Global Insurance and Reinsurance Bulletin

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1 March 2009 Issue 81 Global Insurance and Reinsurance Bulletin Introduction Welcome to the March issue of the Global Insurance and Reinsurance Bulletin the first issue of What lies ahead for the insurance and reinsurance markets in 2009? The financial crisis that has spread across the globe will no doubt continue to impact the financial sector and global economy throughout the year but how will this affect insurers and reinsurers who have not yet been as badly, or indeed directly, affected as other areas of the financial sector. We expect to see issues being dealt with as companies become more litigious in a hardening market, and we expect to see an increase in D&O and E&O claims due to the development of investigations in corporate responsibility relating to the financial crisis. In terms of regulation, one major issue is that of commission disclosure in the UK: the trade bodies looking at the issue of Contents commission disclosure will be reporting back to the FSA with the expectation that the FSA will endorse their suggested guidelines; and in New York Eric Dinall, the Insurance Superintendent, has recently made a proposal for disclosure. Another hot topic for 2009 is that of regulatory compliance, including for example, OFAC sanctions and the need for the insurance and reinsurance market to carry on business in compliance with these regulations. To this end, we enclose a special supplement with this issue of the Global Insurance and Reinsurance Bulletin. n Nick Atkins and Sara Bradstock Editors Nick Atkins T +44 (0) Sara Bradstock T +44 (0) Legal update UK 2 Legal update US 6 Legal update France 12 Legal update Spain 15 Legal update Germany 16 Legal update Italy 18 Legal update Latin America 19 Legal update China 20

2 2 Global Insurance and Reinsurance Bulletin March 2009 Issue 81 Legal update UK: Recent cases TRIGGER FOR EMPLOYER S LIABILITY COVER IN ASBESTOS CASES IS EXPOSURE In the judgment of six Employer s Liability test cases arising from claims of former employees who suffered and died from mesothelioma resulting from the inhalation of asbestos fibres during employment, Mr Justice Burton found that the insurers on risk at the time of the former employee s exposure to asbestos were liable to provide an indemnity. The policy in force as at the date of the tumour was not responsive. The phrase injury or disease sustained or contracted in the policy wording was synonymous with injury caused and therefore it was the exposure or date of inhalation of asbestos which triggered the liability cover. Durham v BAI (Run Off) Ltd (In Scheme of Arrangement) and other cases Burton J 21 November 2008 NON-COMPLIANCE WITH A CONDITION PRECEDENT? The insured had liability insurance cover, the terms of the policy provided that the insured was obliged to give immediate written notice with full particulars of any occurrences which may give rise to indemnity under the insurance. Following a fire which damaged the insured s vessel in March 2004, the defendant notified its intention to claim on 22 March The insurers refused to accept the claim and sought a declaration that they were not liable. The Judge found the insured had not complied with the condition as he could have given notice of his claim to insurers in April 2004 and the condition was a condition precedent. Aspen Insurance UK Ltd and others v Pectel Ltd [2008] EWHC 2804 (Comm) Queen s Bench Division Teare J 18 November 2008 CONSTRUCTION OF WARRANTY IN MARINE INSURANCE A policy of marine insurance provided that Warranted Owner and/or Owner s experienced skipper on board and in charge at all times and one experienced crew member. The insured vessel was returned to the quay and all crew members had left the vessel, following which it caught fire. The insured s claim was denied for breach of warranty. At first instance the court found for insurers on the basis that the at all times warranty had not been complied with. The decision was reversed on appeal the literal meaning of words in a warranty had to be restricted if they produced a result inconsistent with a reasonable and businesslike interpretation of that warranty. Pratt v Aigaion Insurance Company Queen s Bench Division Sir Anthony Clarke MR, Maurice Kay and Stanley Burton LJJ 27 November 2008 DISPUTE TO BE HEARD IN ENGLAND The parties entered into an agreement which contained a provision for the English courts to have jurisdiction for any disputes and a release from suit clause although fraud would be carved out from the release from suit. An issue arose as to whether claims for fraud had to be brought in England. The court held that all disputes, including claims of fraud, were under jurisdiction of the English courts and that it was not appropriate to widen the carve out for fraud to include a claim of dishonest breach of fiduciary duty. The carve out contemplated a claim which would result in a finding of fraud, not a breach of fiduciary duty. Cavell USA Inc and another v Seaton Insurance Co and another Commercial Court Gross J 11 December 2008 INTERPRETATION OF EXCLUSION CLAUSE IN TRAVEL INSURANCE POLICY The insurers provided travel insurance which excluded hazardous activities. F informed the insurers that he would be scuba diving whilst on holiday. F went cave diving whilst on holiday, suffered decompression and required medical treatment, which was provided by the claimants. Insurers refused to pay the claimants alleging that F was not covered by the policy as cave diving was excluded as a hazardous activity. At first instance the Judge found for the insurers but his decision was reversed on Appeal. F had disclosed that he would be scuba diving, once he had been accepted by insurers as covered, then the policy had to be read as excluding hazardous activities, save for scuba diving, of which cave diving was a form. Quantum Processing Services Company v Axa Insurance UK PLC Court of Appeal, Civil Division Waller, Thomas and Aikens LJJ 15 December 2008 INTERPRETATION OF Section 109(1) OF FSMA 2000 Two companies sought transfers of business under Part VII of the Financial Services and Markets Act 2000 ( FSMA 2000 ). An independent actuary was preparing a scheme report but it was not ready at the time the companies applied to waive compliance with certain requirements. The court decided that it had jurisdiction to grant the waivers sought and that Section 109(1) of the FSMA 2000 was not to be read as implying a requirement that the application be accompanied by a scheme report at the time of issue. Names at Lloyd s for 1992 and prior years of account Chancery Division Floyd J 3 December 2008

