry
of the two-year limitation period referred to in Article 2952 of the
Italian Civil Code.
The deadline for submitting observations and comments on the

amending proposals to IVASS passed on October 5, 2017, and
submissions are currently being reviewed.
LATIN AMERICA AND
SOUTH AMERICA
DEVELOPMENTS
Brazil Mergers and Acquisitions
Insurers1 and intermediaries2 continue to invest in acquisitions as
Regulatory and Legislative Developments a way of consolidation. Insurers are looking to broaden their client
2017 marks 10 years of the opening of the reinsurance market base, by entering into distribution arrangements with large retailers
in Brazil. It was also the year that the IRB (the former Brazilian in the country3 or by acquisition of existing portfolios from other
reinsurance monopoly) made an initial public offering in the players, including insurers owned by banks divesting of large risks.
Brazilian stock exchange. The most significant acquisition of portfolios was the ACE (now
Chubb) acquisition of Itau’s large insurance portfolio and Bradesco’s
This year was also marked by SUSEP (the Brazilian insurance joint venture with Swiss Re.
regulator) being closer to the market, looking to understand areas
where regulation can be developed, and creating closer links with Chile
foreign regulators to fur ther understand supervision. SUSEP is
focused on the following: The insurance market in Chile is competitive and throughout the
years has been attractive for foreign investments. According to
■■ Mandatory placement. We understand that the regulator is
recent studies, as of December 2016, 42 insurance groups were
eager to review the need for the co-existence of regulation for
operating in Chile, including 29 general insurance companies and
the mandatory placement of 30 percent of the business with
40 life insurance companies. New companies have focused mainly
local reinsurers and the rule relating to the mandatory offer of
on acquiring local insurance companies with similar core business
40 percent of the business to the local market.
or incorporating local companies.
■■ Intra-group placement. There is also questioning of the need
Additionally, the premium growth in medium and long term is
to restrict intra-group cession of risks (currently limited to
steady. In fact, premium growth has tripled in the last 10 years..
30 percent), which on one hand ensures business is placed
with more market players and that the risk is spread across
the market, but on the other hand has caused a resistance
Regulatory and Legislative Developments
for international market players to propose new products to In 2017, there were two noteworthy pieces of legislation:
the local market, and increases in the cost of reinsurance and
counterpar ty credit risk. ■■ Law N° 21.000 that created the Commission on Finance
Market (2/23/2017), which will replace the Superintendence of
■■ Solvency II. SUSEP is expected to fully regulate Own Risk Securities and Insurance in August 2018 or, as the law details,
and Solvency Assessment by 2019. This will likely represent when the Commission star ts functioning, which ever occurs
a transformation of how insurance companies operate in the first will maintain all the functions that the Superintendence
country, including a requirement for forward-looking solvency currently has, but pursuant to this reform, structure will
assessments and business decisions tailored to risk-taking change from a single Superintendent to a Commission of
choices. Currently, insurers are already required to have a five members. Additionally, it improves the administrative
director responsible for risk management and are required to procedure, by separating enforcement functions, which
implement risk management structures by December 31, 2017. will be performed by the Commission prosecutor; and the
Commission itself will be in charge of sanctions.
■■ Insurance contract bill of law. As there are no specific laws
regulating insurance contracts in Brazil other than the Civil Code, ■■ Law N° 20.920 (6/1/2017): Ar ticle 7 mandates the
a bill of law for insurance contracts was proposed to consolidate administrators of hazardous waste take out liability insurance
and regulate the main provisions in a single legislation. The bill for third par ties and the environment.
intends to bring together in a single law all the provisions related
to insurance, such as life and non-life insurance, mandatory
Future and Current Challenges
insurance, reinsurance, claims adjustments, among other matters.
In December 2016, the bill was unanimously approved by a There are two main challenges that can be highlighted. On one
special commission in Congress, and was then submitted to the hand, according to some, waste insurance may be hardly applicable
Senate. It is expected to be approved by the Senate in 2018. since the law mentioned is not clear when explaining the limits of
strict liability. In other words, insurance companies can be reluctant
1 In 2015, AXA acquired SulAmérica, a large risks business for €40 million. The acquisition fueled AXA’s expansion in the Brazilian market and increase its growth
prospects.
2 In 2016, AON announced a deal to acquire Admix in order to build its position in the growing private health insurance market.
3 Early 2017, Zurich entered into an agreement with Via Varejo, the largest retailer in the country, to expand the lines of distribution and a separate agreement with
Fast Shop, a premium retailer, for distribution of insurance. AXA also secured the distribution channel with Pernambucanas earlier this year.
to assume this risk and, therefore, we will have to pay attention Several lawsuits have been filed; each time with more chances
to the solutions that may arise. On the other hand, ARIAS Latam of success, for errors and omissions of the intermediaries in the
took the first arbitration case since its creation concerning the subscription process, the proposal form, the emission of the policy
overflowing of Mapocho River. The involved companies were and in the formulation of reclamation and procedures for accidents,
Sacry, HDI Insurance and Mapfre Insurance (through coinsurance); with a probability of being condemned, which was unusual
and the risks were assumed in reinsurance by Generali Group in Colombia.
and Mapfre Re. This is a significant piece of news that may change
insurance case law in Chile. Mexico
Colombia The penetration of insurance is still low in Mexico, albeit it is an

