Re-defining the pure protection contract - July 07 ... - Pinsent Masons

This article by Toby Thompson was published by Complinet on 12 June and is reproduced with their kind permission.
June 2007
Insurance & Reinsurance
Re-defining the pure protection contract
A change in the definition of a pure protection contract on 6 June means that more long-term
insurance contracts will be treated in the same way as general insurance.
Until recently, the sale of long-term insurance
contracts was governed by the Financial Services
Authority's Conduct of Business rules (COB), with the
exception of pure protection contracts which fell
under the Insurance Conduct of Business rules (ICOB).
The FSA has now recognised that pure protection
contracts do not have an investment element, so the
more stringent protection afforded by COB was
unnecessary from a consumer protection point of
view. The change means that more long-term
insurance contracts will fall within the pure protection
contract definition.
The new definition in the Handbook reads as follows:
1. a long-term insurance contract in respect of which
the following conditions are met:
a. the benefits under the contract are payable
only on death or in respect of incapacity due to
injury, sickness or infirmity;
b. [deleted]
c. the contract has no surrender value, or the
consideration consists of a single premium and
the surrender value does not exceed that
premium; and
d. the contract makes no provision for its
conversion or extension in a manner which
would result in it ceasing to comply with (a) or
(c); or
e. [deleted]
2. a reinsurance contract covering all or part of a risk to
which a person is exposed under a long-term
insurance contract.
This removes the old requirement that "the contract
provides that benefits are payable on death (other than
death due to an accident) only where the death occurs
within ten years of the date on which the life of the
person in question was first insured under the contract,
or where the death occurs before that person attains a
specified age not exceeding seventy years".
Changing times
During the consultation process, the FSA identified
four main reasons behind the proposal:
• An increased demand for protection policies
expiring over age 70 due to socio economic factors;
• Improvements in mortality;
• Evidence of firms designing term assurance policies
to cease before the assured's 70th birthday, or
selling shorter ICOB-governed policies instead of
passing sales to advisers operating under COB;
• An unjustified higher regulatory cost associated
with the sale of term assurance extending beyond
age 70.
Under the previous rules, the sale of a term assurance
contract with a 25-year duration was subject to ICOB
if the customer was 45 years of age, but subject to
COB if the customer was 46. The new definition
means that the fact that a customer may turn 70
during the course of a policy will no longer be a factor
in determining which regime should apply.
Following the consultation, the FSA decided against an
alternative proposal, which would have increased the
continued overleaf

age limit within the definition to 80. This, it was
recognised, would merely have reduced the anomalous
effect of the definition, as opposed to eliminating it
altogether.
Election provisions
As a result of the consultation exercise, the FSA has
also announced two further changes to the Handbook.
First, the provision in ICOB 1.2.17R(1), under which a
firm can currently elect to sell pension term assurance
policies in accordance with COB as opposed to ICOB is
to be extended to include all pure protection
contracts. Firms will, therefore, have the option of
continuing to sell the affected contracts pursuant to
COB.
Some firms felt that this would minimise the cost
implications of the rule change. Firms taking
advantage of this provision, however, will have to bear
in mind that, in making the election, they must record
their decision and they will be obliged to comply with
the other Handbook provisions relevant to COB
regulated sales.
In addition, firms wishing to take advantage of the
election provisions will now have until 5 June 2008 to
comply with the record-keeping requirement. This will
give smaller intermediaries, who are more likely to
want to make use of this option, additional time to
adjust.
In any event, the election provisions may not survive
the FSA's ongoing review of the ICOB sourcebook. The
FSA has indicated that if, as a result of the review,
changes are made to the way in which pure protection
contracts are sold such that the ICOB regime becomes
more onerous than COB, it may no longer be
appropriate for firms to be able to elect to comply
with COB instead.
© Pinsent Masons 2007
This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered.
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For further information please contact Toby Thompson (toby.thompson@pinsentmasons.com), Tel: 020 7667 0266.