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Hogan Lovells
1
Insurance Horizons
2019
2 Hogan Lovells Insurance Horizons 2019 3
Contents
04 Introduction
06 Another active year for M&A in the insurance industry
08 Developments in UK insurance business transfers
10 Insurance business transfers in the U.S.
12 How to collateralise reinsurance agreements using illiquid assets
14 Solvency II – Brexit and the forthcoming Solvency II review (''taking back control'')
16 Data protection after GDPR and preparing for Brexit
18 Recent acquisition a 'game changer' for German life run-off market?
20 The new Dutch resolution legal regime
22 Focus on vulnerable customers
24 Sustainability and climate change
26 International initiatives on sustainability and climate change
28 Federal Reserve Board preparing insurance group capital requirements
30 The U.S. health insurance regulatory landscape
32 Reconciling California’s new privacy law with the Insurance Information and Privacy Protection Act
34 International sanctions: Breaking rank – stuck in the middle with the EU
36 China inbound
38 Protectionism and the insurance industry
40 Resilience – a global trend
42 Operational resilience
44 The rise of insurtech, AI, machine-learning, blockchain, and smart contracts in the U.S.
48 Key legislation and regulatory changes on the horizon for the insurance sector (2019)
54 Our global insurance team
55 Insurance sector events 2019
56 Genuine global reach
58 Citizenship and diversity
59 Pro bono – making a world of difference
60 About Hogan Lovells
4 Hogan Lovells Insurance Horizons 2019
Introduction
Working on this brochure has provided an as the best strategy to stay up-to-date and, not The UK has for many years been a significant
opportunity to consider recent developments surprisingly, over 25% of deals involving tech exporter of insurance and financial services, with
in the insurance industry and how the industry businesses involve a counterparty which is not exports in 2017 of approximately £18.3 billion
might change. A speech delivered by Gabriel from the tech sector. of insurance and pension services, equivalent
Bernardino, the Chairman of the European to 31% of the UK's financial services exports.
Insurance and Occupational Pensions Authority Globally, we are facing an economic Taking into account the UK's total insurance
(EIOPA) in Berlin in October 2018, referred slowdown and political uncertainty with trade and pension imports of £1.8 billion, this leaves
to the huge challenges that the European wars and Brexit. China's growth is slowing the UK with a trade surplus from insurance of
insurance sector faces of economic uncertainty, and faces challenging levels of domestic around £16.7 billion; according to the WTO, this
digitalisation and climate change. These debt; Germany narrowly avoided recession in is the largest trade surplus amongst the major
challenges are no less significant for being 2018 and its export-led economy is exposed insurance economies by quite some margin.
well known, but it is the ambitions that Mr to tariffs; and Italy is in recession. We are
also seeing increasing protectionism as The forthcoming review of Solvency II will be
Bernardino then outlined for the insurance
governments look at foreign investment in an interesting test case for post-Brexit Britain.
sector which are more interesting, to be a sector
key industries. The German Government The risk is that the UK will be a "rule-taker" in
that will:
recently tightened its control over foreign the process, caught between a need to maintain
• be instrumental in closing societal gaps, investments in a range of industries equivalence with Solvency II and the interests of
such as the pension gap and the protection following concerns that Chinese state-backed the EU27 who will naturally bring forward issues
gap for natural catastrophes; companies were gaining too much access to which reflect their own domestic concerns and
key technologies. The EU has also introduced perspectives. Brexit, however, also provides the
• use its underwriting and investment
a framework for screening foreign direct UK with an opportunity to modify Solvency II to
activities to foster a gradual transition to a
investment. the benefit of the UK market.
more green economy; and
• apply the highest ethical values, acting in For the insurance industry, there is a case for
a customer friendly manner and achieving saying that the trend is towards more liberal,
open markets. Whilst a number of countries Charles Rix
increased trust. Global Head of Insurance Sector
still retain rules which favour local insurers
London
M&A trends are often a good indicator of the and reinsurers, the EU/US Covered Agreement charles.rix@hoganlovells.com
direction of travel in an industry. Three of the and relaxations made by China in relation to
largest deals in the insurance industry were in foreign investment serve to open up markets.
the reinsurance sector, with AXA acquiring XL, The focus for national regulators is perhaps not
AIG acquiring Validus and Renaissance Re's protectionism but rather financial stability; put
acquisition of Tokio Millennium from Tokio simply, will an insurer be able to pay out on
Marine, reflecting ongoing over-capacity in the claims when the time comes?
reinsurance market, soft rates and record losses
in 2018. Then there is the upswing in European We still don't know what form Brexit will
life insurance M&A, with sellers looking to move take or even whether it will happen, but the
away from costly legacy portfolios and a deeper potential implications for the UK are significant.
pool of consolidators active in the market. A According to the ABI, the UK insurance market
is the fourth largest in the world behind the
number of smaller deals involved acquisitions of,
or investment in, tech businesses by insurers – US, China and Japan, with an estimated total Band 1
most businesses see the acquisition of technology premium income of US$283 billion in 2017.
Insurance Chambers UK
6 Hogan Lovells Insurance Horizons 2019 7
They're a high-quality firm with a broad
geographic approach.