important reinsurance market due to the catastrophe risk the
Significant institutional activity occurred in the insurance industry country is exposed to. Although most people are still not insured
in 2017. Several regulatory and legal decisions were made, which in Mexico, the insurance market in Mexico is growing.
focused largely on the protection of consumers and safeguarding
In the first quarter of 2017, the insurance industry grew in real
the interests of policyholders and insureds. The Colombia
terms by 2.1 percent in comparison to the same period of 2016.
Superintendence of Finance’s intervention in the insurance market
As of the third quarter of the year, the CNSF reported 84 million
was particularly controversial as the Superintendence took certain
life insurance, 12.8 million medical expenses, and 6.8 million civil
positions increasing the cover of insurance policies and allowing
liability insurance policies nationwide. There is a huge market
insureds access to indemnifications when resolving jurisdictional
potential in Mexico, considering the amount of insurance policies
disputes. Given such actions, the Supreme Court of Justice took
existing in place and a population of 127 million and that Mexico is
similar positions and issued court orders that expanded the
placed second (just after Brazil) in the insurance market for Latin
authority of judges, which historically interpreted policies on a
America.
restricted and limited basis. These Supreme Court orders have
created general uncertainty in the sector. As a result of the recent earthquakes in Mexico City (September
7 and 19, 2017); 38,291 claims were filed before the different
Regulatory and Legislative Developments insurance companies representing MXN$16 billion Mexican pesos
(approximately US$838.7 million dollars) to be paid in claims.
Aside from the institutional context, 2017 was remarkable due to:
The natural catastrophes have increased the awareness of the
population to the importance of having insurance coverage,
Bancassurance especially for property-casualty insurance and life insurance.
Despite decisively promoting commercialization of insurance
through banks since 2012, in 2017 the Superintendence largely Regulatory and Legislative Developments
restricted such commercialization, through limiting the structures
In the aftermath of the earthquakes, the Mexican Insurance
through which insurance can be offered to the general population.
Institutions Association is considering proposing for 2018 the
From a relatively open structure, financial entities now must following regulation: (i) mandatory damage insurance for all
choose between two very limited alternatives to commercialize buildings that are constituted under a condominium regime and
insurance: either taking them on behalf of their clients (in which (ii) from the funds received for housing reconstruction by the
a series of very demanding selective procedures are needed), Federal Government Disaster Fund, allocating certain amount to a
or lending their office network to an insurance company for mandatory catastrophe insurance.
commercialization (in which the financial entity’s participation in
the process would be very limited).
Intermediary Liability
The increment of actions against insurance intermediaries should

also be noticed. Throughout 2017, Colombia became a very
receptive jurisdiction to the liability action against insurance
brokers, agents and agencies.
ASIA REGULATORY
DEVELOPMENTS
Hong Kong insurance industry in Hong Kong. Historically, the Office of the
Commissioner of Insurance (OCI) took a hands off-approach to
its regulation of the insurance industry, often attracting adverse
The Insurance Companies (Amendment) Ordinance 2015
comment that it was not being sufficiently proactive in enhancing
– Update
the industry’s growth and development and leaving such to
In our 2016 Year End Review, we referred to the key legislative market forces. We are now seeing new initiatives for change with
amendments of the Insurance Companies (Amendment) market consultation being at the forefront of such initiatives.
Ordinance on the understanding that such would be fully effective
The Hong Kong government has also publicly announced its
in mid-2017.
intention to return Hong Kong to a marine hub with insurance
As earlier pointed out in the 2016 repor t, this comprehensive playing a major role in the augmentation of such vision. As a result,
overhaul of the Hong Kong regulatory regime includes the P&I clubs are continuing to establish their physical presence in the
establishment of an Independent Insurance Authority (IIA) and territory and seeking licenses to write business from Hong Kong
bringing the regulation of agents and brokers (currently self- and we anticipate a considerable increase in premium from the
regulated) within the jurisdiction of the new IIA. placement of marine insurance cover out of Hong Kong over the
coming years. This is particularly so due to the growing appetite of
While the commencement date of this Ordinance was
marine insurers to enter the Chinese market which, to date, has
unfor tunately delayed (as it was originally expected to be
been largely left to Chinese insurers for a variety of reasons.
fully effective in the year 2016), many (but still not all) of the
provisions have now come into effect as of June 26, 2017, being The recent changes, while long overdue, are encouraging and
the date on which the IIA was officially established. the future of Hong Kong’s insurance industry bodes well as such
positive changes in both legislation and regulatory culture are
While this step has been encouraging, the work of the IIA is still
anticipated to provide the environment for significant and robust
slow, resulting in a backlog of insurance license applications, other
long-term growth.
related regulatory issues and domestications – see below for
more detail on this. Fur thermore, the introduction of regulation
of agents and brokers continues to be delayed and it is now
The Rise of Domestications and a Road Map to Success
expected that the earliest date for such regulation to be effective As mentioned above, the work of the IIA is still slow. This
is mid-2019. is par tly a result of the transition from Hong Kong’s former
insurance commission, the OCI, to the IIA but it is also a result of
As earlier pointed out in the 2016 repor t, such reform has been
the increasing number of insurance license applications and other
seen as an impor tant step toward recognition of Hong Kong
related regulatory issues, including “domestications” via a transfer
as sitting in the top league of global financial centers, properly,
scheme under Section 24 of the Insurance Ordinance 2015
efficiently and competently regulated to a high level of integrity
(Section 24 Scheme) to a Hong Kong incorporated and licensed
and to international standards. The IIA is showing its commitment
subsidiary.
to bringing the Hong Kong insurance industry in line with its
international competitors and bring the Hong Kong regulatory
and compliance framework to a level which recognizes the IAIS. Commercial Drivers
Among recent developments:
There are a number of common commercial drivers for Section
■■ There are proposals as of September 2015 to introduce a 24 Schemes including:
risk-based capital framework in line with the IAIS ICPs. ■■ improved efficiencies of scale/ better financial stability due to
■■ There are proposals to introduce group supervision. The has diversification benefits
expressed an interest in being par t of a transitional regime for ■■ better aligning the insurer group’s operating units along
third country equivalence under Solvency II, which requires
regional lines
group supervision.
■■ improving longer term corporate flexibility
The Immediate Future – a Positive Outlook ■■ more efficient conduct of administrative responsibilities
While it is early days under the new regime, market perception ■■ simplified administration of the por tfolio/ increased efficiency
is that the IIA is determined to adopt a far more commercial
of capital management
and pragmatic approach to carrying out its functions and
responsibilities and fulfilling its vision of developing the ■■ increased efficiency of audit and regulatory compliance and
■■ removing the tensions that currently
exist within the transferor as a result of
the differing risk profiles and regulatory
regimes that apply to its Hong Kong
and non-Hong Kong businesses, leaving
each territory to pursue the strategy
that best fits the needs of its market,
policyholders and shareholders.
However, more recently, the regulatory

costs and burden of Solvency II, and much
more recently, the Bermuda Solvency
II equivalence implementation, have
incentivized Hong Kong insurers operating
as Hong Kong branches of European
or Bermuda incorporated and licensed
insurers to consider “domesticating” via
a Section 24 Scheme to a Hong Kong
incorporated and licensed subsidiary.
Our understanding from speaking with
our other insurance sector clients and
professional advisers in Hong Kong is that
the IIA currently has more applications for
Section 24 Schemes than ever before.
Key Legal Principles