3 Global Insurance and Reinsurance Bulletin March 2009 Issue 81 3 ORDER FOR COSTS WHERE CLAIMANT RECOVERED FRACTION OF CLAIM At trial, a claimant won damages of 149,249 plus interest. The claim had been for 2 million and the claimant had incurred costs of 1 million. It was held that the normal costs rule applied and that the claimant was entitled to recover its costs from the defendant. Biffa Waste Services Ltd and another v Maschinenfabrik Ernst Hese Gmbh and Others TCC Ramsey J 31 October 2008 SCOPE OF A POLICY EXCLUSION FOR FAILURE OF MACHINERY The claimant was insured against employer s liability and public liability. An exclusion clause stated that the insurer would not indemnify in respect of any claim arising out of the failure of any fire or intruder alarm switch gear control panel or machinery to perform its intended function. The insured supplied fire suppression equipment at premises and a fire occurred but the insured s system failed to operate. The fire spread causing damage. The insurer declined to indemnify the insured and at first instance the Judge upheld the insurer s refusal. The Court of Appeal reversed the decision in part, saying that not all of the equipment could be described as machinery and therefore whether the exclusion operated would depend on the reason for the equipment failure. Reilly v National Insurance & Guarantee Corporation Ltd Court of Appeal, Civil Division Sir Anthony May, Thomas and Moore-Bick LJJ 19 December 2008 SCOPE AND EXISTENCE OF A PROFESSIONAL S DUTY OF CARE The second claimant received advice from their accountants on tax matters in relation to the sale of a business in April The second claimant incorporated a company called Pegasus and subscribed capital in return for shares with the aim of qualifying for certain tax reliefs. In October 2002, Pegasus discovered that it would be liable for capital gains tax and the claimants alleged that the accountants should have advised the second claimant to incorporate subsidiaries rather than to subscribe to shares in Pegasus. The court ruled that the accountants owed Pegasus no duty of care either in contract or in tort. The second claimant s claim against the accountants was time barred. Pegasus Management Holdings S.C.A. and another v Ernst & Young (a Firm) and another Chancery Division Lewison J 11 November 2008 REASONABLENESS OF CONTRACTORS COMBINED POLICY CONDITION A plumbing company was sued for losses resulting from a fire that had allegedly been caused by negligent use of a blow torch. Its insurers denied liability relying on a breach of policy condition that the area in which the [blow torch] is to be used is cleared of loose combustible material. The Judge rejected the insured s argument that the condition was unreasonable and so vague as to be meaningless. What constitutes an area is a question of degree to be determined on the facts of each case. Currie and Others v CK Heating Ltd (National Insurance & Guarantee Corporation Ltd, third party) Sheriff Court, Glasgow Sheriff Principal E Bowen QC 22 October 2008 WHETHER PARTIES HAD CONCLUDED A BINDING AGREEMENT During negotiations for a reinsurance contract the reinsurer asked the broker to forward soonest slip for our agreement. The broker did so but omitted from the slip the class warranty which had been stipulated by the reinsurer and agreed by the parties. The reinsurer failed to notice the omission and agreed to be bound. An issue arose as to whether the reinsurer agreed to cover with or without the class warranty clause. The reinsurer submitted that the exchanges had not resulted in a contract because the offer was on the basis of the clause which was not there and that the acceptance was on the basis previously quoted which had included the warranty clause. The Court of Appeal upheld that there was a contract, but one which did not include the class warranty. Allianz Insurance Co Egypt v Aigaion Insurance Co SA Court of Appeal, Civil Division Laws, Rix and Moses LJJ 19 December 2008

4 4 Global Insurance and Reinsurance Bulletin March 2009 Issue 81 Continued INSURERS MAY RECOVER INTEREST ON COSTS The court had to decide whether an unsuccessful claimant should pay interest on costs that had been paid by the defendants insurers. A claim for negligence had been dismissed. The defendants insurers had incurred costs by paying bills on account to the defendants legal advisors. The court may order a party to pay interest on costs. Akenhead J held that the court s discretion to allow interest on costs for a successful party could be exercised where those costs had been incurred by the party s insurers. Where a claim was entirely voluntarily funded by a third party, it might not be appropriate to award interest, but this was an appropriate case in which to make a compensatory award of interest on costs. Fosse Motor Engineers Ltd v Conde Nast & National Magazine Distributors Ltd TCC Akenhead J 20 August 2008 MISREPRESENTATION AND EXTENSION OF REINSURANCE TREATY BY ENDORSEMENT Reinsurers avoided two treaties of energy reinsurance. One treaty was written in 1996 for 12 months, extended by endorsement for a further seven months. The other treaty was written in 1998 for 12 months. Prior to the conclusion of the 1996 treaty, the reinsured s broker sent a fax with a representation about the amount of the deductible that the reinsured normally required on its insured s business. The Court of Appeal considered whether that representation continued to apply to the 1997 endorsement and the 1998 contract and decided that it did not. If it had been, it followed that if the 1996 treaty could be avoided then so could the 1997 endorsement which extended it. The Court of Appeal held that extension endorsements can be set aside not only if they themselves are the subject of non disclosure or misrepresentation but if the contract they extend has also been procured by the same. Limit No 2 Limited v AXA Versicherung AG Court of Appeal, Civil Division Ward, Longmore and Jackson LJJ 12 November 2008 EMPLOYER MAY OWE DUTY TO WARN EMPLOYEES OF OBVIOUS RISKS The claimant was employed by the defendant and in the course of trying to reach an item on a shelf, fell from the plastic box he was standing on and broke his ankle. The claimant brought an action against his employer, alleging that the employer should have told him that the use of the plastic box was unsafe. The defendant maintained that there were other, safer, methods available to access the shelf and the claimant had not heeded a specific warning not to stand on the boxes. At first instance and on appeal, the court found in favour of the defendant in deciding that the employee had taken a risk for which only he was to blame. However, the Court of Appeal observed that an employer may be under a duty to warn against even an obvious risk although on the facts of the case an adequate warning had been given. Ammah v Kuehne & Nagal Logistics Ltd Court of Appeal, Civil Division Ward, Richards and Aikens LJJ 22 January 2009 n

5 Global Insurance and Reinsurance Bulletin March 2009 Issue 81 5 Legal update UK: Regulatory and legislative developments THE FSA CONCLUDES ITS REVIEW OF INSURANCE COMPARISON WEBSITES The FSA has announced that a further review of insurance comparison websites has found that many sites have made significant improvements and are consistently providing clear, fair and not misleading information, but some firms need to go further to address a few specific concerns. However, the FSA says that it has identified two specific areas where some firms need to make further improvements including; obtaining better information from insurers about the level of excesses that apply to insurance policies; and making clearer the assumptions about consumers needs and circumstances that some websites use to obtain quotes. In addition, the FSA carried out a review of aggregator firms advertising and found the vast majority of firms have clear, fair and not misleading adverts. PAYMENT PROTECTION INSURANCE: COMPETITION COMMISSION PUBLISHES PROVISIONAL DECISION ON REMEDIES The Competition Commission (CC) has published for consultation its proposed remedies designed to increase competition in the Payment Protection Insurance (PPI) market. In its provisional findings report published in June 2008, the CC concluded that distributors of PPI, such as banks, mortgage providers and credit card providers, face little or no competition when selling PPI to their credit customers. The CC is now proposing a package of measures which includes: a prohibition on the sale of PPI by a distributor to a customer within 14 days of the distributor selling credit to that customer; credit providers will be required to provide a personal PPI quote, which will clearly state the cost of the PPI policy individually and when added to the credit product; a prohibition on the selling of single-premium PPI policies, which act as a barrier to customers switching; a requirement on all PPI providers to provide certain information and messages in PPI advertisements; a requirement on distributors to advertise PLPPI (personal loan) and SMPPI (second-charge mortgage) alongside their respective credit advertisements; a requirement on all PPI providers to provide certain information on PPI policies to the FSA; and a requirement on all PPI providers to provide an annual statement for PPI customers. LEGISLATIVE REFORM ORDER TO AMEND LLOYD S ACT 1982 COMES INTO FORCE HM Treasury has announced that the Legislative Reform Order (LRO) that will modernise the operation of Lloyd s of London has come into force. The LRO updates governance provisions in the Lloyd s Act 1982, to reflect changes in the regulatory environment, and to remove restrictions which get in the way of the future development of the insurance market. n Nina Tulloch T +44 (0)

