Life insurance newsletter: Issue 14 - FINRA - Rules and Regulations

Life Insurance Newsletter 

A regulatory update from the 

Insurance Sector Team 

Issue No.14 – April 2009 

Introduction 

Welcome to the latest edition of the Life Insurance Newsletter, which brings 

you up to date with regulatory developments of the past few months. 

In February we published the 2009 Financial 

Risk Outlook against a backdrop of 

prolonged market volatility. We also 

published our 2009/10 Business Plan, 

detailing our priorities for the coming year. I 

would encourage you to look at both of 

these and consider the implications of the 

messages for your firm. Additionally, I 

would draw your attention to the speech 

made on 12 March by our Chief Executive, 

Hector Sants, on delivering intensive 

supervision and credible deterrence. His 

speech reflects on lessons learned from the 

financial crisis and focuses on the response 

of supervisors and market participants. 

This aside, there have been several important 

developments in the insurance sector. Solvency 

II remains a key focus and we are currently 

consulting on Special Project Fees and 

working to publish our Feedback Statement to 

Discussion Paper 08/4 on Insurance Risk 

Management – the Path to Solvency II in May. 

In this issue: 

• Adviser charging – the choices facing insurers 

Results of the fourth Quantitative Impact 

Study have also been published on both a UK 

and Europe-wide level. 

Several reviews of treating customers fairly 

(TCF) issues around pensions have been 

carried out and we would encourage you to 

read about them, particularly in light of the 

December 2008 TCF deadline. There is also 

news of a new modification by consent, an 

update on the reporting of assets in FSA 

returns and developments in stress and 

scenario testing. We also take this opportunity 

to remind you of some existing requirements 

that may be relevant to your firm. 

I hope you will find this newsletter useful and 

informative and, as ever, the team would be 

happy to receive any ideas for future issues. 

Insurance Sector Leader 

• Pensions and TCF – OMOs, quality of advice and unfair contract terms 

• New modification by consent (INSPRU 2.1.22R) 

• Prudential requirements – reporting of assets in annual returns 

• Consultation Paper on stress and scenario testing 

• New limits for professional indemnity insurance 

• Valuation of bonds 

• Impact of foreign exchange rates 

• COBS 21 requirements – unregulated collective investment schemes 

• Solvency II update 

• Euro-Sterling value 

• New insurance firms 

This is not FSA guidance.

Adviser charging – the choices 

facing insurers 

In November 2008, we published a feedback statement 

on our Retail Distribution Review (RDR) containing 

a package of proposals for the investment market 

(http://www.fsa.gov.uk/pages/Library/Policy/DP/ 

2008/fs08_06.shtml). Our proposals include 

consulting on introducing adviser charging. 

Under our proposals, insurers would not have the 

option to pay adviser firms any other commissions 

(e.g. shares of product charges, or rewards for 

placing business through a platform) and adviser 

firms will have to charge the consumer the same 

amount for their services, regardless of which 

particular product provider they recommend. 

This leaves insurers with important decisions to make. 

Some firms may want to offer facilities for deducting 

adviser charges from investments and will therefore 

need to make changes to their systems. Others may 

choose to let adviser firms make their own 

arrangements to collect charges (potentially involving 

third parties like platforms) and will be working out 

what they need to do to create commission-free 

products. Perhaps most importantly of all, insurers 

will need to think about how they will compete for 

business in future with competition focused so clearly 

on the consumer and not the adviser. 

In the coming months, we will be drawing up 

detailed proposals for consultation. Through 

thinking about and planning their own business 

responses to the RDR, we hope that insurers will 

also be in a position to provide us with wellinformed 

responses to our consultation in June. 

Pensions and Treating Customers 

Fairly (TCF) 

Pensions have a crucial role to play in the lives of all 

consumers and, as part of our focus on TCF, we have 

carried out several reviews of standards in this area. 

