Insurance Update. Contents. India starts antitrust enforcement

Transcription

1 Insurance Update. India starts antitrust enforcement Indian competition law enforcement (pursuant to the Competition Act 2002) commenced on 20 May The Act was intended to be a clean break with the former Indian competition law regime, representing a modern framework inspired by laws already implemented in jurisdictions with longstanding competition law enforcement records (most notably the European Union). The Act introduces the three enforcement areas: (i) prohibition of anticompetitive agreements; (ii) prohibition of abuse of dominance; and (iii) merger regulation. Although many of the new concepts are similar to those found under European Union regulation or US competition law, as market conditions are very different in India, interpretation or application of these principles may differ. The current Competition Commission of India was constituted recently and it has been concentrating on finalising the rules that give effect to the Act. It has announced its ambition to become an active and effective enforcer. Initially, the Commission will focus on restrictive agreements and abuses of dominant positions, with enforcement of merger regulation to follow. A Competition Appellate Tribunal has been appointed which will hear appeals against the Commission's orders. Foreign investment in the insurance sector in India (for both life and non-life insurance) is currently restricted to 26 per cent. of the share capital of the company. The Government introduced legislation in October 2008 to increase this restriction to 49 per cent. Approval of this legislation is reported to be high on the agenda of the newly (re)elected Congress-led UPA coalition government. Almost all major international insurance companies operate in India through joint ventures with Indian companies, including public and private sector banks and other local players. Other participants in the market include government owned entities like the Life Insurance Corporation of India and private insurers like Reliance Life Insurance. Contents Page 1 India starts antitrust enforcement Page 2 Consultation on the new Insurance Block Exemption Regulation Page 3 Solvency II Directive Implementation of the Acquisitions Directive Page 5 UK FSA: Turner Review: of Banking Regulation: Possible Impact on Insurers May

2 The intensity of antitrust enforcement has increased in recent years, not least following the entry into force of the Chinese Antimonopoly law last year. After the addition of the Indian Commission to the list of active competition watchdogs, the need for a coordinated approach to antitrust compliance in the region is greater than ever before. Kunal Thakore (kunal.thakore@linklaters.com, (+852) ) Consultation on the new Insurance Block Exemption Regulation In March, the European Commission published for consultation its thinking on the future of the block exemption regulation for the insurance sector. The current rules allow for exemptions from Article 81(1) EC Treaty for four categories of cooperation between insurance companies (as set out below), but the future of all of them is being reviewed: - Joint calculations, tables and studies: the Commission is sympathetic to this type of cooperation, because it believes it facilitates market entry for smaller insurance companies. - Standard policy conditions: the Commission believes that the joint preparation of common standard policy conditions are not a sufficiently special feature of the insurance sector to merit continued exemption. It is likely that the Commission will not renew this exemption and will instead simply apply the general antitrust provisions when assessing common contract terms and conditions. - Common coverage of certain kinds of risks (pools): the Commission wants to preserve the exemption for co-insurance pools. The sharing of risk by insurers by means of insurance pools is considered necessary for certain types of risks (e.g. nuclear risks) in order to enable insurers to cover these risks at all. In this regard the Commission views the insurance sector as differing from other sectors and, accordingly, assumes that there is a special need for cooperation in this area. An increase of the current market share threshold of 20% is not being proposed. The Commission, on the contrary, proposes tightening the rules by requiring that market shares both inside and outside the insurance pool would in future have to be taken into account when examining an insurer s market share threshold (in contrast with the Commission s current interpretation of the rules). - Security devices: requirements made of policyholders by insurers jointly relating to (technical) security devices on property covers are again not felt by the Commission to be a special feature of the insurance sector, 2 May 2009