China
The Insurance Ordinance 2015 confers an absolute discretion
on the Hong Kong Cour t whether or not to sanction a Section
24 Scheme. However, the Cour t’s discretion must be exercised Restrictions on Foreign Insurers Operating or Expanding
by giving due recognition to the commercial judgment of the in China
insurer’s board of directors. As long as the directors of each There is a strong need for a relaxation of the conditions imposed
relevant insurer are acting in good faith and in the best interests on the opening of branches by foreign-invested insurers.
of the insurer, the Cour t will not “second guess” the directors’ Presently, if a foreign investor owns more than 25 percent of
judgment. The commercial drivers/rationale for the Section 24 an insurer in China, the insurer is classified as a foreign-invested
Scheme will need to be carefully explained to the Cour t and will insurer and any branches opened by such an insurer are subject
need to be suppor ted by the conclusions and recommendations to much greater restrictions and scrutiny, for example:
in the independent actuary’s repor t.
■■ The China Insurance Regulation Commission (CIRC)
Timing and Process imposes, as a matter of institutional policy, strict geographical
restrictions on the opening of new branches by foreign
As a result of the IIA’s current workload, we expect a star t to insurers. Foreign insurers are allowed to open one or two
finish timeline for a Section 24 Scheme of between 18 and 24 branch licenses a year while domestic players have no limit and
months. get several licenses in one go. Fur thermore, the procedure
applied to foreign insurers lacks transparency and usually
Phase 1 is the preparatory stage including preliminary meetings
involves a long completion time;
with the IIA. Phase 2 involves submission of draft Cour t and
scheme documents and the independent actuary’s repor t to ■■ Conver ting (incorporating) foreign proper ty and casualty
the IIA, the IIA’s clearance of such drafts and submission of the insurance branches into subsidiaries is an essential requirement
finalized documents and repor t to the Cour t. Finally, Phase 3 for fur ther expansion into more provinces because only
involves handling all policyholder enquiries and complaints, the subsidiaries can establish branches. This has been legally
Cour t filings and Cour t hearings. possible for four years but, in practice, the procedures turn out
to be highly selective, lacking in transparency, and often take a
long time; and
■■ Foreign insurers are not permitted to invest in more than one ■■ household proper ty insurance, liability insurance, credit
proper ty and casualty insurance and life company in China (as insurance and guarantee insurance with an individual as the
per a rule introduced in 2008 by the CIRC). The objective of policyholder or the insured and
this regulation is to prevent foreign insurers from getting overly
■■ proper ty insurance and the whole transactional process,
involved in Chinese companies.
including sales, underwriting and settlement of claims can now
be operated online
Domestication of Foreign Insurers – Getting a Smaller
Piece of a Bigger Pie The arms race among the big three internet companies in China
has accelerated the development and sophistication of online
There has been a fairly recent trend of some foreign-invested
sales platforms for insurance products in China. For example:
insurers becoming domestic insurers by giving up their
majority control and taking a smaller cut of an expanded stake, ■■ In 2014, Alibaba and Tencent joined forces with Ping An
for example: Insurance, the second largest insurer in China, to set up Zhong
An Online Proper ty Insurance; and
■■ In 2012, AXA Life moved from a 50:50 joint venture with
Minmetals to become the ICBC-AXA Life Insurance (60 ■■ In 2015, Baidu par tnered with global insurer Allianz and
percent ICBC to 27.5 percent AXA to 12.5 percent Minmetals) Asian investor, Hillhouse Capital Group, to establish a digital
joint venture, which transformed a business that only had 16 insurance joint venture called Bai An.
branches as of September 2011, to a business with access to
ICBC’s more than 16,000 branches across China. Non-Life Business: The Chinese Motor Industry and its
■■ In 2010, Sun Life Financial diluted its ownership from 50
Pitfalls
percent to 25 percent in Sun Life Everbright Insurance, its Foreign non-life companies are excluded from offering motor
joint venture with China Everbright Group, thus enabling third par ty liability insurance (Motor TPL). As Motor TPL
the joint venture to gain legal status as a domestic insurer. amounts to more than 70 percent of the entire non-life business,
This led to the joint venture being allowed to offer a wider this is a severe disadvantage.
range of products and open more branches across China at a
faster pace. Motor TPL is loss making due to the high accident rates, poor
underwriting, inflated/fraudulent claims and low third par ty
liability limits (only US$52 premium income per car in 2011).
Bucking Regulatory Restrictions through an Online
According to Fitch, the price liberalization of Motor TPL
Approach
premiums (rolled out by the CIRC in June 2015 in six Chinese
Online sales platforms (coupled with China being the global regions initially, then in 12 more provinces and cities from January
leader in e-payment services technologies and penetration) 2016 onwards) has encouraged smaller insurers to try to win
could eventually help foreign invested insurers overcome the market share by discounting, leading to an increase in competition
key disadvantage of being allowed to establish no more than and greater price sensitivity among consumers. In turn, the bigger
two branches a year. Since 2011, the CIRC has been encouraging insurers have followed suit. This, coupled with an influx of new
insurers to grow their businesses through e-commerce. In players, could fur ther constrain major insurers’ capability to
par ticular, on July 22, 2015, the CIRC issued the “Notice on improve their margins. Average motor premiums have fallen by
Issuing the Interim Measures for the Supervision of the Internet 5.3 percent since the reforms star ted, according to CIRC.
Insurance Business,” which specifies the basic requirements of
This opening up of the Motor TPL to foreign invested insurers
par ticipating in internet insurance businesses, such as relevant
has been long promised, for instance, the May 2011 pledge at the
qualifications; operation criteria; geographic scope; information
US-China Strategic and Economic Dialogue meeting to open up
disclosure; and the CIRC supervisory rules.
mandatory car insurance to foreign invested insurers.
The relevant product requirements are in fact the same as those
In the meantime, cer tain foreign invested insurers are par tnering
governing the offline insurance business.
up with domestic insurers since foreign invested insurers are
Pursuant to this new regulation, cer tain insurance products can able to offer optional car insurance – eg, Samsung Fire & Marine’s
now be sold online, without geographical limits, even though cooperation agreement with Huatai Insurance whereby Huatai
no branch/subsidiary of the insurer has been established. Those will sell MTPL policies while Samsung Fire & Marine will sell
permissible online products include: optional “top up” cover to the same policy holders.
■■ personal accident insurance, fixed-term life insurance and