Open Market Options – provider literature 

and delays in transfers 

The decision on whether to buy an annuity from a 

current provider or to switch from another insurer 

on the open market can influence an individual’s 

lifetime income. Poor communications from insurers 

may result in people making poor decisions or failing 

to take any action to maximise retirement income. 

Page ◆ 2 

A review of the quality of annuity provider literature 

and alleged delays in the transfer of annuity funds in 

2008 found some good practice, but also that many 

firms needed to make improvements to ensure that 

pension customers were being treated fairly. 

Individual feedback was given to all firms involved in 

the review and some firms were required to carry out 

remedial action by the end of 2008. We have been 

encouraged by the positive response from firms, all of 

whom completed their remedial work within the 

deadline or are on track to meet individual targets 

agreed with their supervision team. 

We also note the good progress made within the ABI’s 

‘Options’ initiative in rationalising and speeding up 

the OMO payment process, to the significant benefit 

of pension consumers. We are encouraged by the 

number of firms that have joined this initiative, but 

note that there are still some firms that have yet to 

participate. We urge all provider firms active in the 

personal pension market to join in this process and 

adopt the new improved transfer procedures. 

Quality of advice given to customers 

switching into a personal pension or 

self-invested personal pension (SIPP) 

Switching into personal pensions and SIPPs from 

existing arrangements can be an appropriate option 

for many people, but this is a complex area where 

consumers rely heavily on advisers. We are currently 

taking action to improve the quality of advice given 

to consumers following a review that found variable 

standards across a sample of 30 firms. We have 

written to over 4,500 firms that advise on pension 

switches, setting out our findings, the standards we 

expect and the action firms should take to ensure 

consumers receive suitable advice. We will undertake 

further assessments in the third quarter of 2009. 

Firms that fail to ensure customers receive suitable 

advice will face further action. 

According to the review, the main causes of 

unsuitable advice were: 

• switches involving extra costs without good reason; 

• recommendations that did not match 

the customer’s attitude to risk and 

personal circumstances; 

• failure to put in place or explain the need for 

ongoing reviews when these were necessary; and 

• loss of benefits from existing pension schemes 

without good reason. 

You can find more information on our website: 

http://www.fsa.gov.uk/pages/Library/Communication/ 

PR/2008/147.shtml. 


Quality of advice for customers contracting 

out of the State Second Pension or 

transferring existing National Insurance 

rebates from a personal pension into a SIPP 

Since 1 October 2008, people are able to contract 

out of the State Second Pension into a SIPP and 

transfer existing National Insurance rebates 

(protected rights) from a personal pension into a 

SIPP. As with all advised transactions, we expect 

firms to ensure that any advice is suitable and based 

on an assessment of customer need, which involves: 

• determining whether there is a genuine need for 

the investment flexibility and control associated 

with a SIPP; 

• a clear explanation of the costs involved; and 

• how the recommendation meets a customer’s 

needs and attitude to risk. 

We have published a policy statement confirming 

that when advising on contracting out into a SIPP, 

firms will also need to provide a comparison of 

projected retirement income from the SIPP against 

potential benefits from the State Second Pension. 

You can find more information on our website: 


PR/2008/109.shtml. 

An update on unfair contract terms – using 

‘indemnify’ in pension wake-up packs 

In November 2008 we published an undertaking 

relating to terms in a pension wake-up pack in 

which the term ‘indemnify’ was used. We thought 

that asking consumers to indemnify firms was 

unlikely to be fair because we did not think that 

most consumers would understand the meaning of 

the term. The Office of Fair Trading has previously 

expressed its view that the word indemnify ‘…if 

understood at all, is likely to be taken as a threat to 

pass on legal and other costs incurred without 

regard to reasonableness’. In addition, we were 

concerned that the term did not explain what costs 

the consumer was indemnifying the firm against. The 

conditions were drafted so broadly that it was not 

clear to us that the firm would only hold consumers 

responsible for losses or costs it incurred if those 

losses were directly attributable to the consumer’s 

carelessness or dishonesty. You can see the 

undertaking in full on our website: 

http://www.fsa.gov.uk/pubs/other/ 

undertaking_abbeylife.pdf. 