6 6 Global Insurance and Reinsurance Bulletin March 2009 Issue 81 Legal update US: Recent cases STATE PROHIBITION ON INSURANCE ARBITRATIONS DOES NOT TRUMP NEW YORK CONVENTION A federal appeals court overturned a lower court s decision to block a reinsurance arbitration based on a Louisiana state law that makes arbitration agreements in insurance contracts unenforceable. The lower court said the Convention on Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) did not apply because of the McCarran-Ferguson Act, which provides that no Act of Congress other than a law relating to insurance will invalidate a state law that regulates insurance. The appeals court said that because the New York Convention is a self-enforcing treaty, it is not an act of congress. Thus, the appeals court said, the New York Convention overrides a conflicting state law. The Second Circuit Court of Appeals, which hears cases from New York and Connecticut, has reached the opposite conclusion. Safety National Casualty Corporation v Certain Underwriters at Lloyd s US Court of Appeals for the Fifth Circuit 29 September 2008 NON-INSURED POLICYHOLDER UNABLE TO RECOVER FOR INSURER S BAD FAITH A federal court of appeals ruled that a policyholder who is not covered by the policy may not recover for an insurer s bad faith failure to settle a claim. The non-insured policyholder was a medical clinic that obtained and paid premiums on a medical malpractice policy for a doctor. The doctor and clinic were sued for medical malpractice. The insurer refused to accept settlement offers, and the verdict was substantially higher than both the settlement offers and the policy limits. The clinic and the doctor sued the insurer for bad faith failure to settle. The court struck out the clinic s claim, on the grounds that the insurer s duty to settle in good faith did not extend to the clinic. The court said the law protects bargained-for insurance benefits, and allowing recovery by a non-insured policyholder would give the policyholder benefits it never bargained for. Additionally, the court said, the clinic was free to settle on its own behalf. Iowa Physicians Clinic Medical Foundation v Physicians Ins. Co. of WI US Court of Appeals for the Seventh Circuit 31 October 2008 WHICH COURT HEARS PETITION ON AWARD IS QUESTION FOR ARBITRATION PANEL A federal court ruled that an arbitration panel must decide which court will hear a petition to enforce the panel s award. The arbitrators issued a preliminary award ordering a reinsurer to post pre-judgment security, and the insurer brought an action to enforce in Massachusetts federal court. The reinsurer argued that the Massachusetts court lacked jurisdiction, and that the action should be brought in Missouri. The reinsurance agreement provides for enforcement of awards by any court of proper jurisdiction, but also refers to the law and courts of Missouri in respect of an unrelated issue. The court refused to hear the dispute, saying the arbitrators should decide which court will hear the petition. Lyndon Property Insurance Co. v Founders Insurance Co. US District Court for the District of Massachusetts 24 November 2008

7 Global Insurance and Reinsurance Bulletin March 2009 Issue 81 7 NO COVERAGE FOR PROGRESSIVE DISEASE MANIFESTING PRIOR TO INCEPTION OF POLICIES A state appeals court held that an insurer has no duty to defend or indemnify policyholders where the alleged injuries manifested before the inception of the insurance policy. The policyholder was sued based on allegedly continuous bodily injuries as a result of employees inhalation of the flavouring agent diacetyl. The insurers denied coverage after it determined the plaintiffs injuries in the underlying suits were manifested before the relevant insurance policies were issued. The appeals court found no duty to defend or indemnify based on the state s continuous trigger doctrine, which provides that injury occurs continuously from environmental contamination through manifestation of the disease. It did not matter, the court said, that further progression of the disease may have occurred while the relevant policies were in effect. Polarome Int l., Inc. v Greenwich Ins. Co. New Jersey Court of Appeals 17 December 2008 ADDITIONAL INSURED S LACK OF NOTICE PRECLUDES COVERAGE A state appeals court ruled that late notice barred an additional insured from recovery, even if it did not know about the coverage until after settlement. The additional insured, a subcontractor, had a contract requiring the main contractor to name it as an additional insured. The subcontractor was sued after a construction accident. The subcontractor notified its own insurers and settled the suit before trial. The main contractor s insurer was aware of the lawsuit but did not participate in the defence or settlement. Later, the subcontractor received the main contractor s policy and requested coverage. The appeals court ruled that the insurer could rely on its notice and settlement-without-consent clauses to deny the claim, even though it had notice of the lawsuit, and even though the additional insured did not know about the coverage. It said the insurer was prejudiced by the late notice, because it could not participate in the defence and settlement. Maryland Casualty Co. v American Home Assurance Co. Texas Court of Appeals 9 October 2008 INSURANCE EXHAUSTED BY PAYING ANNUAL LIMIT TIMES NUMBER OF YEARS A federal court ruled that an insurer s liability ended after it paid an amount equal to the annual policy limit multiplied by the number of policy years. The insured was sued by dozens of asbestos-related bodily injury claimants, and the insurer paid over $4.4 million in indemnity and defence costs without allocating those losses to specific policies. The insurer sued for a declaration that policy limits were exhausted, since the policies covered seven years with an annual limit of $500,000. It asked the court to order the insured to return payments in excess of $3.5 million. The court rejected the policyholder s argument that the insurer failed to prove exhaustion of each policy because it had not allocated claims to particular policies. Each claim involved asbestos exposure prior to the coverage period, simultaneously triggering all policies in force during the progressive disease process. The court rejected the insured s claim that public policy prevented the insurer from recovering overpayments, saying the insured had assumed a risk by purchasing insurance insufficient to cover its losses. Liberty Mutual Fire Insurance Co. v Flexo Supply Company, Inc, et al US District Court for the Eastern District of Missouri 19 September 2008