Chambers UK, 2019
Another active year for M&A in the
insurance industry
2018 was another active year for M&A. Total towards its new wealth management strategy. Minsheng's acquisition of Sirius and the three
deal values reached US$3.5 trillion, ranking The sale of Standard Life Assurance to Phoenix acquisitions made by AXA, AIG and Apollo
2018 as the third largest year since 2001. It in the UK is not dissimilar with the seller, referred to above. It will be interesting to
was only in Q4 that we saw a downturn, with Standard Life Aberdeen, moving towards see whether the new owners of these Lloyd's
investor confidence weakened by concerns investment management and Phoenix pursuing businesses wish to retain them. This, together
relating to the US/China trade war, Brexit, its consolidation strategy. There is also a with Lloyd's focus on profitability following
central bank policy on interest rates and deeper pool of consolidators in the European a year of significant losses, may lead to an
market volatility. life insurance M&A market comprising trade upswing in M&A involving Lloyd's businesses.
buyers and private equity as well as Japanese
In the insurance industry, the number and 2018 saw two disposals by Japanese insurers,
and Chinese investors. The rating agency Fitch
value of deals in 2018 was slightly down on bucking the trend of Japanese outbound
forecasts that run-off specialists will manage
2017. Care always needs to be taken with investment over the last few years: Tokio
more than 50% of closed life businesses in
comparisons as deal data can be distorted by Marine's US$1.5 billion sale of Tokio
Germany by 2022, up from 25% at present, as
one-off mega deals, although in this case 2017 Millennium to Renaissance Re; and Sompo's
insurers find the cost of managing shrinking
and 2018 were both dominated by one mega disposal of the Lloyd's business, Canopius, to a
portfolios an increasing burden.
deal. In 2018, it was Cigna's acquisition of private equity consortium led by Centerbridge
pharmacy company Express Scripts for US$ Amongst reinsurers, soft rates, excess capacity Partners. Although Japanese insurers may
67 billion, which closed in December 2018. In fuelled by investment from alternative no longer be regarded only as buyers, we
2017, CVS agreed to acquire Aetna for US$77 capital sources, and reinsurance losses have anticipate further outbound investment by
billion – the deal closed in November last continued to drive M&A. Three of the largest Japanese insurers.
year but remains subject to a highly unusual insurance deals of 2018 involved reinsurance
judicial review. businesses: AXA's acquisition of XL for
US$15.3 billion; AIG's acquisition of Validus
The insurance industry appears to be Charles Rix
for US$5.6 billion; and Apollo's acquisition of Global Head of Insurance Sector
going through a period of change, with
Aspen for US$2.6 billion. The ownership of a London
changes in corporate strategies resulting
number of Lloyd's businesses changed hands charles.rix@hoganlovells.com
in disposals of businesses which are no
in 2018. China Re agreed to acquire Chaucer,
longer regarded as "core". Looking at the
but in a number of other deals, Lloyd's
European life insurance M&A market, we see
businesses were part of larger transactions;
Generali involved in the sale of a number of
for example, Markel's acquisition of Nephilia,
life insurance businesses, most notably its
Hartford's acquisition of Navigators, China
German life insurance business which it sold
to Viridium, the biggest run-off deal yet in the
German market, and also making acquisitions
of asset management businesses as it moves
8 Hogan Lovells Insurance Horizons 2019 9
Developments in UK insurance
business transfers
As with much else in the UK, Brexit was At the same time, the fact that the number The complexity of many of these schemes To date, therefore, Brexit has tended to
the dominant theme for insurance business of Part VIIs was not even higher suggests the raised a range of novel issues for the reinforce the position of Part VII as among the
transfers in 2018 and going into 2019. extent to which many insurers with limited UK courts to consider, especially in the most flexible and capable portfolio transfer
Uncertainty over the withdrawal terms and European activities may have adopted a context of transfers of life insurance mechanisms worldwide. Its ultimate impact,
the risk around passporting rights associated risk-based approach to Brexit, weighing the business. These included the implications however, will inevitably depend on what form
with a hard Brexit, led many large insurers significant and ongoing costs associated with of the loss of compensation scheme (FSCS) Brexit finally takes. The main effect of the "no
to separate their EEA operations using an carrying out a transfer and maintaining a and ombudsman (FOS) protection, the deal" contingency legislation introduced by
insurance business transfer scheme under European presence against the extent of the differences between conduct regimes in the UK Government would be to restrict Part
Part VII of FSMA (a "Part VII"), with 16 regulatory risks associated with "no deal" and different jurisdictions and complex issues VIIs to domestic transfers of business within
Brexit schemes initiated in 2018 and an the likelihood of a transition period. of policyholder benefit expectations and the UK, removing the ability to transfer UK
additional 4 in the first quarter of 2019. This security, particularly where with-profits business to other EEA states and to transfer
pushed the overall number of Part VIIs to business was involved. The response to these EEA business into the UK. This may have
near-record levels. issues (as well as those raised by the various some inadvertent benefits: for example, it
banking business transfer schemes that will no longer be necessary to consult with
30 were undertaken over the course of 2018) the regulators in other EEA states in which
demonstrated the UK courts' willingness to transferring risk are situated, which could
25 consider potential adverse effects in the round help shorten the Part VII timetable. It will also
and to extend the scope of what it will order no longer be necessary to publish notices in
20 in connection with a Part VII, where this is other EEA states. However, the domestication
necessary to ensure a transfer is effectively of Part VII is also likely to reduce the options
15 carried out. Notable examples included giving available to international insurers considering
orders to transfer the business of another M&A and restructuring in the future,
10 group company (which was not, on its own, removing one of the best-tested mechanisms
capable of being transferred under Part VII) for implementing cross-border European
5 alongside a transferring business, on the insurance transactions.
basis that this business was integral to the
0 transferring business; and making ancillary
2012 2013 2014 2015 2016 2017 2018 2019
orders to support and supplement a cross- Jonathan Russell
Brexit insurance Part VII transfers (Q1) border merger linked to a Part VII transfer. Senior Associate
Other insurance Part VII transfers London
jonathan.russell@hoganlovells.com
Note: numbers are based on when court proceedings were started, not when completed.
10 Hogan Lovells Insurance Horizons 2019 11
Insurance business transfers
in the U.S.