ordinary whole life insurance
Indonesia represented. There is also a requirement for monthly risk and
audit committees and these have to have majority independent
In 2013, the Indonesian regulator (OJK) was established and representation. Eighty percent of the meetings have to be face-
tasked with supervising non-banking-related financial sectors to-face. This is a significant resource commitment. Due to the
(including insurance). As a new agency, it naturally faces some requirement to have the meetings on a monthly basis, there is
elements of coordination, overlap and delay, both internal to the often little to discuss at a strategic level as things rarely change
organization and across government agencies. Since the OJK’s that quickly.
formation, the insurance industry has experienced significant
regulatory change which is on-going. The New Insurance Law
Change in Ownership Requirements
(UU No. 40/2014) came into effect on October 23, 2014
(New Insurance Law). Under the New Insurance Law, insurance and reinsurance
companies can only be owned by either:
Product Approvals ■■ Indonesian individuals and/or Indonesian legal entities that are
The process of obtaining approval from the OJK is extremely directly or indirectly wholly owned by Indonesian individuals or
lengthy as all new products need to be approved. One of the ■■ Indonesian individuals and/or Indonesian legal entities together
reasons for this is that the OJK is internally separated into
with foreign individuals or legal entities that are engaged in
banking and insurance units. Often, to launch more sophisticated
the same insurance business or a holding company with one
products in the insurance sector, approval is needed from
subsidiary engaged in the same insurance business.
both the banking and insurance units. The internal teams do
not appear to be coordinated so this delays the process and Foreign individuals referred to in the second bullet point above
increasing reliance on internal networks to speed things along. can only hold shares in an insurance or reinsurance company
through a transaction on the stock exchange.
Digital and Liberalization of Distribution Existing companies that do not comply with these requirements
Even though the Indonesian insurance market is developing must adjust their shareholding by November 2019 at the latest by:
toward more modern methods, the market preference remains ■■ transferring their shares to Indonesian citizens or
a traditional distribution method. Almost all new product
sales require some form of intermediation from a regulatory ■■ going public.
perspective, either face-to-face or by telephone.
Companies must prepare an action plan to comply with the
There is little e-commerce in Indonesia despite huge smar tphone ownership requirements, along with the steps they will take to
usage and huge social media adoption (Facebook, Twitter, and achieve compliance and a timeline for implementation. This action
WhatsApp). However, buying online is almost non-existent. This plan must be completed by June 2017.
may be due to Indonesia’s lack of reliable infrastructure (roads,
The government is also required to issue a government regulation
courier services) for the shipment of goods and peoples’ low
regarding foreign ownership in insurance companies, which has
levels of trust in many institutions and businesses.
yet to be issued. Pending the enactment of this government
Digital has a role in creating more efficient sales processes. regulation, the maximum foreign ownership in insurance
Currently, few life insurers use digitally-enabled sales processes. companies is subject to the provision under the old insurance
However, e-commerce is growing at a tremendous pace and the law of 80 percent. It is expected that the new foreign ownership
market is slowly coming to welcome it in Indonesia. requirements will be more stringent.
In December 2016, the OJK approved an IT-based money lending These restrictions are expected to equally apply to insurance/
service in Indonesia. Despite this, the OJK has stayed cautious and reinsurance intermediaries and other providers of insurance/
wary when approving transactions and processes of this nature reinsurance-related services.
when concerning e-commerce sales.
Single Presence Policy
Governance
The New Insurance Law also introduced a “single presence”
There is a significant governance burden: insurers are required policy to the insurance sector in Indonesia. This law provides that
to hold monthly board of commissioners (BOC) and board of each par ty can only be the “controlling shareholder” of one of
directors meetings. The BOC would be akin to a UK board each of the following categories of insurance companies:
of directors, with non-executive and executive directors
■■ Life insurance company This would help to narrow the protection gap which currently
stands at US$609 billion in Singapore
■■ General insurance company
■■ limit current practice of bundling together the policies which
■■ Re-insurance company
are “available” rather than what the customer may need to
■■ Syariah life insurance company meet their needs
■■ Syariah general insurance company ■■ suppor t the Financial Advisory Industry Review (FAIR)
requirement of Quality Advice as a bank is able to
■■ Syariah re-insurance company offer experienced, trained staff with a good compliance
infrastructure
Insurance companies were expected to comply with the single
presence policy before October 17, 2017 through the adoption ■■ remove exclusive market deals, which are expensive as
of an implementation plan, which is to contain the information on a result of the high upfront guaranteed and on-going
the adjustment method, the step plan and the timeline. performance related payments. These payments, which are
linked to exclusivity, make Bancassurance the most expensive
The implementation plan must be approved by an insurer’s
distribution channel and the cost is ultimately borne by the
shareholders. Fur ther, it was to be submitted to the OJK by or
customer and
before June 28, 2017.
■■ align more closely to the FAIR requirement of Spreading of
The OJK would then approve the implementation plan or ask for
Commission as the current arrangement of upfront payments
revisions within 20 working days of receipt.
is in effect, front loading commissions, which is contradictory
Insurers must submit a repor t on the realization of the approved to what the Singapore regulator is seeking to do in terms
plan within 10 working days after the realization of the plan or of fair practices for customers. This would also suppor t
after the realization of any stage set out in the plan. better customer management by the banks as commissions
are spread over the term of the policy encouraging an
To comply with the single presence policy, a controlling
ongoing relationship.
shareholder can merge or consolidate the insurers under its
control, or par tially sell its shares in the
insurers under its control or do other
corporate actions based on the OJK’s
approval. This policy has resulted in
an active market this year and beyond
for M&A.
Singapore
Banks’ Long-term Deals with a Single