We expect all firms to have fair terms in their 

standard contracts with consumers. To have fair 

terms, firms need to comply with the requirements of 

the Unfair Terms in Consumer Contracts Regulations 

1999 and the principle of TCF. We expect firms to 

proactively review their contract terms and we 

encourage all firms to review other firms’ published 

undertakings and consider their own contracts in 

line with them. 

Policy developments 

New modification by consent (INSPRU 

2.1.22R) available to insurance firms with 

exposures to entities which have HM 

Treasury as a common shareholder 

The recapitalisation of several UK banks by HM 

Treasury and the nationalisation of Northern Rock 

and Bradford and Bingley have led to questions 

about whether insurance firms with exposures to 

entities which have HM Treasury as a common 

shareholder should be treating these entities as being 

closely related for the purpose of applying the 

counterparty limits in the above rule. Having 

considered this issue, we have concluded that there 

may be uncertainty over the application of the 

current rules and whether these do indeed deliver 

their intended purpose in the current situation. 

In response we have prepared a rule modification 

that will enable insurance firms with exposures to 

entities which have HM Treasury as a common 

shareholder not to have to treat those exposures as 

being to a group of closely related counterparties. If 

firms want to take advantage of the modification by 

consent described here, they should email 

centralwaiversteam@fsa.gov.uk. 

More detailed information about the waiver can be 

found at: 

www.fsa.gov.uk/pages/Doing/Regulated/Notify/Waiver/ 

Consent/inspru2122.shtml 

Prudential requirements for insurers – 

amendments to FSA returns 

The insurance prudential sourcebooks have been 

updated with effect from 31 December 2008 by 

FSA 2008/66 Prudential Requirements for Insurers 

(Amendment No 3) Instrument 2008 

(http://fsahandbook.info/FSA/handbook/LI/2008/ 

2008_66.pdf). The amendments to IPRU(FSOC) and 

IPRU(INS) apply to all FSA returns for financial 

years ending on or after 31 December 2008. 

This is not FSA guidance. 

Page ◆ 3

The changes: 

• enhance the analysis of assets held by insurers by 

improving the analysis of derivatives in response 

to the current financial crisis; 

• add guidance on assets that embed derivatives; and 

• make several amendments of a technical or 

clarifying nature in response to queries from 

firms and their advisers. 

Further information can be obtained from our online 

Handbook, Handbook Notice 83 

(http://www.fsa.gov.uk/pubs/handbook/ 

hb_notice83.pdf) paragraphs 2.7 to 2.11 and 4.14 to 

4.105 and Chapter 4 of Quarterly Consultation 

(No 17) published in July 2008 

(http://www.fsa.gov.uk/pages/Library/Policy/CP/ 

2008/08_12.shtml). 

Consultation Paper (CP) on stress and 

scenario testing 

In September 2008, our Insurance Sector Briefing 

highlighted the need for insurers to continue to make 

advances in the integration of risk and capital 

management. A key aspect of these advances was 

updating stress and scenario practices. The briefing 

provided some feedback on how – within the 

existing rules and guidance – we expect insurers to 

develop their approach to stress and scenario testing 

in light of recent market events. 

In December 2008 we published a CP on stress 

and scenario testing for banks, investment firms 

and insurers 

(http://www.fsa.gov.uk/pubs/cp/cp08_24.pdf). A key 

aim of the CP is to ensure that firms have stress and 

scenario testing practices in place that allow for better 

informed and more timely decision-making by their 

senior management. We have proposed several changes 

to our Handbook rules and guidance to achieve that 

outcome. The following are relevant to insurers. 

• Reverse-stress testing: We have proposed the 

introduction of a reverse-stress test requirement, 

whereby a firm must identify and assess the 

scenarios most likely to cause its current business 

plan to become unviable. 