8 8 Global Insurance and Reinsurance Bulletin March 2009 Issue 81 Continued INSURER IN COVERAGE SUIT BOUND BY REASONABLE GOOD FAITH SETTLEMENT A state supreme court held that a reasonable and good faith settlement by the insured establishes the fact of liability and the presumptive amount of damages against the insurer, even if the insurer acted in good faith. The insured was sued for water damage due to faulty construction. The insurer provided a defence, but declined to participate in the final round of settlement discussions. The parties settlement was approved by the trial court as reasonable. The insurer sued for a declaration that did not have to pay its share of the settlement. It argued that the insured would have prevailed in the underlying case. The high court ruled that an insurer is bound by the results of a judicially-approved settlement in the underlying lawsuit, absent a showing of collusion or fraud. Mutual of Enumclaw Ins. Co. v T&G Construction, Inc. Supreme Court of Washington 23 October 2008 CLAIMS REVIEW NOT LIMITED BY AMOUNT OF SETTLEMENT A federal district court rejected limitations on claim inspection imposed by a bankruptcy court overseeing the policyholder s bankruptcy. The insurer paid $5.5 million into a trust fund for asbestos claims. Under the agreement, the insurer could review claims subject to payment or potential payment with the proceeds. The trust asked the bankruptcy court to limit the review, and the bankruptcy court ruled the insurer could see and copy a random selection of claims totalling $5.5 million, but could not share them with third parties. The district court disagreed, finding the language of the agreement did not permit the bankruptcy court to tie the claim selection to the amount actually paid. The court agreed that the insurer could copy files, saying that retaining copies and discussing them internally was part of a meaningful review, and also upheld the restriction on sharing documents with third parties. In Re: The Babcock & Wilcox Co. US District Court for the Eastern District of Louisiana 31 October 2008 BROKER LIABLE FOR IRRECOVERABLE REINSURANCE A jury found that a broker must reimburse an insurer for irrecoverable reinsurance on fronted insurance policies. The broker set up the fronting arrangement and obtained reinsurance on the insurer s behalf. Following an arbitration, the reinsurer avoided almost $17 million in reinsurance liabilities. The insurer sued the broker, saying the broker caused the reinsurance to fail by misrepresenting the loss history. The jury found that the broker made negligent misrepresentations in its dealings with the reinsurer, and awarded the insurer $24 million in damages, attorney fees, and costs. United National Insurance Co. v Aon Ltd. US District Court for the Eastern District of Pennsylvania 4 December 2008

9 Global Insurance and Reinsurance Bulletin March 2009 Issue 81 9 NO DUTY TO DEFEND ALCOHOL MANUFACTURERS AGAINST CLASS ACTIONS A federal court of appeals ruled that an insurer has no duty to provide a defence for class actions alleging intentional commission of harmful acts. The class action plaintiffs alleged that the policyholders caused human suffering and economic injury by deliberately marketing alcoholic beverages to underage consumers. The trial court found that the insurer had no duty to defend because the underlying complaints did not seek redress for bodily injury. The Court of Appeals disagreed, saying the underlying claims could be interpreted as seeking relief for deaths and injuries sustained by underage drinkers and others. However, the appeals court reasoned, the insurer had no duty to defend because the policy excluded expected or intended bodily injury, and the plaintiffs expressly alleged intentional conduct by the policyholders. Adolph Coors Co. and Coors Brewing Co. v Truck Insurance Exchange Court of Appeals for the District of Columbia 26 November 2008 PANEL WITHOUT POWER TO SUBPOENA THIRD PARTY DOCUMENTS The federal court of appeals in New York held that an arbitration panel does not have the power to subpoena documents from a third party intermediary. The intermediary purchased an in-force life insurance policy on behalf of a trust, which assumed the premium payments. The intermediary also arranged contingent insurance for the trust, which would pay if the original policyholder outlived his projected life expectancy. An arbitration began over the placement of the contingent insurance and the insurer sought documents from the intermediary. When the intermediary refused, the arbitrators issued a subpoena ordering the intermediary to turn over the documents. A lower court granted the subpoena, but the appeals court reversed, saying the language of the Federal Arbitration Act does not allow a panel to issue third party subpoenas. It said the panel had an alternative -- it could have issued a subpoena to the intermediary to appear at a hearing and produce the documents. Life Receivables Trust v Syndicate 102 at Lloyd s of London US Court of Appeals for the Second Circuit 25 November 2008 ARBITRATION MUST RESTART AFTER PANEL MEMBER RESIGNED A federal court ruled that arbitration must start anew after a panel member resigned. Before the final hearing, the Panel issued a Summary Judgment Award deciding one issue in favour of the insurer. The Panel later agreed to reconsider that award based on new arguments from the parties, but before it could do so one of the arbitrators resigned for health reasons. The insurer argued that arbitration should continue with a new panel member. The court disagreed, citing the general rule that if an arbitrator dies or resigns, the arbitration must start over. Although arbitration can sometimes continue if a partial, final award has been rendered, the court said, in this case the arbitrators had agreed to reconsider their award. If the arbitrator was replaced, the existing panel members would have heard the arguments on the original award, but the new arbitrator would not. Ins. Co. of North America, et al v Public Service Mutual Ins. Co. US District Court for the Southern District of New York 10 December 2008 n

10 10 Global Insurance and Reinsurance Bulletin March 2009 Issue 81 Legal update US: Regulatory and legislative developments NAIC ADOPTS THE REINSURANCE REGULATORY MODERNISATION FRAMEWORK PROPOSAL At its Winter National Meeting in December, the National Association of Insurance Commissioners ( NAIC ) adopted a Proposal, which provides for two new classes of reinsurers in the US US-domiciled national reinsurers and non-us-based port of entry (POE) reinsurers which would be regulated by a single US state. Instead of a 100% collateral requirement for all non-us reinsurers, the Proposal imposes collateral requirements based on a sliding-scale tied to the POE reinsurer s financial strength ratings. The existing credit for reinsurance rules would continue to apply to reinsurers that choose not to become either national or POE reinsurers. The Proposal provides for the creation of a new NAIC Reinsurance Supervision Review Department ( RSRD ), which will evaluate regulatory regimes of other countries to identify jurisdictions from which reinsurers could seek POE status and will also establish standards for a state to be certified to regulate reinsurance on a cross-border basis. The Proposal recommends federal enabling legislation for the RSRD. The changes under the Proposal will likely take several years to take effect. Moreover, for life reinsurance, the Proposal states that it would not be applicable to life reinsurance contracts until the earlier of 24 months from the effective date of this proposal, or the implementation of US principles based reserving standards for life insurance to co-ordinate with life insurance reserve reform efforts. RESERVE AND CAPITAL RELIEF PROPOSALS FOR LIFE INSURERS On 29 January 2009, the NAIC s Executive Committee denied proposals from the American Council of Life Insurers for reserve and capital relief for life insurers. The proposals were intended to help alleviate the financial strains caused by the ongoing market turmoil and had covered four key areas: life insurance reserves; annuity reserves and risk-based capital; risk-based capital for investments; and accounting for deferred tax assets. However, the proposals will continue to be considered by the relevant NAIC technical groups and committees for later adoption. Independent of the consideration by the NAIC of the capital and reserve relief proposals, the various US states have adopted or are considering adopting relief measures for life insurers. These states include New York, Ohio, Connecticut, Alabama, Illinois, Iowa and Kansas, and other states may also proceed on their own in giving relief to life insurers under their regulatory jurisdiction. ASSETS IN A NEW YORK REGULATION 114 TRUST In an opinion issued on 27 October 2008, the New York Insurance Department has opined that assets placed in a Regulation 114 Trust by unauthorised reinsurers to allow New York cedents to receive credit for reinsurance may not be denominated in any currency other than US dollars. According to the opinion, [d]enomination of an asset in a foreign currency introduces the risk of exchange rate fluctuation (and possibly the imposition of exchange controls), which would run counter to Regulation 114 s aim of providing New York domestic companies unfettered access to readily liquidatable collateral. ANTICIPATED FEDERAL REGULATION OF INSURANCE AND REINSURANCE Although federal regulation of insurance and reinsurance including an optional federal charter has been considered for several years, such as through proposed legislation in the US Congress, the current financial crisis has strengthened expectations for greater federal regulation of insurance and reinsurance in the US as part of the financial services regulatory overhaul expected under President Obama s administration and the new Congress. Proponents of federal regulation argue for the need for comprehensive and unified regulation of the complex financial services industry including insurance. Opponents argue that the state-based insurance regulatory system has sufficiently protected the interests of consumers and other stakeholders during the current crisis. CASCADING FEDERAL EXCISE TAX ( FET ) In Revenue Ruling , the US Internal Revenue Service ( IRS ) took the position that FET applies to premiums paid by one foreign insurance company to another on reinsurance of US risks. In Announcement , the IRS stated that it would not audit FET liabilities for payments made or received before 1 October 2008 by participants in the voluntary compliance initiative for FET (the Initiative ). On 24 October 2008 the IRS issued a Directive to auditors containing certain requirements for participation in the Initiative.