Insurer
Presently in Singapore, big banks have
secured long term deals with a sole
insurer. This has been mainly driven by
the desire/need to secure high upfront
guaranteed payments and on-going
performance related payments.
An open architecture environment in

Singapore would help increase insurance
penetration and growth, encourage
healthy competition and consumer choice.
It would:
■■ provide greater customer choice of

both products and distribution channels.
Simplification of Digital Processes business lines in Vietnam, or act as an outward investing
subsidiary of a foreign insurance enterprise and have been
Existing legislation limits insurers’ future direct/digital capability. mandated by the foreign insurance enterprise to invest in the
There are simplifications that may be made to online verification incorporation of an insurance enterprise in Vietnam
processes (ie, to simplify the journey for customers). For example,
–– have operated for at least 10 years in the sector of business
■■ a “fact find” is required for all financial purchases (except Term in which they intend to engage in Vietnam
and GI and the government-linked health and long-term care
schemes). This limits insurers’ ability to serve the customer in –– have total assets wor th at least US$2 billion in the year
a direct way. A better approach would be that the customer immediately preceding the year that the application for
should be able to choose whether they want to complete a full licensing is submitted and
fact find or skip the process if they want to;
–– have not seriously violated any laws on insurance business
■■ the anti-money laundering and KYC guidelines state that and other legal regulations of their home country for three
customer identification and verification has to take place consecutive years immediately preceding the year that the
before a policy can be issued. Facilitating this online (real application for licensing is submitted.
time) or offline through manual checks and processes leads
to additional costs. Insurers have implemented this through Additional Restrictions
camera technology but there are still par ts of the legislation
that put obstacles to the digital customers’ journeys; for There are cer tain additional points that should be considered.
instance, the requirement to have a signature for all policy ■■ A stronger framework for the protection of trademarks and
servicing requests. A possible solution to identify verification/ IP rights under a free trade agreement. For example, the
policy servicing changes/wet signature requirements could be EVFTA contains several provisions aimed at improving the legal
the use of the national “one key” token which is being issued framework for the enforcement of IP rights in Vietnam
to all Singaporeans or indeed, through email verification, which
has already been widely accepted in Hong Kong. ■■ Mutual recognition of professional qualifications and
■■ The provision of strong and efficient investment dispute

Vietnam resolution mechanisms that could enable foreign insurers to
protect their rights and guarantee the application of investment
Foreign Ownership Restrictions and Requirements protection provisions applicable to them.
From a legal perspective, there is no foreign ownership

restriction applicable to foreign insurers for entry into Vietnam.
Notwithstanding this, there are certain specific provisions applicable
to foreign insurers that insurers are hoping to be relaxed, as follows:
■■ permission for foreign life insurance enterprises to establish

branches in Vietnam
■■ permission for foreign reinsurance enterprises to establish

branches in Vietnam (noting that a similar provision is included
under the Free Trade Agreement that has been negotiated
between the EU and Vietnam (EVFTA))
■■ removal of restrictions on the cross-border provision of

insurance retrocession services (noting that a similar provision
is included under the EVFTA) and
■■ there are cer tain specific conditions applicable to foreign

insurers to be able to establish their subsidiary in Vietnam in
the form of limited liability companies. In par ticular, foreign
insurers must:
–– trade in insurance abroad and have been permitted by

