A Guide to Insurance

A Guide to Insurance

Combining governance, compliance and regulation

By Nigel Feetham Contributions by Robin Amos

A Guide to Insurance examines the practice of insurance law as an issue of governance. The author applies a practical approach to insurance regulatory law (both domestic and international) and provides a guide to current trends, markets and policy choices facing governments and regulators. The book covers the way captives as well as open market insurers are regulated, how they operate and what the potential issues are.

Category: Business, Finance

Insurance has become a highly specialised area and understanding insurance requires an insight into the changing regulatory environment as well as an understanding of what the challenges affecting insurance companies are. The author, a practising lawyer and international insurance practitioner, examines the practice of insurance law as an issue of governance. He applies a practical approach to insurance regulatory law (both domestic and international) and provides a guide to current trends, markets and policy choices facing governments and regulators.

The book covers the way captives as well as open market insurers are regulated, how they operate and what the potential issues are.

The author has written in a clear and understandable manner, so that he can also provide some insight into the world of insurance for students who are now studying insurance law and to whom the book may provide a greater understanding of the area of law they will be practising law in.

Robin Amos provides a chapter on Own Risk and Solvency Assessment (“ORSA”), part of the Solvency II project which is planned to improve the prudential supervision of insurers in the European Union. Solvency
II is expected to be in force on 1 January 2014.

A Guide to Insurance examines the practice of insurance law as an issue of governance. The author applies a practical approach to insurance regulatory law (both domestic and international) and provides a guide to current trends, markets and policy choices facing governments and regulators. The book covers the way captives as well as open market insurers are regulated, how they operate and what the potential issues are.