A number of U.S. states have adopted, or Modelled after the highly successful Part For example Recently, the NAIC established a restructuring
are considering adopting, law under which VII transfer process in the UK and EU, IBTs mechanism working group to consider IBT laws.
insurance businesses can be transferred to provide a unique mechanism for transferring • Vermont’s Legacy Insurance Management As a first step, the working group will draft a
other insurers without the consent of the and assuming insurers to transfer blocks Act allows non-admitted insurers to transfer white paper addressing: (a) the perceived need
policyholders ("IBTs"). Similar to Part VII of insurance business to another insurance discontinued commercial business to a third- for restructuring statutes and alternatives that
transfers under the UK's Financial Services company while also providing the legal finality party company with regulatory approval. insurers are currently employing to achieve
and Markets Act 2000, these transfers require that has not traditionally been available in • Rhode Island’s “Voluntary Restructuring similar results; (b) existing state restructuring
regulatory and court approval. Should the the United States outside of a whole company of Solvent Insurers Act” provides statutes; and (c) legal issues posed by an
deployment of IBTs gain traction, they may acquisition. The IBT, once approved in a mechanism for court-sanctioned Order of a Court (or approval by an Insurance
become viable alternative structures to accordance with the applicable IBT law, will commutation of policies of commercial Department) in one state affecting the
complex reinsurance transactions typically result in a transfer of contracts of insurance, property and casualty insurers. policyholders of other states.
employed in the sale of a block of insurance resulting in the assuming insurer becoming
• Connecticut, Illinois, and Michigan have
business to a third party in the U.S. directly liable to the policyholders of the
adopted IBT statutes allowing companies
transferring insurer and extinguishing the
Widespread acceptance of IBTs may also domiciled in those states to divide books of Robert Fettman
transferring insurer's insurance obligations or Counsel
attract greater interest from non-traditional business within a company into two or more
risks under the contracts. New York
forms of capital, such as private equity and insurance companies with regulatory approval.
robert.fettman@hoganlovells.com
sovereign wealth funds, seeking to acquire An increasing number of states are adopting, • Oklahoma’s IBT law, which some in the
insurance assets, as the regulatory approval or considering, IBT laws. However, while industry have called a “game changer”,
process for implementing IBTs may be Connecticut, Oklahoma, Rhode Island, applies to both in-force contracts as well
relatively easier and quicker than with Vermont, Illinois, and, most recently, as discontinued or run-off insurance and
traditional insurance acquisitions. However, Michigan, among other states, have passed includes property/casualty, life, health, and
the presence of various technical and legal IBT laws or regulations, there are numerous any other line of insurance that the Oklahoma
issues which states will need to work through differences in the transfer process. These Insurance Commissioner finds suitable.
before IBTs achieve widespread acceptance differences include: whether the IBT must be
may defer their practical commercial benefits approved by the state’s insurance regulator
for some period of time. and by court order; the types or classes of
business that may be transferred; whether
the transferring insurer is “divided” into
two distinct legal entities; and whether
policyholders may “opt out” of the transfer.
They combine an international
approach with knowledge of both the
national market and the law.
Chambers Europe, 2018
12 Hogan Lovells Insurance Horizons 2018 13
How to collateralise reinsurance
agreements using illiquid assets
As is well known, reinsurance is a technique value that can be attributed to the collateral Illiquid assets cannot be held in a custody beneficial interest on trust for the insurer
by which an insurer can lay off some or all of arrangement based on the assets that are held account, so the above model will not work rather than the reinsurer.
the risks arising from its insurance policies. as part of it. as a means of using them as collateral. So,
However, the primary liability on the policies Whether this solution can work in a particular
Focus on more illiquid assets assuming that the insurer is willing, as context depends on the flexibility of the
is not transferred, so the insurer is still required a commercial and regulatory matter, to
to pay out to policyholders even if the reinsurer trustee and the existing documents under
Insurers and reinsurers are increasingly accept illiquid assets as part of the collateral
defaults on its reinsurance obligations. which it holds the illiquid assets.
searching for greater yield from their arrangement, what can be done to ensure that
The insurer is therefore exposed to the credit risk investment portfolios, which has led them there is security over them? There are three Company or collective investment scheme
of the reinsurer. This risk contains two important to invest to a greater extent in illiquid assets potential solutions:
such as equity release mortgages, commercial The illiquid assets can be transferred to a
features – first, the risk of non-payment, and, Funds withheld/deposit-back separate entity, such as a limited company or
second, the risk of a delay in payment. mortgages, loan portfolios and infrastructure
assets. There is also a growing desire to hedge a collective investment scheme. The shares or
The illiquid assets remain owned by the insurer, units in the entity are initially owned by the
The need for insurers to protect themselves liabilities through derivatives, which are also a but subject to an obligation to pass on cashflows
against this credit risk has long been form of illiquid asset. Naturally, it has followed reinsurer, and the reinsurer grants a security
from them to the reinsurer, and, within the interest over the shares or units in favour of
recognised, and various legal structures that reinsurers wish to provide collateral for confines of the reinsurance agreement, to deal
have been developed through which the reinsurance in the form of such assets. the insurer. On default of the reinsurer, the
with them in accordance with instructions of the insurer can then enforce its security to take
reinsurer can provide collateral for its reinsurer. The value of these assets is then set off
reinsurance obligations. In recent years, Leaving aside illiquid assets, the typical model ownership of the shares or units, and therefore
for reinsurance collateral is as follows: against the payment obligation of the reinsurer if take indirect control of the illiquid assets,
though, three factors have contributed to these the reinsurance is terminated.
arrangements being more complicated. which it can access by liquidating the entity.