the relevant foreign authorities to conduct expected
AUSTRALIA AND
NEW ZEALAND
DEVELOPMENTS
Australia Consumer Credit Insurance Sales Process
2017 saw the continued focus of the corporate regulator, the In August, ASIC announced the establishment of a Consumer
Australian Securities and Investments Commission (ASIC) into the Credit Insurance (CCI) Working Group, which has been tasked
sale of add-on insurance products and life insurance products to with improving outcomes for CCI customers. CCI has historically
retail customers. ASIC has proposed a number of reforms in these been a key focus for ASIC, with ASIC’s view being that CCI is
areas. The insurance sector will continue to face scrutiny in 2018, associated with poor consumer outcomes.
following the announcement of a Royal Commission inquiry into
The CCI Working Group will progress a range of reforms. A key
the financial services industry.
reform will be the introduction of a deferred-sales model for
CCI sold with credit cards over the phone and in branches. If
Sale of Add-on Insurance implemented banks will be prohibited from selling a CCI policy until
In 2017, ASIC continued to focus on reforming the sale of add-on at least four days after the customer has applied for their credit card.
insurance through car dealerships, following their 2016 Report 492. The intention of this reform is to reduce the risk that the
Add-on insurance policies are sold at point of sale in addition to the customers will feel pressured to purchase the CCI policy or
sale of other products or goods. Examples are the sale of consumer purchase a CCI policy that does not meet their needs. The
credit or payment protection insurance at the time that a consumer deferred-sales model will not apply to CCI sold online or with
loan is arranged, including a loan to acquire a motor vehicle. homes loans and personal loans (though other measures will be
introduced to ensure good consumer outcomes in these areas).
Throughout 2017, ASIC has worked with insurers who sell, or
have sold, add-on insurance through car dealerships to see that The CCI Working Group will be responsible for determining how
improvements are made to the sale and design of add-on products, the deferred-sales model will work and, in addition, will determine:
and will continue to do so in 2018. Some insurers have already ■■ what measures need to be implemented for CCI sold with credit
implemented significant refund programs as a consequence of cards over the internet
ASIC’s review.
■■ other measures to promote good consumer outcomes (including
In August 2017, ASIC announced proposals to reform the sale of well informed decision making) for CCI sold with credit cards
add-on insurance through car dealerships. Consultation Paper 294 and other loan products and
sets out ASIC’s approach and proposed reforms in detail.
■■ the data necessary to ensure that the success of these reforms
At this stage, the reforms have not been implemented. If they can be monitored.
proceed, the reforms would see the introduction in 2018 of:
Life Insurance Conflicted Remuneration Reforms
A Deferred Sales Model
The Corporations Amendment (Life Insurance Remuneration
This model would insert a pause in the sales process for add-on Arrangements) Act 2017 went into effect on January 1, 2018. The
insurance products. The proposal is that a period of between Act will have a significant impact on life insurance distributors
four to 30 days must elapse before dealers could sell an add-on and represents the government’s response to a number of recent
insurance product to a customer. investigations into the life insurance industry. The Act amends the
Corporations Act to remove the exemption against the ban on
Enhanced Supervision Obligations on Insurers conflicted remuneration for benefits paid in relation to certain life
insurance products. Conflicted remuneration is a benefit which could
This reform would see the introduction of more robust and
reasonably be expected to influence the choice of financial product
targeted requirements for insurers to meet when supervising
recommended, or the financial product advice given, to retail clients.
and monitoring their authorized representatives who sell add-on
insurance products. As of January 1, 2018, the exemption to the ban on conflicted
remuneration only applies to life risk insurance products, if:
These requirements would be based on the risks for customers.
ASIC has indicated that appropriate risk indicators could include ■■ the benefit is a level commission or
tailoring the level of supervision according to:
■■ the benefit satisfies the benefit ratio requirements and claw-back
■■ the amount and basis on which commissions are earned and requirements under the Act.
■■ whether a representative has been identified as having a history ASIC has the power to determine the benefit ratio requirements.
of non-compliant or unfair sales practices. The benefit ratio is calculated with reference to the benefit and the
policy cost for the product (which includes premiums and other The government has established the Royal Commission to give
fees payable). The claw-back requirements require financial services Australians “a greater degree of assurance” about the financial
licensees to pay back all or part of the benefit if: services sector.
■■ the product is cancelled or not renewed; or The Royal Commission will have 12 months to investigate and
will report to the government by February 2019. The Royal
■■ the policy cost is reduced, within two years after it is first issued
Commission will investigate how financial institutions have
to a retail client, and that benefit is equal to or greater than the
previously dealt with misconduct and whether these cases expose
amount set by ASIC.
any issues in terms of cultural and governance issues with respect
The Act (and the associated regulations) also extends the ban on to the regulation and supervision of the industry.
conflicted remuneration to situations where no financial advice is
Further details regarding the Royal Commission are not yet
given. From January 1, 2018, it will be conflicted remuneration if the
available, but the conduct of the Commission and its findings are
benefit relates to:
likely to have a significant impact on the financial services sector in
■■ information given to a person in relation to a life risk insurance 2018 and beyond.
product; or
New Zealand
■■ a dealing in a life risk insurance product with a person as a
retail client,
New Zealand Insurance Regulation Updates and Pending
and access to, or value of, the benefit is dependent on the value or Reforms
number of the life risk insurance product(s) subsequently acquired
or varied. Summary
These changes are significant for the life insurance industry, as they During 2017, private insurers worked to settle most Kaikoura
extend the application of conflicted remuneration to non-advice earthquake claims by the end of the year. This process involved
scenarios and will impact multiple distribution channels for life risk an agreement between private insurers and the Earthquake
insurance products. Commission (EQC) for insurers to manage EQC claims, so as to
streamline the process. This has provided a model for future claims
Life Insurance Code of Practice handling and speedy settlements of earthquake claims. Along with
EQC reforms, the regulation of financial advisers and supervision
Following ASIC’s 2016 industry-wide review of claims handling in
of insurers doing business in New Zealand all progressed in
the life insurance industry, the Financial Services Council introduced
a measured way, but stalled slightly by a general election in
a Life Insurance Code of Practice. The code, which was effective
September 2017 which saw an unexpected change of government.
on July 1, 2017, imposes customer service standards on life insurers.
The new government may have different priorities in 2018.
It was designed to protect consumers and imposes standards
above current statutory obligations and includes provisions relating
to, among other things, sales practices, advertising practices, and Prudential Supervision
minimum standard medical definitions. Insurers carrying on business in New Zealand must hold a license
A voluntary code is also being developed for life insurance sold from, and are supervised by, the Reserve Bank of New Zealand
through superannuation by the Insurance in Superannuation under Insurance (Prudential Supervision) Act 2010. The Reserve
Working Group. A key objective of this code is “insurance offered Bank is reviewing IPSA, and in 2017, sought submissions from
on an automatic basis in superannuation must be appropriate stakeholders on key issues. The Reserve Bank will consider these
and affordable, and must not inappropriately erode retirement submissions in 2018 during Phase 2 of the review.
income.” This code is intended to go into effect on July 1, 2018. The Reserve Bank sought submissions on the scope of obligations
and proportionality to the risks of business being carried out here,
Royal Commission to Investigate Financial Services Sector how overseas insurers that are sufficiently regulated in their home
jurisdiction should do business here, whether statutory funds
In was announced in November that a Royal Commission will be
would provide comfort for life insurance policyholders, whether
established to investigate “misconduct” in the financial services
the enforcement regime is appropriate and incentivizes compliance
sector. This will involve a “comprehensive inquiry” that will cover
in a proportionate way, whether distress management is good
not only banks, but also insurance companies (along with wealth
enough to protect New Zealanders from overseas insurers in
managers and superannuation providers).
financial distress, and the appropriateness of the disclosure regime,
especially in comparison to similar industries, such as banking.
After considering the submissions, the Reserve Bank reported in expected to take the form of minimum standards of client care in
October 2017. Its focus for Phase 2 of the Review is on insurers’ relation to the agent’s competence and knowledge.
requirements for capital to face another catastrophe, monitoring
Over the next 18 months, the Financial Markets Authority will
parent insurance companies, licensing, enforcement tools and
work with the industry in order to help participants understand
financial strength ratings. The soundness of the insurance sector
and get ready for the new financial advice regime and licensing. All
has improved, but competition and innovation have not been
insurers and brokers operating in New Zealand will need to ensure
unduly restricted.
they are complying with the changes and aware of the implications
for their business.
Insurance Contract Law Reform
It is not clear whether a change of government will impact the long Review of Earthquake Commission Act 1993
awaited proposed reform of insurance laws. In 2017, New Zealand
New Zealand has a national disaster insurance scheme established
expected a review of the Insurance Law Reform Act along similar
by the Earthquake Commission Act 1993. A review was announced
lines to the reforms in other countries including the UK. This will
in 2012 and clarity on its reforms arrived in 2017. The reforms aim
include a review of the duty of disclosure as the insurer’s remedies
to simplify the scheme and help private insurers work together
for mis-statement and non-disclosure are said to create a power
with EQC on earthquake claims, by:
imbalance between insurers and policyholders. The proposed
reform, although delayed, is still very much on the cards, and ■■ Increasing the monetary cap from $100,000 (plus GST) to
expected to follow once the financial advisor reforms are complete. $150,000 (plus GST) for EQC building cover
■■ Clarifying EQC land cover is for natural disaster damage that