11 Global Insurance and Reinsurance Bulletin March 2009 Issue INSURERS UNDER THE TROUBLED ASSETS RELIEF PROGRAMME ( TARP ) Although the initial plan for TARP was for the US Government to purchase troubled assets from financial companies, it has been used thus far to make capital injections primarily to banking institutions, although recipients of TARP assistance also include American International Group, Inc. ( AIG ) and the automaker General Motors and Chrysler. Insurers that have (or that have acquired) affiliates or holding companies that are federally regulated banking or thrift entities qualify for TARP assistance. Several insurers, including Hartford Financial, Protective, Genworth Financial, Lincoln, and Prudential Financial, have applied for financial assistance under TARP and are awaiting decisions on their applications. As the parameters of TARP and the US Government s assistance for the economy continue to evolve, insurance companies may possibly be included more broadly among the non-bank financial institutions being considered for capital injections or through other US Government assistance programmes. RESTRUCTURED FINANCIAL ASSISTANCE PACKAGE FOR AIG On 10 November 2008, the US Government announced a restructured aid package for AIG, which amounts to approximately $150 billion, to replace the earlier assistance programmes announced in September and October The restructured $150 billion assistance programme consists of three main parts: 1. $40 billion investment by the US Treasury in AIG s preferred shares; 2. reduction of the earlier $85 billion credit facility to $60 billion and reduction in the interest rate charged; and 3. the creation of two new lending facilities to alleviate the burden that AIG faces from the credit default swaps that it wrote through its financial products unit and residential mortgage backed securities in its securities lending programme. In addition, AIG can issue up to $20.9 billion in commercial paper to the US Federal Reserve s new commercial paper funding facility. REGULATION OF CREDIT DEFAULT SWAPS ( CDSS ) In the United States, CDSs are currently not regulated as insurance, securities, or futures. As CDSs are considered to have played a major role in exacerbating the current financial crisis, regulation of CDSs is expected in the US most likely at the federal level. In response to the financial crisis, the New York Insurance Department, which had determined in 2000 that CDSs were not insurance and not subject to insurance laws and regulations, had announced in September that it would begin regulating CDSs as insurance if the buyer of a CDS owns the underlying security on which it buys protection. However, based on expectations of more comprehensive US federal regulation of CDSs, New York announced in November that it would delay indefinitely its regulation of CDSs as insurance. n Jonathon Glusman T Vikram Sidhu T

12 12 Global Insurance and Reinsurance Bulletin March 2009 Issue 81 Legal update France: Recent cases INSURANCE INDEMNITY TO BE BASED ON VALUE OF PROPERTY AT TIME OF LOSS An individual bought a second-hand car in 1999 for 16, and insured it. The vehicle was then stolen. The insurer denied coverage. The Court of Appeal held that the insured was entitled to compensation, but fixed its amount at a much lower figure, because the former vehicle owner bought the car in 1998 for 3, The Supreme Court quashed the decision as contrary to Article L of the French Insurance Code, which provides that insurance in respect of property is a compensation contract and that the compensation may not exceed the amount of the value of the insured property at the time of the loss. The amount of indemnity to be paid must be based on the value of the vehicle at the time it was stolen, not on its value at an earlier time the vehicle may have been repaired and its value improved in the meantime. Cour de Cassation, Civ September 2008 INSURER S RIGHT TO SUBROGATE An individual purchased an insurance contract that covered him for bodily injuries relating to car accidents. The insured died in a car accident for which a third party was liable. The widow of the insured received compensation from the insurer of the deceased and from the liable third party. The insurer alleged before the court that the benefits that he paid to the widow were subject to his recourse action against the liable third party and sought payment by the widow for the amounts paid to her by the said liable party. The Supreme Court ruled that the Court of Appeal lawfully dismissed the insurer s claim by ruling that, regarding the payment of compensatory benefits for bodily injury, the insurer is subrogated in the rights of the insured or beneficiary against liable third parties but cannot seek direct payment of the related amounts from the insured or beneficiary himself. Cour de Cassation, Civ October 2008 FAILURE TO PAY PREMIUM DOES NOT AUTOMATICALLY TERMINATE COVERAGE According to Article L of the French Insurance Code, if the insured fails to pay all or part of its insurance premium within 10 days of its due date, an insurer who wishes to terminate the contract may suspend the coverage only 30 days after the insured has been served with a formal notice. The insurer is then entitled to terminate the contract 10 days after the expiry of the 30-day period, if the insured has still not paid. In the present case, the Court of Appeal ruled that the insurer was entitled to terminate the insurance contract, due to the insured s failure to pay the premium. The Supreme Court quashed this decision, because the Court of Appeal had not verified whether the insurer had complied with the above Article. This decision underlines the fact that there is no automatic termination of the coverage due to the non-payment of the premium. Cour de Cassation, Civ. 2 2 October 2008