• the reinsurer opens a custody account on the
books of a reputable highly rated custodian; This solution provides strong protection to the These solutions generally require careful
Increasing size insurer, as it already owns the assets in the
• the collateral is held in the custody account thought and more planning than the
Reinsurance agreements now often cover very event that the reinsurer defaults, with no need traditional custody account model. However,
in the form of a mixture of cash and for any proceedings to recover them from the
large portfolios of policies, with reinsurance in light of the continuing appetite of insurers
government and corporate bonds; insolvent estate of the reinsurer.
premiums often over £1 billion. Exposures of and reinsurers for higher yielding illiquid
this size mean that a reinsurer default could • the reinsurer grants a security interest over assets, we expect to see them being used more
Commitment from third party trustee
be devastating for an insurer if the collateral the custody account in favour of the insurer, frequently on reinsurance transactions.
arrangement were to fail. which enables the insurer to recover the Some types of illiquid asset are legally owned by
assets in priority to any other creditors of a third party trustee who holds them on trust
More intense regulation the reinsurer; and for an identified beneficiary. For example, this
Steven McEwan
Prior to Solvency II, there were no EU-wide • the insurer, reinsurer and custodian enter is often the case for equity release mortgages. Partner
rules covering credit risk for reinsurance, into an "account control agreement" which One solution is therefore for the reinsurer to London
so it was a topic left to national regulators. allows the insurer to recover the assets grant a security interest over its beneficial steven.mcewan@hoganlovells.com
In the UK, insurers had to demonstrate directly from the custodian, without the interest in the illiquid asset in favour of the
that they were "safely managing" large need for any court proceedings, in the event insurer, and then for the insurer, the reinsurer
reinsurance exposures, and to hold capital of a default by the reinsurer. and the trustee to enter into an agreement
against the risk of reinsurer default as part of under which the trustee agrees that if it is
their individual capital assessment process. notified by the insurer that it is enforcing
Solvency II introduced specific requirements its security interest then it will hold the
that collateral arrangements must satisfy in
order to be eligible, plus adjustments to the
14 Hogan Lovells Insurance Horizons 2019
Solvency II
Brexit and the forthcoming Solvency II review (''taking back control'')
In 2001, the European Commission formally 2020 and the Commission is due to finish its Brexit also provides UK regulators with the
launched the Solvency II project. The review by the end of 2020, but no timetable for opportunity to make changes to the Solvency
negotiations were protracted and complex – 15 consulting on, and then implementing, proposed II provisions as implemented in the UK.
years later, on 1 January 2016, the Solvency legislative changes, has been announced. The Treasury Select Committee's review of
II Directive came into force. To alleviate Solvency II in 2016/2017 was an opportunity
concerns that certain elements of Solvency On the basis that at some point the UK
for a transparent exchange of views from
II may have unintended consequences and will leave the EU, the UK Government has
a variety of market participants on the
to allow for improvements, the legislation put in place legislation to ensure that the
operation and shortfalls of Solvency II and
provided for two reviews: a review in 2018 of Solvency II provisions are ''on-shored'' into
the PRA's application of it. One key theme to
the Delegated Regulation; and a review in 2020 UK law, but the UK will have no part in the
come out from the evidence submitted was
of the Directive. future discussions about possible changes
the industry's dissatisfaction with the PRA's
to Solvency II. The relative size of the UK
interpretation and application of Solvency
In March 2019, the European Commission insurance industry compared to that of other
II, particularly in relation to the risk margin
published a new Delegated Regulation EU member states has, in the past, enabled it
and matching adjustment calculations. The
amending the Solvency II Delegated to have a significant influence on the shape of
Committee, in its report, concurred and
Regulation including changes to the design insurance regulation.
asked the PRA to look again at those issues
and calibration of some elements of the
The risk to the UK in the forthcoming raised by, among others, the ABI in the
Solvency Capital Requirement (SCR) standard
review of Solvency II is that it will be a context of Brexit and the freedom it may
formula. In preparation for the 2020 review,
"rule-taker" in the process, caught between a provide. The PRA stated in its response that
on 11 February 2019 the European Commission
need to maintain equivalence with Solvency II it is unable to make changes or put forward
asked EIOPA to provide advice on a number of
(and, it must be said, the support for Solvency solutions due to constraints under Solvency
issues including:
II from its own regulators) and the interests II and the lack of a clear view of the future
• long-term guarantees measures and of the EU27 who will naturally bring forward regulatory landscape post-Brexit. Once there
measures on equity risk (including the issues which need to be addressed in their is clarity on the terms of the UK's withdrawal
functioning of the volatility adjustment and own domestic insurance markets and for their from, and future trading relationship with,
matching adjustment); stakeholders. It remains to be seen whether the EU we should see developments on the
or not that will lead to deviations between the PRA's approach to Solvency II.
• the Solvency Capital Requirement
EU and UK regulatory landscape. Insurers
standard formula;
and reinsurers with a global reach are likely
• member states' rules and supervisory to prefer a level regulatory playing field rather Kirsten Barber
authorities' practices on the calculation of than a jigsaw of different rules. Senior Knowledge Lawyer
the Minimum Capital Requirement; and London
kirsten.barber@hoganlovells.com
• group supervision and capital management
within a (re)insurance group.
EIOPA is due to deliver its advice by 30 June
16 Hogan Lovells Insurance Horizons 2019
Data protection after GDPR and
preparing for Brexit
2019 is likely to be an eventful year in data investigations are currently underway On the matter of Brexit, if the UK leaves
protection. The EU General Data Protection following complaints by organisations such the EU with a deal, the UK will continue
Regulation (GDPR) has now been in effect as Privacy International and NOYB (the to be treated as part of the EU during the
throughout the EU since 25 May 2018 European Centre for Digital Rights). The transition period. An adequacy decision
and data protection authorities have been progress, and perhaps conclusion, of these would be carried out during this time, and
reporting numerous data breach notifications investigations will give businesses some clues would hopefully be made in the UK’s favour,
and general awareness of data protection as to the activities where non-compliance with resulting in a preservation of the status
issues. This year is likely to see the first the law will not be tolerated. quo as far as data protection is concerned.
substantial fines being levied, giving an However, if the UK leaves the EU without a
indication of how enforcement will proceed In any event, some key issues have already deal, the situation will be very different, as
under the new legislation. 2019 will also see emerged as immediate areas for attention. the UK will become a third country for the
judgment being given in some cases before One of the greatest achievements of the GDPR EU’s purposes.
the Court of Justice of the EU concerning data has been its ability to bring privacy and data
protection into the mainstream. That has, in If there is no deal, the Government has put
protection and privacy, including cases on the
part, led to an unexpectedly high uptake in in place various measures to ensure that
meaning of consent and the scope of the “right
the exercise of data subjects’ rights. Dealing data protection standards will remain the
to be forgotten”. Further guidance is likely to be
with data subjects’ rights is not easy because same after exit day (bringing GDPR into
given about the interpretation of GDPR by the
most of these rights are not absolute rights. UK law via secondary legislation) and that
European Data Protection Board (EDPB).
