BRAZIL

IRB changes its conduct in its business assignment

IRB-Brasil Re will operate in accordance with new criteria and guidelines as regards its business relationship with the international market. The new criteria and guidelines were approved by the State
Owned Company’s Upper Management, and were due to come into effect in January 2005. Keeping an up to date record of foreign reinsurers and the elaboration of a minimum rating for risk classification by companies responsible for analyzing risk, are amongst the new provisions.

With this new policy of classifying Brazilian risk internationally (an area in which approximately R$1 billion is spent per year) the IRB will prioritize those reinsurers with a minimum amount of capital (US$100 million) and those who have a representative office already established in the country.

Another requirement is the positive evaluation of the reinsurance company by the Security Committee based upon the proposal presented by the competent sector regarding the capacity it has to liquidate its obligations within the established time limits.

To be able to do business in Brazil, the foreign reinsurer must vehemently follow up how the IRB’s operations are developing (clause – follow the fortune), cooperate in the case of disastrous events, and accept the Brazilian legislation and jurisdiction, as well as the Courts of the country in the case of any controversies. The same conditions will be applied to arbitration.

Sergio Barroso de Mello
Pellon & Associados
Rio de Janeiro, December 2004

UNITED KINGDOM

Legal update from the United Kingdom

The most important of the recent developments in the UK are regulatory. On 14 January 2005 the UK implemented European Parliament and Council Directive 2002/92/EC on Insurance Mediation, replacing the previous system of self-regulation which has operated in a number of forms for many years. The implementation was effected by a complex combination of legislation and administrative rules. The legislation extends the notion of home state control to brokers and confers single European passport rights on all brokers authorised in their home states. The administrative rules, which take effect as part of the Handbook issued by the UK’s insurance regulator, the Financial Services Authority (FSA), are concerned with the manner in which brokers carry on their business, and go some way beyond what is required by the Directive. In outline, a broker must obtain authorisation from the FSA to carry on business, and to do so the broker must demonstrate that it has its head office in the UK, that it possesses adequate resources, and is a fit and proper person assessed by reference to the criteria of honesty, integrity and reputation.  Insurance company employees are exempt from the authorisation requirement, as they are the responsibility of the insurers themselves. Once authorised, brokers are under a complex range of obligations, including: conducting business with integrity, skill, care and diligence, maintaining adequate financial resources, avoiding conflicts of interest and giving suitable advice; adopting appropriate training programmes; maintaining minimum capital resources and liability insurance; operating a management structure which ensures that its affairs can be adequately monitored and regulatory obligations are complied with; and complying with detailed financial reporting rules.

On the same day, the UK took the further step of extending statutory regulation to the general (non-life) insurance business sector. Life business has been heavily regulated for some 20 years, but general insurers have been allowed to operate self-regulation, subject of course to the basic rules established in the EU for authorisation and financial stability. The industry had adopted Statements of Practice as to how claims would be handled and had established an Ombudsman Service to handle consumer complaints. Some three years ago general insurers established a new body, the General Insurance Standards Council, the membership of which included virtually all of the important insurers and brokers, and GISC laid down detailed rules – in the form of Codes of Practice – on virtually every aspect of the conduct of general business. However, GISC was found to be operating in an anti-competitive fashion by the UK’s competition authorities, by reason of its attempts to ensure that insurers who were members of GISC would not operate through brokers who had not joined GISC. Once it became clear that GISC could not impose standards on the entire industry, its days were numbered. GISC was dissolved on 14 January 2005 and was replaced by direct regulation of general insurers by the FSA. Once again, the FSA’s Handbook is the primary source of the obligations of general insurers. The previous voluntary Statements of Practice and the Ombudsman Scheme have now been brought within the statutory structure. There is now an enforceable obligation on general insurers which precludes them from avoiding consumer policies for non-disclosure in the absence of fraud, and from relying upon breach of warranty unless there is a causal link between the breach and the circumstances of the loss. At the same time, the UK implemented European Parliament and Council Directive 2002/65/EC “Concerning the Distance Marketing of Consumer Financial Services”. It is now the case that cancellation and cooling-off period rules, which previously applied only to life insurance, have been extended to general policies made at a distance.

The number of insurance and reinsurance cases coming before the English courts has continued to increase. Amongst the major issues dealt with by the courts in the last year or so have been the vexed question of exactly how a broker is remunerated (the English courts now appear to be coming to the view that payment is by the assured and not by the underwriters), the circumstances in which an insurer can avoid a contract for want of good faith by the assured (it having recently become necessary for insurers to show that they would have acted differently had all information been disclosed to them) and the possible duties on insurers in the claims-handling process (England seems to be moving slowly towards the notion that insurers must act in good faith in considering whether to accept or to reject a claim).

Robert Merkin

Professor of Commercial Law, Southampton University and Consultant, Barlow Lyde & Gilbert