13 Global Insurance and Reinsurance Bulletin March 2009 Issue PROVISIONS EXCLUDING COVERAGE FOR FAULT OF THE INSURED Article L of the French Insurance Code provides that save formal and limited exclusions contained in the policy, the insurer shall bear the losses and damage caused by unforeseen accidents caused by the insured s fault. In the present case, fires damaged several television sets. The distributor brought a legal action against the manufacturer and its insurer. The insurer denied coverage and argued that the contract expressly excluded coverage in the case of wilful violations by the insured or the management of the insured company, of statutes, regulations and standards with which they must comply in the course of their business. The insurer alleged that the distributor failed to comply with safety testing procedures required by an applicable certification standard with which the company had complied in the past. The Court of Appeal accepted this argument. The Supreme Court quashed the decision and ruled that the litigious policy provision violated Article L.113-1, because it was not sufficiently limited and did not allow the insured to know the exact scope of the coverage. Cour de Cassation, Civ. 2 2 October 2008 BANKER S DUTIES IN PROPOSING GROUP INSURANCE In the first matter, a 61-year old borrower was proposed by the bank to participate in a group insurance notably including death insurance and coverage for invalidity, but part of the coverage was applicable only until the sixtieth birthday of the insured. In the second matter, a borrower was proposed by the bank to participate in a group insurance contract providing coverage for death and certain categories of disability. In both cases, the information documentation communicated by the bank to the insured clearly mentioned these elements (the age limit, the categories of disability covered). The insurers denied coverage, based on these contractual provisions. The Court of Appeal accepted this argument and ruled that the insured had been duly informed and advised by the bank, via the information documentation. The Supreme Court quashed the Court of Appeal s decisions and ruled that a bank that suggests an insurance contract to a borrower has a special duty to inform the latter of the imperfections of the coverage proposed, in respect of his personal situation, and to advise him on alternative or additional coverage. This special duty is not fulfilled by the mere communication of the information documentation, however explicit. Cour de Cassation, Civ. 2 2 October 2008 (two decisions) n

14 14 Global Insurance and Reinsurance Bulletin March 2009 Issue 81 Legal update France: Regulatory and legislative developments THE AUDIT COMMITTEE NOW COMPULSORY Ordinance No of 8 December 2008 aims to increase the supervision of accounts and the independence of the audit function. It makes, in particular, the audit committee compulsory for French listed companies, credit institutions, insurance and reinsurance undertakings, mutual insurance companies and pension institutions. The audit committee s role will be to monitor financial information, internal control, risk management and the compliance of the accounts with legal requirements. This requirement will come into force for each company and institution affected eight months after the end of the financial year beginning after 1 January 2008 when a mandate on the company/ institutions management or supervisory body expires during that financial year. In concrete terms, if a mandate expired during the financial year ended on 31 December 2008, the entity in question will need to have an audit committee by 1 September CODES OF CONDUCT NOW BINDING Ordinance No of 5 December 2008 relating to the introduction of codes of conduct and agreements governing relations between producers and distributors for the marketing of financial instruments, savings and life assurance products has amended the French Insurance Code. The aim of the Ordinance is to increase the protection of investors, savers and insured parties. At the request of identified representative professional organisations and after the Advisory Committee on Financial Law and Regulations (Comité consultatif de la législation et de la réglementation financières or CCLRF) has provided its opinion, the Minister of the Economy may now approve by Order, the codes of conduct developed by these organisations. Once approved, codes of conduct are legally binding and the French regulatory authority (the Autorité de Contrôle des Assurances et des Mutuelles, the ACAM), will ensure that insurance undertakings under their control implement appropriate measures to comply with the approved codes of conduct. Further, starting from January 2010, agreements must be entered into to govern relations between insurance undertakings and intermediaries, in respect of information and promotional communications on life insurance products. INSURERS ENJOY THE BENEFIT OF ACCOUNTING ADJUSTMENTS Decree No of 22 December 2008 relating to various prudential provisions applicable to insurance undertakings allows insurers to spread over eight years, rather than three, the reserve that has to be posted when the life insurance portfolio of assets has undergone a latent loss, that is, the reserve for payability risk (provision pour risque d exigibilité). Insurers therefore have the option of posting a reserve of only one-eighth of the latent loss. This accounting adjustment is subject to the following conditions: a) the solvency margin must be adequate after full allocation of the reserve; and b) the charge deferral must be deducted from distributable profits. These provisions apply from the 2008 financial year. n Marine Duponcheel T Jean-Baptiste Pessey T

15 Global Insurance and Reinsurance Bulletin March 2009 Issue Legal update Spain: Recent cases RIGHTS TO INTEREST FOR DELAY IN THE PAYMENT OF AN INDEMNITY The delay interest foreseen in Article 20 of the Spanish Insurance Contract Act (which can amount to 20% of the indemnity to be paid by the insurer) is imposed on an insurance company unless there is a justification for a delay in the payment of the indemnity. The Supreme Court confirmed that issuing proceedings in order to establish the amount of that indemnity is not a justified reason for the delay (within the terms of the Insurance Contract Act). This position of the Supreme Court is an attempt to avoid the fraudulent use of proceedings to delay the fulfilment of the payment duty. In any event, the justifications argued by the insurers must be analysed by the courts on a case by case basis. Spanish Supreme Court Civil Division 10 September 2008 AUDITOR S LIABILITY Directive 2006/43/EC establishes that auditors are liable for damage caused negligently not only to the audited company, but also to those who have a relationship with that company. To be liable for such damage, it is necessary for there to be a negligent act or omission of the auditor, and a causal link between that act or omission and the damage suffered. In the current case, some clients of a stockbroker who was in a severe financial situation entrusted a significant sum of money to the broker to be invested. The money was used by the broker to deal with its own financial situation. The clients claimed that the auditors were liable for the loss of their investments because they did not detect the broker s financial situation if they had detected the situation the Securities Commission ( CNMV ) would have intervened immediately and the clients would not have entrusted their investments to that broker. The Civil Section of the Supreme Court held that there was no causal link between the actions of the auditors and the damage suffered by the clients (but rather the damage suffered was due to the non-intervention of the CNMV). Spanish Supreme Court Civil Division 9 October 2008 ACCEPTANCE OF RESTRICTIVE POLICY TERMS Article 3 of the Spanish Insurance Contract Act establishes that contractual clauses restricting the rights of the insured ( cláusulas limitativas ) can be valid, but they must be highlighted in the policy and must be specifically accepted by the policyholder. In practice, it is considered sufficient by the Spanish courts for a general acceptance of such restrictive clauses to be included in the policy which is signed by the policyholder. Nevertheless, the Supreme Court considered in this case that signing the Particular Conditions (which contained a general reference to the General Conditions where the acceptance of the restrictive clauses was included) was not sufficient to establish that the policyholder had accepted those clauses. It seems that the Supreme Court understands that the acceptance clause could be included in the Particular or in the General Conditions but in order to show that he has accepted the restrictive clauses of the policy, the policyholder must sign the document where the acceptance clause is included. Spanish Supreme Court Civil Division 13 November 2008 n