They cannot be ignored but they often involve data transfers out of the UK will be able to
Another big event on the horizon for data careful thinking about the limits to be applied, continue. However, if adequate safeguards
protection is the UK’s scheduled exit from the rights of others and the practicalities are not put in place for data transfers into the
the EU, although when, and on what basis, of honouring those rights. As with many other UK, these transfers are likely to be disrupted.
remains unclear. While the proposed European data protection matters, having a No-deal preparations for businesses should
Withdrawal Agreement would have preserved process in place is key, and following it is essential. therefore include examining cross-border
the status quo in data protection terms, at EU-UK data flows and putting in place
least until the end of the transition period, if On another important front – international alternative safeguards such as Standard
the UK leaves the EU without a deal, cross- data transfers – Binding Corporate Rules Contractual Clauses or BCR.
border data flows between the UK and the EU (BCR) have emerged as the go-to solution for
will be disrupted. The outcome of the current any organisation seeking a robust yet flexible
political crisis in the UK and its dealings with approach to legitimising global data flows.
the EU will therefore have an important effect BCR top the list of options available in the
GDPR for this purpose, and regulators appear Use their industry knowledge and Nicola Fulford
on privacy and data protection.
sensitive to this situation. As a result, with expertise to reach sensible commercial Partner
There has been a lot of media speculation the coming into effect of the GDPR, the EU positions. London
about the potential for fines of up to €20m regulators are clearly endorsing the role of nicola.fulford@hoganlovells.com
Legal 500 UK, 2018018
or 4% of global turnover to be levied under BCR as the main enabling tool for lawful data
the new legislation, but 2019 is likely to show transfers worldwide.
the true direction of travel of the European Eduardo Ustaran
regulators. In a similar way, a number of Partner
London
eduardo.ustaran@hoganlovells.com
18 Hogan Lovells Insurance Horizons 2019
There are three features of the Generali Leben
Recent acquisition a 'game changer' deal worth mentioning:
• Generali has retained a minority stake
for German life run-off market? of 10.1% of the share capital of Generali
Leben, with an option granted to Viridium
to acquire that stake.
• The consideration paid by Viridium is
subject to adjustment if changes are made
On 9 April 2019, the German regulator, BaFin, sale of ARAG Leben to Frankfurter Leben in to rules and regulations governing the
announced that, after intensive examination, September 2016, which BaFin cleared in June contributions to ZZR reserves required to
it had concluded that there was no reason for 2017), it appears that BaFin will review any be held for guarantees contained in the
it to object to the sale of 89.9% of the share share deal essentially in the same way that terms of the life insurance policies issued
capital of the German life insurer Generali it would review a portfolio transfer. When by Generali Leben.
Leben to the German life insurance run-off Generali and Viridium signed their deal in
platform Viridium. BaFin reviewed the deal July 2018 for the sale of Generali Leben, • Generali Deutschland will provide asset
under the EU Acquisitions Directive (as BaFin's Chief Executive Director of Insurance management services for the investments of
implemented in German law) which grants EU Supervision, Dr Grund, stated that "no Generali Leben for a minimum of five years.
insurance regulators the power to review the policyholder may be worse off as a result of a There is certainly the depth of potential
acquisition of 10% or more of the shares of an company being sold". buyers in the German life insurance industry
insurance company. In order to understand but whether the Generali Leben deal is the
BaFin's approach to the review of such share For the purposes of its assessment of an
acquisition of shares in an insurance company, game changer we expect it to be will obviously
deal, it is worth noting that a business transfer depend on businesses being put up for sale by
of a life insurance portfolio would be subject BaFin will want to consider the buyer's
financial position, its capitalisation and its their owners. The rating agency, Fitch, forecasts
to a full examination and approval by BaFin. that run-off specialists will manage more than
financial viability. BaFin will also consider the
The Generali Leben deal is regarded as a buyer's reputation, its business model and its 50% of closed life businesses in Germany by
game changer in the German life run-off internal governance structures. A key issue 2022, up from 25% at present, as insurers
market; therefore it is worth highlighting a will be the buyer's risk management system find the cost of managing shrinking portfolios
number of aspects: and ability to comply with extensive regulatory an increasing burden. Familiarity with recent
reporting requirements. In addition, BaFin deals and BaFin's expectations and approach
In relation to a life insurance portfolio will clearly have an advantage for both buyers
will consider the buyer's operational plans
transfer, BaFin will normally insist that the and sellers in the German life run-off market.
for the company, including the extent to
value of the contractual entitlements of the
which existing systems and employees will
policyholders are at least the same after
be retained. As with other EU insurance
the transfer; and in considering whether
regulators, BaFin has the power to impose
that will be the case, BaFin will undertake Christoph KÜppers
conditions on its approval of an acquisition Partner
a comprehensive review of the transfer. At
of shares in an insurance company. This Dusseldorf
face value, the criteria which an insurance
might include a requirement for outsourcing christoph.kueppers@hoganlovells.com
regulator must use when considering an
arrangements to ensure that the business is
acquisition of shares in an insurance company
properly managed; the retention of a specified
are different; the new owner needs to have
level of capital resources in the company in
the knowledge and skills (and reputation)
order to protect the interests of policyholders;
required to run the insurance company in
and caps on charges which may be extracted
a sound and prudent manner. However, in
from the company by the new owner for
light of recent sales of life companies (such
administration and other services.
as the Generali Leben and the preceding20 Hogan Lovells Insurance Horizons 2019 21
The new Dutch resolution legal
regime – a solution for Dutch insurers
that run into solvency trouble?