New Financial Advice Legislation
directly affects the insured residence or access to it
Insurance is a financial product for the purpose of the regime
■■ Standardizing the claims excess on EQC building cover at $1,000.
regulating financial advice. In its financial audit, the International
This currently ranges from $200 to $1,150 depending on the size
Monetary Fund encouraged New Zealand to “strengthen
of the claim
or remove the registration-only regime available now to
intermediaries.” ■■ EQC no longer providing any residential household contents
insurance and
New Zealand had already started on that mission when the
audit report came out in May 2017. By August 2017, the Financial ■■ Requiring EQC claimants to lodge claims with their private
Services Legislation Amendment Bill had been introduced to insurer who would pass the claim on to EQC (if the property
Parliament. The Bill repeals the Financial Advisers Act and brings is insured)
provisions into the Financial Markets Conduct Act to regulate
financial advice. Two Committees are working on the new regime Before a change of government, the plan was to release a draft
and one will draft a new Code of Conduct for financial advisers. reform bill in early 2018.
The new Code of Conduct should be ready for approval in August

Fire Service Levy Increases
2018. A licensing regime will commence shortly thereafter. The new
Code of Conduct will cover advice given from May 2019 with a two- The New Zealand Fire Services Levy is set to increase in the
year transition period for the adviser competence requirements. 2017/18 financial year. This is mostly due to re-structuring fire
services in New Zealand for a more streamlined service. To
As currently drafted, the Code of Conduct applies to all regulated
maintain the current level of services, the board of the New
financial advice and is far wider than its current scope. It may
Zealand Fire Service Commission is proposing to increase the rates
capture advice activities of authorized financial advisers, registered
of levy on fire insurance contracts. This followed an amalgamation
financial advisers, advice businesses and even “robo-advice.”This
in July 2017 where the New Zealand Fire Service, National
year saw a startup insurer enter the market with a service managed
Rural Fire Authority and 38 rural fire authorities became one
fully by chat-bots. The Financial Markets Authority has started
organization, Fire and Emergency New Zealand.
drafting exemptions from the Financial Advisers Act to enable
personalized robo-advice. The legislation and related guidance on how the new levies are to
be calculated and applied is complex. During this current transition
The new Code of Conduct should help to provide consistency
period, industry participants are finding they need to dedicate
across all types of financial advice, removing a products distinction
resources to understanding the changes and adjusting their systems
and a distinction between personalized and class advice, regulating
to accommodate the new regime.
advice without any occupational codes and framing the regulation
through the eyes of the client. The new Code of Conduct is
CONCLUSION
AND FORECAST
2018 will be a dramatic year for the insurance industry. Geo-political and
economic developments will impact the industry. From the devastation towards
the end of 2017 and in early 2018, it seems clear that the industry will continue
to see an increase in natural disasters. These terrible events, of course, provide
the industry with the opportunity to do what it does best, respond and assist
policyholders.
In addition, the year will provide an opportunity to reset the regulatory rules for many insures
– for better or worse. This includes progress on Brexit, a possible new strategic direction
for the IAIS, the implementation of the EU-US covered agreement and other developments.
Technology (and with it, new competitors) will also continue to present significant new
opportunities and challenges for the insurance sector – and its regulators. As we have seen for
the last several years, insurers will continue to hunt for the elusive prizes of top line growth,
increased investment yields, operational efficiencies, and improved profitability.
As far as forecasts, we anticipate:
• B rexit will end with a kick of the can down the road.
•T
here will be no more covered agreements, but there will be a renewed effort by global
regulators to increase cooperation and reliance on equally effective regulation.
•G
lobal regulators will increasingly change their focus from capital issues to risk management,
market conduct, regulation of technology, and use of data.
•T
he ghost of legacy business will continue to haunt the performance of insurers and also lead
to disposals to a new class of strategic buyers.
• The healthcare and health insurance industry will continue to converge.
• C VS/Aetna will be a harbinger.
•G
oogle, Amazon, and other technology behemoths will make additional moves into the
insurance space.
•A
serious effort will be made to close the protection gap in response to growing global
natural disasters.
• The London insurance market will continue to thrive – and so will Bermuda.
OUR GLOBAL PRESENCE
DLA Piper presence