3 but more of a general standard setting. Therefore, the Commission does not feel that a special exemption should be necessary. The Commission is organising a public meeting in Brussels on 2 June It has already announced that, in the likely event of at least a partial renewal of the exemption, it would publish draft rules to be considered at a further meeting. Carsten Grave (carsten.grave@linklaters.com, (+49) ) Solvency II Directive The European Parliament approved the Solvency II framework directive on 22 April. Please click on the attached link for a copy of the full text: Victoria Sander (victoria.sander@linklaters.com, (+44) ) Implementation of the Acquisitions Directive As reported previously (in our September 2008 issue and January 2008 issue), European Union member states were required to implement the Acquisitions Directive (2007/44/EC) by 21 March This directive is designed to provide a coordinated approach to the supervisory approval process for mergers and acquisitions in the banking, insurance and securities sectors. Across the board, the 33% threshold has been/will be decreased to 30%. - In Belgium, details of the implementation of the directive have yet to be released. A draft implementation bill is expected to be introduced into parliament shortly. - In the Czech Republic, two bills are proposed to implement the directive, one of which has been partially approved by the Czech Parliament. The wording of both of these bills has yet to be finalised. The current proposals are in line with the wording of the directive. The proposed Czech National Bank s time limit is 60 working days although this may be extended to 90 working days in special circumstances. - In France, the directive is expected to be implemented by 4 August In Germany, there are few material changes. In order to avoid delays, BaFin s three month time limit has been reduced to 60 working days Insurance Update. 3

4 although this may be extended to 90 working days in special circumstances. - In Hungary, the Hungarian Financial Regulatory Authority time limit is 60 days, which may be extended by altogether a maximum of 70 days. - In Italy, details of the implementation of the directive have yet to be released by the government. The Bank of Italy has recently issued a resolution applying certain provisions of the directive to banks and investment firms, however, the same position has not yet been adopted by ISVAP (the insurance regulator). - In Luxembourg, the CAA s 3 months time limit has been changed to 60 working days. - In the Netherlands, the directive will come into effect on 1 December The Dutch Central Bank s 13 week time frame has been changed into 60 working days with the possibility to extend this period by 30 extra working days. Also, the Dutch Central Bank will become the only institution able to authorise qualifying holdings (currently, the Minister of Finance also has authority in certain circumstances). The grounds on which the declaration of no objection may be denied have been restricted to the situations named in the directive. - In Poland, the directive has not yet been implemented, and the KNF will continue to apply Polish law pending implementation (i.e regulator consent is required for the acquisition of at least 10% of shares of a financial institution and the regulator will seek a warranty from the purchaser to carry on the business of a financial institution in such a manner so as to properly protect its clients' interests). - In Portugal, the directive has not yet been implemented. A preliminary draft proposal for implementing the directive into Portuguese law is available for public consultation between 13 and 29 May In Romania, implementation legislation is generally in line with the directive, with the exception of certain inconsistencies (e.g. in the banking and insurance sectors the one third threshold has been adopted while in the securities sector the relevant threshold is set as 33%). We have identified further inconsistencies in the insurance sector such as: (i) the insurance regulator has not transposed the calculation method of holdings of a significant shareholder (i.e. the calculation of a qualifying holding ), providing guidance only in respect of listed insurance/reinsurance companies by reference to the calculation of voting rights under the capital markets legislation; and (ii) notification is triggered if there is an intent to acquire (or dispose of) a relevant interest. - In the Slovak Republic, implementation legislation is in line with the wording of the directive. The Slovak National Bank s time limit for the 4 May 2009

5 decision is 60 working days from written confirmation of applications delivery, although this time limit may be extended to 90 working days in case the proceedings are stayed. - In Spain, the directive has not yet been implemented however, the draft bill contains few material changes. If implemented in its current form, acquisitions of stakes or voting rights of 5% or more in insurance companies will need to be notified to the DGS and the corresponding insurance company. Also, the DGS three month time limit will be changed to 60 working days. - In Sweden, the directive has not yet been fully implemented. A government bill has been prepared and the intention is that any changes shall come into force as of 1 July The changes relate mainly to how a 'qualifying holding' is calculated. - In the UK, there are few material changes. The FSA s three month time limit has been changed to 60 working days and the obligation to notify the FSA of a change of control is now triggered by the making of a decision to acquire (or dispose of) a relevant interest. Information in relation to Hungary, the Czech Republic, Romania and the Slovak Republic has been provided by Kinstellar. Kinstellar is the leading premium regional law firm focused on serving the needs of global corporations in the emerging European countries. Operating from offices in Bucharest, Budapest, Bratislava and Prague, Kinstellar s team has been involved in some of the biggest transactions in the region. Kinstellar is a spin-off from Linklaters and maintains the Linklaters legacy through a best friends relationship. With over 100 fee earners, Kinstellar offers expertise in corporate, M&A, private equity, tax, banking and finance, capital markets, real estate, litigation, projects, energy, telecoms and competition/anti-trust law. Lukas Sevcik (lukas.sevcik@kinstellar.com, (+420) ) For further information in relation to any other jurisdiction, please contact: Madhu Jain (madhu.jain@linklaters.com, (+44) ) UK FSA: Turner Review of Banking Regulation: Possible Impact on Insurers The Turner Review [ recommends various changes in relation to the supervision of the banking, investment banking and shadow banking sectors. Many of these recommendations have implications for insurers. Most obviously are those that are cross-sectoral by nature. Examples are the recommendations regarding risk management, governance, group supervision and the FSA s Insurance Update. 5