Due to the low interest rate climate, the strict The Act distinguishes two phases: The DNB is for example not required to draw In addition, the Act also grants the DNB
Solvency II regime and the unfavourable up a resolution plan if the resolvability of the supporting resolution powers. These supporting
characteristics of certain legacy insurance • Planning phase; and insurers has been sufficiently safeguarded. resolution powers are: (i) the DNB can take over
products, certain insurers may face increased • Resolution phase. control of the insurer in resolution, (ii) the DNB
Resolution phase
supervision and scrutiny from their financial can appoint a special managing director to take
Planning phase
regulators. Will the new resolution regime for The DNB must decide to resolve an insurer if control, (iii) the DNB can change the legal form
Dutch insurers provide relief for Dutch insurers In the planning phase, the insurer will the following conditions are met: of the insurer, if necessary to apply the bail-
facing solvency issues for example as a result of need to draw up a preparatory crisis plan in measure and (iv) the DNB can terminate or
legacy issues in insurance portfolios? in preparation for a deteriorating financial 1. the insurer is failing or is likely to fail to modify the terms of an agreement to which the
position. This plan needs to be submitted to meet Solvency II capital requirements; insurer is a party.
The new Dutch Insurers Recovery
DNB, and is comparable to the recovery plan 2. there is no reasonable prospect that a
and Resolution Act The Act includes a number of safeguards
in the banking sector. private solution will prevent this from to protect the interests of creditors and
On 1 January 2019, the new Dutch Insurers happening; and
The purpose of the preparatory crisis plan policyholders. For example, the Act underpins
Recovery and Resolution Act (the "Act")
is to make clear what recovery measures 3. the resolution is in the public interest. the 'no creditor worse off' principle. This
came into force. The Netherlands is one of
could be taken if the financial position of the means that creditors should not be worse off
the first countries in Europe to implement In this phase, the following resolution
insurer deteriorates. The preparatory crisis than they would be in normal bankruptcy
a resolution regime for insurers. One of the measures will be available to the DNB:
plan is drawn up during the normal course proceedings of the insurer.
reasons for the Netherlands to move forward
of business. • bail-in: this uses the DNB's power to
at a national level was that the intervention The Bankruptcy Act
measures available did not provide an write down or convert equity or debt, or
In addition, the DNB will need to draft a
effective framework to protect the interests restructure insurance policies; Finally, the Act also amends the Dutch
resolution plan for every insurer or insurance
Bankruptcy Act to improve the position of
of policyholders. This came to light when group. In this resolution plan, the DNB will • sale of business: sell the shares of an
the Dutch financial group SNS REAAL ran policyholders in cases where the DNB decides
describe how it intends to deal with the insurance group or troubled company
into problems in 2013 and the whole group not to apply resolution measures but to apply
resolution of the insurer or insurance group, within the group;
(the bank and insurance company) was for bankruptcy of the insurer.
the resolution tools and powers it may use and
• bridge institution: temporarily
nationalised by the Dutch Minister of Finance. which obstacles are hindering the resolution.
transferring either the insurer's shares
The plan also describes the important
The Act is not based on EU legislation; or its assets and liabilities to a bridge
characteristics of the insurer that are relevant Victor De Vlaam
however, the Dutch legislator drew the on institution. The DNB will use this tool if
for resolution (for example, the existence of Partner
the recovery and resolution framework for no alternative solution involving market Amsterdam
unit-linked policies).
banks (directive 2014/59/EU BRRD1 and parties can be found in the short term; and victor.devlaam@hoganlovells.com
Directive 2017/2399 BRRD2). If the DNB takes the view that there are • asset separation: this tool allows the
obstacles hindering the resolution, it can DNB to transfer assets and liabilities to an
Applicable to all insurers
require the insurer to take measures to remove asset management vehicle. This measure Carlijn Van Rest
The Act applies to all insurers (life and non- these obstacles. These measures can be far- can only be used in combination with one of Counsel
life insurers) under supervision of the Dutch reaching. For example, the DNB can request: the other measures Amsterdam
carlijn.vanrest@hoganlovells.com
Central Bank ("DNB"). This also includes
• selling assets;
Dutch branches of insurers established in non-
EU countries. The Act in addition applies to • limiting existing or proposed activities;
Dutch parent holding companies and entities and/or
performing critical activities for an insurance • changing the legal or operational structure.
group. There are a few exceptions and special
rules for insurers with a limited risk profile.22 Hogan Lovells Insurance Horizons 2019 23
Focus on vulnerable customers
During 2018, the FCA, the Treasury Select effectively with their impact and the outcomes The insurance industry has already made • Vulnerable circumstances can impact people
Committee and the Competition and Markets measured. Christopher Woolard (Executive steps in the right direction. In 2017, the ABI for differing periods of time given causes can
Authority (CMA) each highlighted the Director of Strategy and Competition, FCA) published an industry guide – Addressing include bereavement, divorce, job loss, long-
potential challenges of dealing with vulnerable stressed that firms which fail to do so could customer vulnerability, a guide to identifying or short term-illness and so on. With this in
customers and emphasised the importance of face FCA intervention. There have already and supporting vulnerable customers in the mind, firms will need to consider the types
finding solutions to prevent these customers been significant challenges determining how long-term saving market – with the aim of of scenarios they need to make provision for
from being financially excluded. to define and treat vulnerability within proving a reference point to help insurers within their operating environments.
financial services but the FCA are proposing to improve their processes for dealing with
In July 2018, the CMA held a symposium on • Will existing terms and conditions need to
introduce minimum standards with which vulnerability. The ABI's long-term saving
the challenges facing vulnerable consumers be reviewed in light of the need for flexibility
firms will need to be aligned. There is no members have committed to implementing
and the potential solutions. A summary of the to accommodate the changing needs of
doubt more to come from the FCA on the a vulnerability policy of strategy, providing
symposium explained that, as part of a re- customers in vulnerable circumstances?