16 16 Global Insurance and Reinsurance Bulletin March 2009 Issue 81 Legal update Spain: Regulatory and legislative developments Legal update Germany: Recent cases ENVIRONMENTAL LIABILITY NEW REGULATION The Spanish Government approved on 22 December 2008 the new Regulation concerning environmental liability. This Regulation, that will come into force on 23 April 2009, develops Act 26/2007, dated on 23 October 2007, on Environmental Liability, and contains important new rules concerning the insurance of this liability. Royal Decree 2090/ December 2008 n Luis Alfonso Fernandez Manzano T INSURERS OFFERING THEIR SERVICES EXCLUSIVELY VIA THE INTERNET DO NOT NECESSARILY HAVE TO SUPPLY A TELEPHONE NUMBER In a decision concerning the interpretation of the EC Directive 2000/31 on electronic commerce, the European Court of Justice held that an insurer cannot be compelled to provide its telephone number on its internet site. The Federation of German Consumer Organisations held the view that the EC Directive requires that a (potential) customer can contact the service provider via telephone and filed a claim against Deutsche Internet Versicherung AG, an insurer offering its services exclusively via the internet. According to the European Court of Justice, it is sufficient if the service provider supplies such information, which enables the consumer to contact the service provider quickly, directly and in an effective manner. An electronic enquiry template through which the service provider can be contacted via the internet generally meets these requirements if the service provider ensures timely responses. Only under exceptional circumstances must the provider, on request, offer contact by alternative, non-electronic, means. European Court of Justice 16 October 2008 LEGAL EXPENSES INSURANCE: ANNOUNCEMENT TO TERMINATE CONTRACT CAN TRIGGER COVER The Federal Court of Justice confirmed that the announcement of an employer to terminate the employment contract can be an event that triggers cover under a legal expenses insurance contract under general policy conditions. With its decision, the Federal Court of Justice resolved an ongoing dispute since this issue has been assessed differently by several courts and has been disputed in legal literature as well. In general terms, the court held that the insured must describe an actual event, which, in its opinion, constitutes a violation of law and on which it bases its claims. The mere allegation of a violation is sufficient. Whether it is true, conclusive or of decisive relevance, is irrelevant. Federal Court of Justice 19 November 2008 LIABILITY INSURANCE: CONSEQUENCES OF THE INSURER S PROMISE TO ADJUST THE CLAIM In a decision from November 2008, the Federal Court of Justice held that the insurer s promise to the injured party to adjust damage caused by its insured, has to be classified as a declaratory acknowledgement in two respects. From the (relevant) injured party s point of view such a promise implies that the insurer accepts that the cover is triggered and that it acknowledges the claim against its insured on behalf of its insured. In consequence the insurer must not, in relation to the injured, invoke any objections in respect of the cover of which it were aware of before making the promise. Federal Court of Justice 19 November 2008

17 Global Insurance and Reinsurance Bulletin March 2009 Issue D&O CO-INSURANCE: LEADING UNDERWRITER CLAUSE AND DIRECT CLAIMS AGAINST INSURER The insurance contract at issue stipulated that proceedings could only be brought against the leading underwriter whom the co-insurers were obliged to follow in any respect. The leading underwriter was also authorised by the insurance contract to act for the co-insurers. The Higher Regional Court of Cologne held that the insured could not sue the co-insurers since the clauses amounted to a standstill agreement in respect of the co-insurers. The court also commented on the validity of these clauses under the law of general terms and conditions, leaving open whether and to what extent it should be applicable at all. The court held that the clauses were neither surprising nor unclear and do not constitute an inappropriate disadvantage. The disputed contract was a D&O insurance contract and another issue was whether the claimant who was at the same time policyholder and injured party, was entitled to claim payment from the insurer although the insured persons were its managers. The court held that the claimant was not entitled to bring direct claims against the insurer since the D&O insurance is a kind of liability insurance where as a matter of principle the injured party may not make claims against the insurer. The court rejected an exception from this principle for cases where the injured party is also the policyholder. Higher Regional Court of Cologne 2 September 2008 HOME CONTENTS INSURANCE: INSURERS OBLIGATION TO INFORM INSURED ABOUT HIS DUTY TO SUBMIT A LIST OF STOLEN ITEMS TO THE POLICE Contrary to previous decisions by the Higher Regional Courts, the Federal Court of Justice recently approved that under certain circumstances a home contents insurer may have a duty to notify the insured of his obligation to submit a catalogue of the stolen items to the police and the consequences of a failure to comply. Such a duty arises in particular where the home contents insurer asks the insured for detailed information about the loss (for example, name of the police station where the damage was reported, file number under which the case was registered) and even requests a catalogue of the stolen items for the insurer s file. The Federal Court of Justice held that if requesting such detailed information, the insurer must also notify the insured of his obligation to submit a list of stolen items to the police and on the fact that failure will result in the insured losing his insurance coverage. Although the court did not establish a general obligation, the decision will affect the insurers practice in handling a claim and insurers will have to review (and possibly adjust) their standard forms and instruct their employees accordingly. Federal Court of Justice 17 September 2008 n Silke Justen T

18 18 Global Insurance and Reinsurance Bulletin March 2009 Issue 81 Legal update Italy: Recent cases Legal update Italy: Regulatory and legislative developments misconduct of finanacial intermediaries The Supreme Court has stated that in the case of misconduct of financial intermediaries, investors are allowed to claim for the annulment of the contract, together with damages. The decision of the Supreme Court is of great importance as investors cannot request for the nullity of the contract (being restored to the situation they would have been in should the contract never have been executed) but just for its annulment. Due to the recharacterisation of life insurance products with financial content as being financial products, the decision of the Supreme Court is applicable to policyholders of unit, index and with-profits life insurance policies. Italian Supreme Court, decision 19 December 2007, No (1st. Banc. San Paolo/Fin. Comm. Valori S.r.l./Centro Immobiliare S.r.l.) n AMENDMENT TO ISVAP REGULATION 16 OCTOBER 2006 NO. 5 IN MATTER OF INSURANCE AND REINSURANCE MEDIATION ACTIVITIES On 17 December 2008, ISVAP issued a consultation paper containing proposed amendments to the Regulation of insurance and reinsurance mediation activities. The main proposed changes concern: a) the termination of insurance agency agreements (with the possibility for insurance companies to directly undertake the business for a limited period of time); b) exemption from the discipline of segregation of accounts for those insurance and reinsurance intermediaries been guaranteed by a bank guarantee; and c) disciplinary measures and sanctions. The consultation period ended on 9 February NEW RULES FOR INDEX LINKED POLICIES On 22 December, ISVAP issued a consultation paper containing new rules for index linked policies. The document contains revised eligibility criteria for the reference values and for the assets that can be used for technical reserves purposes. As for reference values eligibility has been restricted to bond and share indices negotiated on regulated and liquid markets, whereas for assets eligible for technical reserves purposes, stricter requirements have been set for the bond component of the structured notes and to the limits to investment. The consultation period ended on 15 February AMENDMENT OF ARTICLE 354, PARAGRAPH 4, OF LEGISLATIVE DECREE 7 SEPTEMBER 2005, NO. 209 ( CODE OF PRIVATE INSURANCES, THAT IS, ITALIAN INSURANCE CODE) By means of the Legislative Decree 2008, No. 207 ( Postponement of certain terms provided by laws and financial provisions ), the Italian Government amended Article 354 ( Provisions expressly abrogated ), Paragraph 4 of the Legislative Decree 7 September 2005, No. 209 ( Code for private insurances, Italian Insurance Code). As a result of such amendment, the effectiveness of the provisions, apparently abrogated, will be postponed for a further six months, thus allowing ISVAP to have more time in which to release the regulations necessary to implement most of the provisions of the Italian Insurance Code. The amendment can be read as an attempt to extend the terms at ISVAP s disposal to complete the issue of the regulations without causing any vacatio legis. n Chiara Cimarelli T