• Capital planning: We have proposed 

clarifications of our general prudential 

sourcebook rules and guidance on stress and 

scenario testing in the context of capital 

planning, typically over a three to five-year time 

horizon. These set out the requirement for a firm 

to project the capital necessary to cover all its 

material risk exposures and to support any new 

business plans, taking account of the effects of 

potential adverse economic and business cycles. 

• Further proposed guidance on pension obligation 

risk and group risk. 

A guide to the key messages for insurers can be 

found in Annex 3 of the CP. The closing date for 

responses is 31 March 2009. 

Passporting and reinsurance 

The Reinsurance Directive (RID) extended a system 

of authorisation and financial supervision to all pure 

reinsurers with their head offices in EEA member 

states. Our Handbook was amended on 31 

December 2006 to incorporate the prudential 

provisions of the RID. HM Treasury completed the 

implementation of the RID on 10 December 2007 by 

making changes to the Financial Services and 

Markets Act (the Act) and regulations made under it. 

We have recently made some further updates within 

the Supervision Manual with effect from 6 March 

2009 as follows: 

• Updated guidance on passporting changes to 

the Act. 

• Introduction of a basic notification requirement 

on UK pure reinsurers, which is not a 

requirement under the Act and not a precondition 

of carrying on business through a branch in 

another EEA state. The requirement enables us to 

monitor the activities of UK pure reinsurers and 

to carry out our obligations under the CEIOPS 

general protocol. UK pure reinsurance firms had 

already voluntarily complied with the notification 

prior to consultation. 

• Clarification of our guidance on the exercise of 

Treaty Rights by EEA direct insurers in respect 

of their reinsurance business. 

Further details may be found in FSA 2009/9 

Supervision Manual (Passporting And Reinsurance) 

(Amendment) Instrument 2009 

(http://fsahandbook.info/FSA/handbook/LI/2009/ 

2009_9.pdf), Handbook Notice 85 paragraphs 2.10 

to 2.14 and 4.7 to 4.10 

(http://www.fsa.gov.uk/pubs/handbook/ 

hb_notice85.pdf) and CP08/16 Quarterly 

Consultation (No 18) Chapter 4 

(http://www.fsa.gov.uk/pubs/cp/cp08_16.pdf). 

Page ◆ 4 


Professional indemnity insurance (PII) – 

new limits 

From 1 March 2009, there are new PII minimum 

indemnity limits for intermediaries who give advice 

on or sell insurance-based products (both investment 

and non-investment types). The limits have been 

changed, as required by the Insurance Mediation 

Directive (IMD), in line with the increase in the 

European Index of Consumer Prices over the 

five-year period since the IMD came into effect. 

The minimum limits for firms have been raised to 

€1,120,200 for a single claim (currently €1 million) 

and €1,680,300 in aggregate (currently €1.5 

million). PII indemnity limits for firms not subject to 

the IMD remain unaffected. 

More information is available on our website at: 

http://www.fsa.gov.uk/smallfirms/good_practice/ 

protecting_your_business/PII_limits.shtml. 

Reminders of existing requirements 

Valuation of bonds 

Some insurers may have experienced difficulty with 

the valuation of their assets and in particular 

corporate bonds because of the considerable 

reduction in market activity in many asset classes. 

We would expect firms to have regard to guidance of 

the IASB’s Expert Advisory Panel (published in 

October 2008) in this regard. Mark-to-market 

valuations are still likely to be the norm, but if this 

guidance were to steer some firms towards adopting 

a mark-to-model approach for valuing some of their 

assets, then they may need to develop their 

modelling capability and enhance the relevant 

internal controls on this activity, including 

appropriate involvement of senior management. 

Impact of foreign exchange rates 

Given the scale and speed in the decline of the value 

of the Sterling and the changes in the relative 

strengths and weaknesses of various currencies, it is 

important that firms with material currency exposures 

recognise fully, and reflect in their ICAs, current and 

potential future risks that could arise from future 

foreign exchange movements. Consideration should 

apply not only to the reported figures, but also to 

underlying currency exposures and risks that may not 

be fully reflected under various reporting 

methodologies. 