About the author. iii

Contents. v

Table of Cases. x

Acknowledgment. xi

Preface. xiii

Introduction.. xv

1.... THE CONCEPT OF RISK IN COMMERCE.. 1

1.1.    Risk Management. 4

1.2.    Why do we have Regulation?. 5

1.2.1.     Rules-based regulation.. 7

1.2.2.     Principles-based regulation.. 7

1.2.3.     Risk-based regulation.. 8

1.3.    What is Insurance?. 8

2.... SELECTION OF DOMICILE.. 11

2.1.    Bermuda. 13

2.2.    Dubai 14

2.3.    Malta  14

2.4.    Dublin.. 14

2.5.    Gibraltar. 15

2.6.    Guernsey. 15

3.... BUSINESS, MARKET AND REGULATORY ISSUES FOR CAPTIVES AND INSURERS   21

3.1.    Captives – The Economic Basis for establishing Insurer must be sound   21

3.2.    Key issues - Snap-shot of Current Trends. 21

3.2.1.     Business plans. 21

3.2.2.     Market and business. 22

3.3.    How to Manage Cost for a Captive?. 23

3.3.1.     Premiums. 23

3.3.2.     Coverage. 23

3.3.3.     Claims. 24

3.4.    Evolution of Insurance – a Case Study. 24

3.5.    Insurance Banana Skins 2011 – survey of the risks facing insurance industry  31

4.... INSURANCE COMPANY FAILURE.. 33

4.1.    Quinn Insurance. 34

4.2.    American International Group, Inc. (AIG). 40

4.3.    The Independent Insurance Company Limited.. 44

4.4.    European Insurance Group (Malta). 47

4.5.    HIH Insurance. 51

4.5.1.     Strategy and the board.. 52

4.5.2.     A failure: the UK operations. 53

4.5.3.     A second failure: the US operations. 54

4.5.4.     A third failure: the FAI acquisition.. 54

4.5.5.     The harbinger of doom: the Allianz joint venture. 54

4.6.    Compensation Schemes. 56

5.... OWNERSHIP, MANAGEMENT AND FINANCING... 59

5.1.    Controller Suitability. 59

5.2.    Trust/Trustees. 62

5.2.1.     Undertakings from Trustees. 64

5.3.    Influence of Controllers. 65

5.4.    Managing Investment Risk. 67

5.5.    Managing Claims. 69

5.6.    Avoiding Unnecessary Complexity. 70

5.7.    Financing and Solvency. 72

5.8.    Financial Crime Risk and Mitigation.. 77

5.9.    Risk of Regulatory Failure. 78

5.10. Third Party Contracts. 79

6.... SUPERVISION... 83

6.1.    Sienna Protocol 83

6.2.    International Association of Insurance Supervisors. 87

6.3.    Codes of Conduct. 92

6.3.1.     The Irish Code of Conduct. 93

6.3.2.     The Bermuda Code. 96

6.3.3.     The Guernsey Code. 98

6.3.4.     Codes: concluding thoughts. 100

6.4.    Solvency II. 104

6.5.    Principles v Rules. 105

7.... SYSTEM OF GOVERNANCE.. 109

7.1.    The Five Lines of Defence. 110

7.2.    Mind and Management. 111

7.3.    On-Site Inspections. 115

7.3.1.     Training and awareness. 116

7.3.2.     What are the possible questions and issues?. 116

7.4.    What happens after the on-site inspection?. 119

7.5.    Whistleblower. 120

7.6.    Walker Review... 121

7.6.1.     Board size, composition and qualification.. 123

7.6.2.     Functioning of the board and evaluation of performance. 124

7.6.3.     The role of institutional shareholders: communication and engagement  126

7.6.4.     Governance of risk. 128

7.6.5.     Remuneration.. 129

7.7.    Emergence of International Standards and Best Practice in relation to insurance regulation.. 132

8.... REGULATORY ARBITRAGE.. 135

8.1.    Illustrative examples. 138

8.1.1.     Fronting Insurance. 138

8.1.2.     Transformers. 140

8.2.    Interest and currency rate insurance. 141

8.3.    Life policies. 143

8.4.    Other examples. 144

8.4.1.     Commission disclosure rules. 144

8.4.2.     The Bermuda branch route. 144

8.5.    Jurisdictional competition.. 145

8.6.    Redomiciliation.. 147

8.7.    Regulatory co-operation.. 150

9.... A GUIDE TO “ORSA” FOR CAPTIVES AND SMALL INSURERS.. 153

9.1.    Solvency II – some background.. 153

9.1.1.     Solvency II as World standard.. 155

9.1.2.     Solvency II for captives and small insurers. 155

9.1.3.     Solvency II has three pillars. 157

9.2.    The theory of Pillar Two and “ORSA”. 158

9.3.    ORSA – a case study in governance design.. 164

9.3.1.     Strategy and risk appetite. 165

9.3.2.     The four core principles. 166

9.3.3.     Principle one - board.. 167

9.3.4.     Principle two - management. 167

9.3.5.     Principle three – risk assessment. 168

9.3.6.     Principle four – risk controls. 169

9.3.7.     Assessing the base of the pyramid – gap analysis. 170

9.3.8.     Constructing the risk register - the primary risk control tool 174

9.3.9.     Calibration of the risk register. 178

9.3.10.   Secondary risk control tools. 180

9.3.11.   Board charter. 180

9.3.12.   Governance Committee. 183

9.3.13.   Audit committee. 188

9.3.14.   Directors’ checklist. 191

9.3.15.   Outsourcing procedures. 194

9.3.16.   Business continuity. 197

9.3.17.   Threat matrix. 198

9.3.18.   Other risk control tools and compliance statements. 200

9.3.19.   Project planning for governance. 201

9.3.20.   Combining ORSA with Pillar One – towards a total view of capital requirements  203

9.3.21.   Draft ORSA guidelines – analysis and implications. 207

10.. GENERAL CONCLUSION AND SUMMARY.. 215

11.. EPILOGUE.. 217

APPENDIX 1.         BOARD OF DIRECTORS TERMS OF REFERENCE.. 221

Background.. 221

Composition, Board Organisation and Meetings. 221

Duties and Responsibilities. 222

CODE OF ETHICS. 225

Introduction.. 225

Purpose of code. 225

Use of Code. 225

Relationship with Customers and Suppliers. 226

Relationship with Shareholders. 226

Relationship with Employees. 226

Relationship with the Government, Regulator and Community. 227

Compliance, Verification and Implementation.. 227

Whistle Blowing Policy. 228

Appendix I. 228

Employee Gifts & Entertainment form... 228

APPENDIX 2.    THE BERMUDA INSURANCE CODE OF CONDUCT CODE   231

APPENDIX 3.   THE GUERNSEY CODE.. 251

APPENDIX 4.    INSURANCE INTERMEDIARY CONTRACT CLAUSES                       265

APPENDIX 5.    CORPORATE GOVERNANCE QUESTIONNAIRE.. 273

Index. 277

Imprint
Spiramus Press
Publisher
Spiramus Press
Language
English
Product Format
Hardback
Dimensions
234 x 156
Publication Date
2 Jan 2012
Number of Pages
302
ISBN
9781907444463
Edition
1
Product Format
PDF
Publication Date
1 Dec 2011
Number of Pages
302
ISBN
9781907444579
Edition
1