19 Global Insurance and Reinsurance Bulletin March 2009 Issue Legal update Latin America: Regulatory and legislative developments NEW REINSURANCE REGULATIONS APPROVED IN BRAZIL The Brazilian National Counsel on Private Insurance (CNSP) has approved, at last, the new regulations on reinsurance activity. The market now is not only open to but also regulated for foreign reinsurers, providing they fulfil certain requirements: a technical note shall be filed on the SUSEP (Brazilian Authorities on Insurance) indicating the retention capability of every reinsurer; a relationship has been established between the reinsurer rating and the reserves to be managed; and it remains an obligation to open an account in Brazil amounting to $5 million, as per the Law 126 s requirements. SUSEP announcement 17 December 2008 NEW PROPOSAL FOR PRIVATE INSURANCE REGULATION IN GUATEMALA The Guatemalan Congress is going to analyse a proposed Act to adapt the insurance regulations, after more than 10 years of debate, on the market and Administration. The Act will substitute the current regulation, from 1966, and is going to provide a rigid control on the capabilities of foreign insurers to offer its products in Guatemala without a permanent basis on that country. Guatemalan Association of Insurance Institutions announcement 7 November 2008 NATIONALISATION OF THE PRIVATE PENSION SYSTEM IN ARGENTINA The Argentinean Government is analysing the possibility of covering the risks previously granted by the AFJP ( Administradoras de Fondos de Jubilación y Pensión ), through a specific unit to be created in the Argentina National Bank; no additional information about the characteristics of that unit has been given yet. Announcement made by the Argentinean Government 20 January 2009 RESTRICTIONS FOR FOREIGN INSURERS IN COLOMBIA The Colombian Association of Insurers, FASECOLDA, has issued a reminder that only through a specific approval from the Financial Supervisory Authority ( Superintendencia Financiera ), as stated on the Concept issued by such Administration, can foreign Companies operate underwriting risks in that country, bearing in mind that general interest reasons must exist to grant such authorisation. Announcement made by FASECOLDA 21 January 2009 n Joaquín Echauri Ruiz T

20 20 Global Insurance and Reinsurance Bulletin March 2009 Issue 81 Legal update China: Regulatory and legislative developments NEW REGULATING FRAMEWORK ON THE SOLVENCY OF INSURANCE COMPANIES The Administrative Provisions on the Solvency of Insurance Companies, effective 1 September 2008, require annual reports, quarterly reports and interim reports on the solvency of insurance companies, and provide for a variable level of supervision based on an insurance company s solvency level. Different supervision measures apply to insurance companies with solvency rates: lower than 100%; over 100% but below 150%; and above 150%. The Provisions also improve solvency supervision mechanisms by clearly allocating responsibilities between the central China Insurance Regulatory Commission ( CIRC ), local CIRC branches and the insurance companies themselves. IMPLEMENTATION OF CLASSIFIED SUPERVISION OF INSURANCE COMPANIES On 30 December 2008, the CIRC issued the Notice on Classifying and Supervising Insurance Companies which classifies insurance companies in four categories, from A to D, with category A including the safest companies and category D the most risky companies. Depending on a company s classification, the CIRC may implement a range of administrative measures in exercising regulatory oversight (the most stringent being reorganisation or seizing control of the company). Property and life insurance companies are classified by evaluating solvency margin, corporate governance, fund management, business operations and financial risk. Reinsurance companies are evaluated solely on the basis of their solvency margin. RULES ON QUALIFICATIONS OF CFOS OF INSURANCE COMPANIES The Rules on Qualifications of Chief Financial Officers of Insurance Companies, effective 1 February 2009, set out detailed requirements on the professional qualifications of CFOs, or those with equivalent responsibilities. For example, CFOs must have an established residence in China, have working fluency in Chinese, and satisfy various other criteria. The responsibilities of the CFO must be stipulated in an insurance company s articles of association and he must be responsible for preparing and signing off on an insurance company s solvency report, risk assessment report, and other key financial documents. A CFO may only be appointed with CIRC approval, and if an insurance company wants to fire the CFO, it must provide a written explanation to the CIRC. CIRCULAR ON STRENGTHENING THE ADMINISTRATION OF INVESTMENT-TYPE INSURANCE BUSINESS OF PROPERTY INSURANCE COMPANIES The Circular on Strengthening the Administration of Investment-type Insurance Business of Property Insurance Companies, effective 20 November 2008, provides that property insurance companies managing investment-type insurance products must now satisfy a series of criteria, including four consecutive quarters with a solvency ratio above 150%, and three years without having been assessed administrative penalties. Investment-type insurance products developed by property insurance companies are subject to CIRC examination and approval. For products with a predetermined rate of return, that rate (excluding the insurance benefit) shall not exceed 80% of the interest rate of the deposit rate for an equivalent term. DRAFT PRINCIPLES FOR CALCULATING SOLVENCY RELATED TO REINSURANCE On 3 December 2008, the CIRC issued the Draft Insurance Company Solvency Reporting Principles No. 15: Reinsurance Business. The Draft: 1. determines which assets may not be admitted; and 2. specifies how reinsurance business transferring material risks, and that which does not transfer material risks, are respectively valued for the purpose of determining the solvency ratio. GUIDELINES ON THE OPERATION OF THE BOARD OF DIRECTORS OF INSURANCE COMPANIES The Guidelines on the Operation of the Board of Directors of Insurance Companies, effective 1 October 2008, seek to improve corporate governance of insurance companies by regulating the operation of boards of directors and setting out decisions which must be made by the board. Included are procedures for appointment and dismissal, qualifications for appointment, authorities and obligations of directors, rules for holding board meetings, reaching board resolutions, and preparing corporate governance reports. SUPERVISORY FEES LOWERED On 21 November 2008, the National Development and Reform Commission and the Ministry of Finance issued the Notice on Insurance Industry Supervision Fees (effective 1 January 2008). Under the notice, the administrative fees payable by insurance companies and insurance intermediaries have been reduced in a variety of areas.

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