Cooperation firm*
AMERICAS EUROPE MIDDLE EAST AFRICA ASIA PACIFIC

Albany Philadelphia Aarhus Madrid Abu Dhabi Algiers Auckland
Atlanta Phoenix Amsterdam Manchester Al Khobar Addis Ababa Bangkok
Atlantic City Raleigh Antwerp Milan Doha Accra Beijing
Austin Rio de Janeiro* Birmingham Moscow Dubai Bujumbura Brisbane
Baltimore Sacramento Bratislava Munich Jeddah Casablanca Hong Kong
Bogota San Diego Brussels Oslo Kuwait City Dakar Melbourne
Boston San Francisco Bucharest Paris Manama Dar es Salaam Perth
Calgary San Juan Budapest Prague Muscat Johannesburg Seoul
Chicago Santiago Cologne Rome Riyadh Gaborone Shanghai
Dallas São Paulo* Copenhagen Sheffield Kampala Singapore
Edmonton Seattle Edinburgh St. Petersburg Kigali Sydney
Houston Short Hills Frankfurt Stockholm Lagos Tokyo
Lima Silicon Valley Hamburg Vienna Luanda Wellington
Los Angeles Toronto Helsinki Warsaw Lusaka
Mexico City Vancouver Kyiv Maputo
Miami Washington, DC Leeds Mwanza
Minneapolis Wilmington Lisbon Nairobi
Montreal Yellowknife Liverpool Port Louis
New York London Tunis
Northern Virginia Luxembourg Windhoek
About us
DLA Piper is a global law firm with lawyers located in more than 40 countries throughout the Americas, Europe, the Middle East, Africa
and Asia Pacific, positioning us to help clients with their legal needs around the world.
For more information
This publication reflects the work and experience of many within our global insurance team. The principal authors are:
William C. Marcoux Nick PK Paran Jim Halpert

New York London Washington, DC
[email protected] [email protected] [email protected]
Peter S. Rice Melanie James Sydney White

Boston London Washington, DC
Stephen W. Schwab George Mortimer Steven R. Phillips

Chicago Birmingham Washington, DC
Paul Chen Heng Loong Cheong Gerald Rokoff

New York and Silicon Valley Hong Kong New York
David Luce Roy Chan Michael Greenberg

New York Shanghai New York
Kathleen A. Birrane Peter Shelford Sophie Devitt

Baltimore Bangkok Brisbane
Carla Small Samantha O’Brien Magdi Adab

New York Brisbane London
P. Nicholas Kourides Marcella Hill*

New York São Paulo
[email protected] [email protected]
If you have any questions or comments regarding this Insurance Sector Trends: Forecast for 2018 and 2017 Year End Review, or would like
fur ther information about these evolving areas of law, please let us, or your DLA Piper relationship par tner, know.
www.dlapiper.com
*Marcella Hill is a partner in Campos Mello Advogados, an independent law firm working in cooperation with DLA Piper in Brazil.
DLA Piper is a global law firm operating through DLA Piper LLP (US) and affiliated entities. For further information please refer to www.dlapiper.com. Note past results are not guarantees
of future results. Each matter is individual and will be decided on its own facts. Attorney Advertising. Copyright © 2018 DLA Piper LLP (US) . All rights reserved. | FEB18 | MRS000096448

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INSURANCE SECTOR TRENDS:

2017 YEAR END REVIEW AND

• L ife and non-life companies continued to shed non-core or under-performing business

• F IO got a new Director (Acting)

GLOBAL DEVELOPMENTS DRIVING OPPORTUNITIES AND CHALLENGES 06

COMMERCIAL AND TRANSACTIONAL ISSUES AND TRENDS 14

INNOVATION AND TECHNOLOGY IN INSURANCE 22

THE INTERNATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS 31

US FEDERAL UPDATE: ELECTIONS; AND LEGISLATIVE AND REGULATORY DEVELOPMENTS 34

NAIC AND STATE REGULATORY DEVELOPMENTS 39

EUROPEAN REGULATORY AND LEGISLATIVE DEVELOPMENTS 42

LATIN AMERICA AND SOUTH AMERICA DEVELOPMENTS 48

ASIA REGULATORY DEVELOPMENTS 51

AUSTRALIA AND NEW ZEALAND DEVELOPMENTS 58

CONCLUSION AND FORECAST 62

Brexit dominated much of the political, economic and regulatory

Dominic Dudley / Shutterstock.com

FSOC needed a majority vote of its 10

■■ GE. In 2016, GE Capital was de-designated as a result of selling

■■ Prudential. Prudential has not yet been de-designated, but it is

Although there are pronounced trends regarding the globalization

Although, in some cases, restrictive laws are put in place for

Broker consolidation. Insurance brokers have been the most

The following summary highlights some of

Prevention of Base Erosion

The TCJA requires “applicable taxpayers”

■■ Modified taxable income generally is

Data Security Cyber Risk Addressed in the United Kingdom

■■ March 1, 2019: Third party service provider security policy (500.11)

Digitalization and Big Data – the

Transaction 1 Transaction 2 Transaction 3

NODES NODES NODES

Transaction Valid? Transaction Valid? Transaction Valid?

Transaction Confirmed Transaction Rejected Transaction Confirmed

Confirmed transactions are collected in a candidate block

‘Miner’ nodes compete to find a hash of the candidate block.

New block is shared with all the nodes

30 | INSUR ANCE

Despite Republicans controlling both the House and Senate, they

In May 2017, DOL Secretary Alexander Acosta announced in a

Elections, Resignations and Appointments – NAIC Leadership

■■ Colorado – Michael Conway, Interim Commissioner (selected

On December 21, 2017, the NAIC amended its Life and

The impetus for the amendments was the conjoined multibillion-

Botond Horvath / Shutterstock.com

■■ product oversight and governance requirements − insurance

Increased Powers for the High

The HCSF is a continuation of the Financial

Public Consultation 3/2017 on the Simplification of Non- Regulatory Changes

The information in the supplemental IPID must be consistent with

No exemptions are provided other than with regard to large risks,

Pre-contractual documents should be submitted via email or

The deadline for submitting observations and comments on the

Colombia The penetration of insurance is still low in Mexico, albeit it is an

The increment of actions against insurance intermediaries should

However, more recently, the regulatory

Key Legal Principles

■■ personal accident insurance, fixed-term life insurance and

Banks’ Long-term Deals with a Single

• L ife and non-life companies continued to shed non-core or under-performing business

• F IO got a new Director (Acting)

• The healthcare and health insurance industry will continue to converge.

• C VS/Aetna will be a harbinger.