practical impact of its Approach to regular staff training and sharing examples of
examination of the CMA’s legislative framework • Does reporting within firms provide the
Consumers, including as part of its discussion good practice through the ABI.
under the Government Green Paper on necessary clarity and transparency for
paper on a new duty of care (DP18/5).
modernising consumer markets (April 2018), the The challenges for firms Senior Managers to take action where
However, it is clear that the FCA expects firms to
CMA has asked for further work on how the required? For example, do firms analyse
act now. While this current focus from the regulators
regime could be strengthened to better protect data to determine whether causes for
the vulnerable. In particular, the CMA is Finally, in late 2018 the Treasury Select is welcome and will encourage and establish
declined claims and rejected complaints
concerned about the issue of price Committee launched an inquiry into a more inclusive environment for vulnerable
could be indicative of a need to revise
discrimination (experienced by long-standing consumers’ access to financial services, customers, there are some key implementation
policies and approach to dealing with
customers and vulnerable customers) and is focussing on the interaction between challenges for firms.
customers in vulnerable circumstances?
focussing on challenges and opportunities for vulnerable customers and financial services • Consideration of the potential conflicts
consumers presented by digital technology. firms and whether certain groups of between recording and maintaining
The CMA concluded that its mandate could be consumers are excluded from obtaining a sensitive customer information versus Julie Patient
adjusted to take account of vulnerable basic level of service from financial services meeting strict GDPR requirements. Counsel
consumers specifically. providers. As part of this inquiry, the London
Committee intends to examine the FCA’s • The “80/20” rule has been effective in the
Then, in September 2018, the FCA held a julie.patient@hoganlovells.com
definition of "vulnerability" and consider past in determining policies and processes
workshop on "Customers in Vulnerable that work effectively the majority of the
whether financial services providers should
Circumstances", which focused on its time, with robust processes for managing
increase efforts to prevent financial exclusion. Elizabeth Greaves
approach to ensuring inclusive and fair exceptions. However, do firms now need to
The deadline for submissions of evidence was 14 Senior Associate
treatment of vulnerable consumers in the consider designing and implementing
December 2018, and the practical impact of London
financial services industry. Much of the focus policies, processes, products and
the inquiry remains to be seen. elizabeth.greaves@hoganlovells.com
draws from its Approach to Consumers services that provide the flexibility to
published in July 2018. Nick Stace (Non- accommodate customers with the greatest
Executive Director, FCA) emphasised the need needs, rather than assuming them (the
for firms within the industry to demonstrate “20”) to be exceptions?
that guidelines and policies relating to
vulnerable consumers are implementedInsurance Horizons 2019 25
Sustainability and climate change
Sustainable or ''green'' finance (the process of • new categories of benchmarks comprising In the UK, the FCA and PRA have published Insurers can, of course, make choices over
taking environmental, social and governance low-carbon and positive-carbon impact reports considering the impact of climate what they underwrite; some risks may come
(ESG) considerations into account in benchmarks; and change on financial services. The reports to be seen as too risky or require specific
investment decision-making) and a focus highlight the financial risks to the markets exclusions, such as housing in flood plains or
• changes to the MiFID II Directive and the
on the impact of climate change have risen and firms and the increasing need for business disruption arising from weather events.
Insurance Distribution Directive which will
up the international regulatory agenda over adequate disclosure of those risks to investors,
require investment firms and insurance Recognition of the systemic impacts of climate
the last few years. Kick-started in 2015 by consideration of those risks at board level and
distributors to collect information about their change and the transition to a low carbon
the adoption of the Paris Agreement on the development of strategies to ensure (re)
clients' ESG preferences and to take these into economy on the financial services sector
Climate Change and the UN 2030 Agenda insurers manage those risks.
account as part of the advisory process. has prompted a global response. Through
for Sustainable Development, national
Financial risks from climate change can be their underwriting and investment activities,
governments, regulators and market bodies EIOPA has been asked by the European
divided into physical and transition. Physical insurers are particularly exposed to the risks
have been looking at how the financial services Commission to give technical advice on the
risks arise from a number of factors and arising from climate change. Increasingly,
sector can play its part in achieving a more integration of sustainability risks and factors
can be related to specific weather events some insurers and reinsurers are starting
sustainable economy. in the Delegated Regulations of the Solvency
such as heatwaves, floods, wildfires and to incorporate sustainability principles into
II Directive and Insurance Distribution
The European Commission has been quick to storms and longer term shifts in climate their businesses. We can expect the trend for
Directive (due by 30 April 2019), and provide
act on its 2018 Action Plan and has published such as changes in precipitation and extreme more regulation in this area to continue. The
an Opinion on sustainability in the Solvency
legislative proposals which will introduce: weather variability, and rising sea level and challenge for regulators, insurers and other
II Directive (by 30 September 2019). EIOPA's
temperatures. These risks can obviously stakeholders is to ensure that regulatory
• an EU classification (taxonomy) for policy proposals in its draft technical advice
impact insurers and reinsurers through higher initiatives are consistent, proportionate
sustainable investments; will require insurance companies to review
claims. Global insured losses from natural and do not result in constraints stifling the
and amend their internal policies, processes
• new requirements on certain firms, including disaster events in 2017 were the highest ever innovation of new products.
and compliance procedures to integrate
insurers who provide insurance-based recorded. The number of registered weather
sustainability risks into their investment, risk
investment products (IBIPs) and insurance related natural hazard loss events has tripled
and capital management functions, which
intermediaries providing advice on IBIPs since the 1980s and inflation-adjusted Kirsten Barber
will have cost and infrastructure implications.
about the integration of sustainability risks insurance losses from these events have Senior Knowledge Lawyer
No timetable for implementation of these
in their investment decision-making process increased from an annual average of around London
proposals has been given but they are likely to
and advisory process; US$10 billion in the 1980s to around US$55 kirsten.barber@hoganlovells.com
be implemented in 2020.
billion over the last decade.