6 general supervisory approach. In addition, there are other recommendations concerning EU passporting and capital/liquidity regulation that could be translated into insurance regulations, however the FSA s intention in this regard is not yet clear. The Turner Review has attracted headlines for heralding the demise of light touch regulation. That is a term that Turner himself describes as somewhat of a caricature. Nevertheless, Turner does support fairly significant changes to the FSA s current approach. Many of these changes form part of the existing Supervisory Enhancement Program, which was launched last April and encompasses training and developing existing employees, hiring hundreds of additional employees, and overhauling the FSA s internal processes and management. Even considering these enhancements, Turner recommends that the FSA s supervisory approach become more intensive (not just better resourced). This is reflected in what appears to be a general preference on Turner s part for regulations that are more formulaic and rule-based, leaving less scope for firms to adapt general principles to their individual businesses or for the FSA to grant individual concessions (presumably through waivers and individual guidance). For many insurers, such a move will be unwelcome since issues arising in practice are often resolved by applying the Handbook purposively in open consultation with the FSA. Other recommendations from the Turner Review that are likely to impact directly on insurance regulation include the recommendations regarding: - risk management and governance improvements (including strengthening the role of non-executive directors and aligning remuneration with risk management); - an expansion of the FSA s review of proposed approved persons to include an assessment of competence/technical skills, in addition to probity; and - the assessment of intra-group risks and changes in the FSA s approach to multi-national groups (potentially including the enhancement of international information-sharing procedures and bodies). One of Turner s key recommendations is for the establishment of explicitly counter-cyclical reserves. Such reserves would be built up by banks during upward economic cycles and then made available to absorb losses during recessions. This type of dynamic reserving is not necessarily appropriate to insurers, as they are not subject to the same intensive cyclicality as banks. This is because many insurers liabilities are defined principally by reference to non-cyclical events, such as weather events and torts (in the case of nonlife insurers) and mortality and longevity (in the case of life insurers). Whilst insurers assets are of course exposed to economic cycles, their liability profile means that cyclical downturns in asset values are not necessarily compounded by cyclical increases in liabilities. 6 May 2009

7 This points to one of Turner s other key recommendations that liquidity should be as closely regulated as solvency. One of the primary functions of banks is to perform maturity transformation (i.e., to take on long-term assets (receivables) and short-term liabilities (deposits), so that the rest of the economy can do the opposite). Banks therefore have an inherent mis-match between asset and liability maturity profiles, which was exaggerated by the massive increase in lending in recent years. Insurers explicitly seek to (and largely can) avoid such mis-matches. Liquidity risk is therefore less ingrained in insurance business. Accordingly, the case for regulating liquidity is much stronger in relation to banks than insurers. One other recommendation made by Turner is that, in the absence of a pan- European regulator, countries in the European Economic Area should be willing and able to require foreign firms to establish locally regulated (and therefore locally capitalised) subsidiaries rather than using the passporting regime to establish branches. This appears to be particularly due to the presence of government-backed deposit guarantees. That is, if governments are likely to find it politically necessary to guarantee the deposits of local savers in relation to foreign banks operating within their territory, the local regulator ought to be able to prudentially supervise those banks. It is possible that any moves to restrict passporting will apply on a cross-sectoral basis. The impact of the Turner Review on insurers is not yet clear. There are a number of recommendations (e.g., regarding the FSA s supervisory approach) that are clearly not specific to banks and will likely apply to all regulated firms, including insurers. There are yet other recommendations where the position of insurers is unclear (e.g., the recommendations regarding counter-cyclical capital and liquidity regulation). Until a clear policy position emerges, insurers may find that this is the best time to lobby for a measured approach. The FSA has published a Discussion Paper [ inviting comments on these and other issues by 18 June Tim Scott (tim.scott@linklaters.com, (+44) ) Insurance Update. 7

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