COBS 21 requirements: unregulated 

collective investment schemes (CIS) 

The Permitted Links rules (COBS 21) allow up to 

20% of assets used to back unit-linked retail 

policyholder benefits to be held in unregulated CISs, 

provided that: 

• all the assets held within the unregulated CIS are 

themselves permitted links; and 

• all the other requirements of COBS 21 are met. 

The purpose of the 20% limit is to prevent the risk 

of marketing restrictions on the sale of unregulated 

CIS to retail consumers being circumvented by 

placing it in a unit-linked life or pension fund, which 

is then marketed to retail policyholders. The limit 

applies to all funds except those available only to 

institutional-linked policyholders. 

Recently, some firms have notified us that their 

holdings in unregulated CIS have risen above the 

20% limit. While the new Permitted Links rules are 

designed to operate more flexibly, exceeding the 

20% is still regarded as a breach and we expect 

firms to notify us and then submit a plan to take 

reasonable and timely steps to restore compliance. 

We would not expect firms to act in a way likely to 

aggravate the breach. 

Gearing 

Gearing on linked property funds must not exceed 

10% of the gross asset value of a linked fund. 

Unregulated CIS that invest in property are often 

highly geared. Firms must ensure that the gearing in 

unregulated CIS contained within unit-linked funds 

does not put them in breach of the overall 10% 

gearing limit. If a breach does occur, firms must 

notify us in writing as soon as they become aware of 

the breach and submit timely and coherent plans for 

bringing their funds back into compliance. 

Solvency II update 

The negotiations between the Council of Ministers 

and the European Parliament (EP) on the final 

wording of the legislation needed to underpin the 

new regime are still ongoing in Brussels. The aim is 

to find an agreement before the EP elections in June. 

In the meantime, work has started on the 

development of technical rules and guidance needed 

to implement Solvency II (the Level 2 implementing 

measures). The CEIOPS consultation schedule for 

2009 will cover a number of the major areas of the 


Page ◆ 5

new rules and will provide a useful early indication 

of what the Level 2 implementing measures might 

look like. This should be helpful for firms in their 

preparations to be compliant in time for the new 

rules. Further details on the consultation schedule 

can be found on our website: 

http://www.fsa.gov.uk/pubs/international/ 

solvency_papers.pdf. 

Quantitative Impact Study 4 (QIS 4) 

QIS 4, designed to inform the development of the 

new European Standard Formula and the rules for 

technical provisions, was conducted between April 

and June 2008. There was good participation from 

the UK industry in this exercise and it has provided 

us with useful information on the possible impact of 

the new standards. This insight is allowing us to 

better reflect any UK-specific issues in the 

discussions we have with our European colleagues in 

CEIOPS. The UK country report, with details on the 

key findings for those UK firms who participated, 

was published in December 2008. The report can be 

found on our own website at: 

http://www.fsa.gov.uk/pubs/international/ 

QIS4_report.pdf. The EU-wide results were outlined 

in a CEIOPS published in November 2008: 

http://www.ceiops.eu/content/view/118/124/. 

Discussion Paper (DP) 08/4: The Path to 

Solvency II 

To assist the UK industry in its preparations for the 

implementation of Solvency II, we published DP08/4 

in September 2008. The DP draws attention to some 

of the major changes that Solvency II will bring to 

existing UK regulatory requirements and practice, 

and identifies areas in which firms might best focus 

their preparations through the coming 12-18 

months. We consider this publication essential 

reading for most insurers and reinsurers. We 

recommend that as a minimum, Chapter 2 is 

presented to firms’ senior management and the 

board, as it outlines their responsibilities and 

indicates how they might delegate them. 

The period for firms to respond to the DP closed on 

31 December 2008. The level of responses was very 

encouraging and we are grateful to all those that took 

the time to provide us with detailed feedback. We plan 

to publish our Feedback Statement in early May. 