Transition risks can arise from the process
of adjustment towards a low-carbon
economy. This adjustment is influenced by
a range of factors including climate-related
developments in policy and regulation,
the emergence of disruptive technology or
business models, and shifting sentiment and
social preferences.26 Hogan Lovells Insurance Horizons 2019 27
International initiatives on International European Commission UK
sustainability and climate change 2018
IAIS/SIF published Issues HLEG final GFT published its report
Paper on Climate Change recommendations Accelerating Green
Risks to the Insurance published. Finance.
Sector.
Commission's Action Plan FCA published a
International European Commission UK on Sustainable Finance discussion paper on
published. Climate Change and
Green Finance.
2015 Technical expert group
on sustainable finance
Paris Agreement and UN PRA publishes a report (TEG) established to help
2030 Agenda for Sustainable on The impact of climate the Commission develop
Development adopted. change on the UK insurance legislative proposals.
sector.
Financial Stability Board Three legislative proposals
launched its Task Force on published on establishment
Climate related Financial of a framework to
Disclosures (TCFD). facilitate sustainable
investment (taxonomy),
regulation of disclosures
2016 and amendments to the
Benchmark Regulation.
Sustainable Insurance High Level Expert Group
Forum (SIF) established on Sustainable Finance
– network of insurance (HLEG) established to 2019 Publication of amendments FCA and PRA hosted the
supervisors and regulators. advise on how to promote to provisions on suitability first meeting of the Climate
the use of public and private assessments under MiFID Financial Risk Forum,
capital for sustainable II and the Insurance a new body comprising
investments and on the Distribution Directive (IDD) representatives from across
protection of the stability of not yet adopted. the financial sector, with the
the financial system from aim of developing practical
environmental risks. EIOPA publishes technical
tools and approaches to
advice on integration of
address climate-related
sustainability risks and
financial risks.
2017 factors in the delegated
regulations of Solvency II PRA published policy and
and IDD. supervisory statements on
TCFD recommendations Government established a enhancing banks' and
EIOPA due to give its
published. Green Finance Task-force insurers' approaches to
Opinion (by 29 September)
(GFT) to report on how managing financial risks
on sustainability in the
to make green finance an from climate change.
Solvency II Directive.
integral part of the financial
system.28 Hogan Lovells Insurance Horizons 2019
Federal Reserve Board preparing
insurance group capital requirements
Recent remarks by the U.S. Federal Reserve concluded that the insurance capital standard The FRB also described a number of
Board (FRB) provided the insurance industry (ICS) being developed by the International adjustments that the BBA would need to
with a high-level overview of the FRB's Association of Insurance Supervisors (IAIS) make to the building blocks in order for
forthcoming proposal on consolidated capital for internationally active insurance groups the aggregation to function appropriately,
requirements for insurers supervised by the FRB. was not an optimal framework for the U.S. including measures designed to avoid
insurance market. double-counting that could arise from
By way of background, the Dodd-Frank Wall inter-company transactions and provisions to
Street Reform and Consumer Protection Key attributes of the BBA comply with the Collins Amendment under
Act gave the FRB regulatory responsibilities Dodd-Frank. Significantly, one adjustment
both for insurance holding companies that As the name implies, the soon to be published
BBA constructs "building blocks" — or to the building blocks would apply insurance
own a federally insured bank or thrift and capital rules consistently, without regard to
for insurance companies designated as groupings of entities in the supervised firm
— that are covered under the same capital permitted accounting practices granted by
systemically important by the U.S. Financial an individual state, thus uniformly applying
Stability Oversight Council (so-called SIFIs), regime, which are then used to calculate
combined, enterprise-level capital resources statutory accounting principles as set forth
the former of which represent approximately by the National Association of Insurance
10 percent of the U.S. insurance industry. and requirements. For example, subsidiaries
within a life insurance building block Commissioners (NAIC).
In June 2016, the FRB published an advance would be treated under the BBA the way The FRB also noted the need of the BBA to
notice of proposed rulemaking (ANPR) they would be treated under life insurance "scale" capital positions in different regimes
describing two potential regulatory capital capital requirements, while subsidiaries through analyzing historical defaults because,
frameworks for FRB-supervised insurers: a in a depository institution building block as he noted, "two building blocks under two
capital framework, styled as a "building block would be subject to bank regulatory capital different capital regimes cannot simply be
approach," to be applied to savings and loan requirements. added together if, as is frequently the case,
holding companies or bank holding companies each regime has a different scale for its ratios
with significant insurance activities; and a To address regulatory gaps and arbitrage
risks, the BBA generally would apply and thresholds".
"consolidated approach" applicable to insurer
SIFIs. With Prudential's de-designation in bank regulatory capital requirements to
October 2018, no insurer currently has the nonbank/noninsurance building blocks.
Once the enterprise’s entities are grouped Robert Fettman
SIFI label. Counsel
into building blocks, and capital resources
New York
The FRB's building block approach (BBA) and requirements are computed for each robert.fettman@hoganlovells.com
building block, the enterprise's capital
In its written remarks, the FRB noted that
position is, subject to certain adjustments
it: (i) decided against applying FRB bank
and scaling (described below), produced by
holding company capital rules to supervised
generally adding up the capital positions of
insurers at the enterprise level, in light
each building block. Finally, the BBA would
of the very different business models of
impose a minimum capital requirement
insurance and banking; (ii) determined that
against the holding company's aggregate
a capital approach akin to the European
capital position calibrated to "ensure that
Solvency II framework would not adequately
the risks of the enterprise do not present
incorporate U.S. accounting frameworks and
undue risk to the safety and soundness of the
could unintentionally crimp the ability of
depository institution".
insurers to provide long-term life insurance
and retirement planning products; and (iii)You can also read