Solvency II Special Project Fees (SPFs) 

In our Fees CP (CP09/7) published in February, we 

set out proposals to charge an SPF to recover part of 

our costs relating to Solvency II in the financial year 

2009/10. In Chapter 10 of the CP we propose to 

levy £4.2m to recover our Solvency II 

implementation costs from the firms likely to be 

affected by the Directive. This is in addition to the 

SPF we consulted on in CP08/18 (Chapter 6) to 

recover £3.2m in 2009/10 for work related to the 

Internal Model Approval Process (IMAP). This 

IMAP-SPF will be applied to larger insurers that are 

likely to seek to use the internal model approach for 

most or all of their business. The firms that we have 

identified as within scope of the IMAP-SPF have 

been written to on an individual basis. Overall we 

are proposing to recover a total of £7.4m in 2009/10 

for Solvency II-related implementation costs. 

Euro-Sterling value for insurance 

regulatory purposes 

As we state on our website, the Sterling value of the 

Euro for insurance regulatory purposes for the 

12-month period beginning 31 December 2008 is 

78.690 pence. You should use this value for 

calculating capital resources requirements and it will 

apply to the relevant regulatory returns that insurers 

are required to deposit under FSA rules. 

Rule 2.1.33R of the General Prudential Sourcebook 

(GENPRU) and rule 1.1.50R of the Prudential 

Sourcebook for Insurers (INSPRU) state that: 

• For the purposes of the base capital resources 

requirement, INSPRU 1.1.45R(1) and INSPRU 

1.1.47R(1), the exchange rate from the Euro to 

the pound sterling for each year beginning on 31 

December is the rate applicable on the last day of 

the preceding October for which the exchange 

rates for the currencies of all the European 

Union member dates were published in the 

Official Journal of the European Union. 

Rule 4.7(7) of IPRU (FSOC) states that: 

• For the purposes of the rules in Chapter 4 and 

the definition of non-directive friendly society, 

the exchange rate from the Euro to the pound 

sterling for each year beginning on 31 December 

is the rate applicable on the last day of the 

preceding October for which the exchange rates 

for the currencies of all European Union member 

states were published in the Official Journal of 

the European Union. 

This year’s value was set on 31 October 2008 and 

published in the Official Journal on 1 November 2008. 

Page ◆ 6 


It is important to note that this rate applies from 

31 December 2008 (not 1 January 2009) and is 

therefore the rate to be applied in calculations for 

the regulatory returns carried out in respect of the 

2008 calendar year-end. 

This information can be found on our website: 

http://www.fsa.gov.uk/Pages/About/Teams/Insurance/ 

value/index.shtml. 

New insurance firms 

14 August Chubb Insurance Company of 

Europe SE (481725) 

3 October Harbor Point Re Ltd (481754) 

Useful publications 

Financial Risk Outlook 2009: 

http://www.fsa.gov.uk/pubs/plan/ 

financial_risk_outlook_2009.pdf 

Business Plan 2009/10: 

http://www.fsa.gov.uk/pubs/plan/pb2009_10.pdf 

Speech by Hector Sants on ‘Delivering intensive 

supervision and credible deterrence’ (March 2009): 


Speeches/2009/0312_hs.shtml 

Speech by Sarah Wilson on ‘Treating customers 

fairly: issues at Board level’ (5 February 2009): 


Speeches/2009/0205_sw.shtml 

Speech by Sarah Wilson on ‘Capital, risk and 

strategy: the regulator’s view of life insurance’ 

(November 2008): 



Speech by Sarah Wilson on ‘TCF and with-profits: 

the FSA’s perspective’ (29 October 2008): 



Contact us 

If you have any queries on this issue of the 

newsletter, please contact: 

Jenny Clark 

jenny.clark@fsa.gov.uk 

020 7066 2986 


Page ◆ 7

Life insurance newsletter: Issue 14 - FINRA - Rules and Regulations

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