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Lloyd's Insurance Market > Module 5: London Market Regulation > Flashcards

Module 5: London Market Regulation Flashcards

1
Q

What three elements form the three lines of defence model?

A
  1. Management - taking responsibility for the operation of the controls and owning the risk.
  2. Risk management/Compliance function.
  3. Internal Audit team.
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2
Q

What is the Financial Services Authority (FSA)?

A

The independent body set up by the Government under the Financial Services and Markets Act 2000 (FSMA) to regulate financial services in the UK and protect the rights of customers.

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3
Q

What is the FSA’s four statutory objectives?

A
  1. Maintain confidence in the financial system.
  2. Promote public understanding of the financial system.
  3. Secure the appropriate degree of protection for consumers.
  4. Reduce financial crime.
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4
Q

What are the FSA’s seven principles of good regulation?

A
  1. Efficiency and economy.
  2. Role of management.
  3. Proportionality - the burdens or restrictions we impose on the industry should be proportionate to the benefits that are expected to result from those burdens or restrictions
  4. Innovation.
  5. International character.
  6. Competition.
  7. Public awareness.
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5
Q

What are the key points of the FSA handbook?

A
  1. The high level of general standards are for every type of firm to follow.
  2. There are numerous specific rules for different areas of financial services business.
  3. The Handbook is not a static document and it is continually evolving.
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6
Q

What does the FSA regulate?

A
  1. Banks
  2. Building societies
  3. Credit unions
  4. Insurance companies
  5. Insurance intermediaries
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7
Q

The FSA adopts a risk based approach when regulating entities. What does this mean?

A

A risk based approach means that:
1. It monitors firms on an ongoing basis.

  1. It seeks to work with the market.
  2. It generally restricts regulation to the following circumstances:
    - Where the market does not provide adequate market based solutions to protect consumers.
    - Where regulation can be provided at a reasonable cost.
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8
Q

What risks could a business face?

A
  1. Bad luck
  2. Bad strategy - a lack of balance within the underwriting book.
  3. Bad management - poor quality of processes and controls.
  4. Bad investments.
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9
Q

What are the FSA’s first five principles for business?

A
  1. Integrity
  2. Skill, care and diligence
  3. Management and control
  4. Financial prudence
  5. Market conduct
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10
Q

What are the FSA’s last five principles for business?

A
  1. Customers’ interests: a firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.
  2. Conflicts of interest: a firm must manage conflicts of interest fairly, both between itself and its customers and between customer and another client.
  3. Customers: relationships of trust: a firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgement.
  4. Clients’ assets: a firm must arrange adequate protection for client’s assets when it is responsible for them.
  5. Relations with regulators: a firm must deal with its regulators in an open and co-operative way
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11
Q

What happens if a firm breaches an FSA principle for business?

A

Breach of a Principle will make a firm liable to potential enforcement action by the FSA, including possible disciplinary sanctions.

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12
Q

What are Approved Persons?

A

People who take up key positions such as directors, compliance functions and money laundering reporting officers.

They’re known as controlled functions, and certain controlled functions are also called significant influence functions.

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13
Q

What qualities does the FSA look for when considering an Approved Person application?

A
  1. Honesty, integrity and reputation.
  2. Competence and capability.
  3. Financial soundness.

FSA interviews can form part of the process.

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14
Q

How does Lloyd’s handle the Approved Persons approval process?

A
  1. Lloyd’s requires that all appointments to senior positions are notified to them before any Approved Person application is made to the FSA.
  2. Lloyd’s will advise within 3 days whether it needs more information.
  3. Lloyd’s does retain the power to either block a senior appointment or require the removal of a senior appointment.
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15
Q

What does ARROW stand for?

A

Advanced Risk Responsive Operating FrameWork.

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16
Q

What happens during an ARROW visit?

A
  1. There will be an information request sent by FSA before the visit.
  2. The visit consists of testing and interviews with approved persons and other senior management.
  3. The FSA runs the business’s internal risk analysis against its own knowledge, experience and expectations and performs a gap analysis focusing on whether any particular risk or event might occur and how sever the impact might be.
  4. If the business’s risk management and analysis fits well with the FSA’s expectations, the FSA will regards them as a fairly low risk.
  5. If the business’s risk management does not satisfy the FSA’s expectations in any way, the FSA response will be more intense.
  6. Any firm dealing in large personal lines portfolio or dealing in large value risks will automatically be treated as high risk.
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17
Q

What is the Risk Mitigation Programme?

A

After an ARROW visit, the FSA will issue a list of action points, called a Risk Mitigation Programme, together with a timescale for actioning.

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18
Q

How does the FSA treat low risk firms after an ARROW visit?

A
  • Those firms which are regarded as low risk after the ARROW visit will not get a risk mitigation programme
  • They will be monitored by a combination of specified standardised returns to the FSA called baseline reporting and sample exercises.
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19
Q

How high a risk are Lloyd’s and London Market insurers?

A

Lloyd’s and London Market insurers are generally regarded as medium to high risk.

Each firm will have an individual risk assessment performed which drills into the business risks identified in a high level review and into what the controls are within the firm.

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20
Q

What does ICOBS stand for?

A

Insurance: Conduct of Business Sourcebook (ICOBS).

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21
Q

What is an insurance consumer customer?

A

An individual who is acting for purposes which are outside his trade, business or profession.

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22
Q

What is an insurance commercial customer?

A

The other main category of client or business is commercial.

Commercial customers are those that do not meet the consumer definition.

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23
Q

Who created the ICOBS and what are they?

A

The ICOBS are a set of rules set down by the FSA which…

  • are based on the requirement to provide a high level of consumer protection.
  • and the nature of the requirements and the duties, responsibilities and obligation that a firm has towards its customers.
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24
Q

The FSA and Lloyd’s meet on a regular basis. What do they discuss?

A
  1. Material issues and risks in relation to managing agents;
  2. Impact of market events, including systemic issues; and
  3. Actions to be take by either the FSA or Lloyd’s (or both if appropriate).
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25
Q

What information does the FSA provide Lloyd’s with?

A
  1. Copies of Risk Mitigation Programmes and letters;
  2. The conclusions of thematic reviews; and
  3. The findings of syndicate ICAs reviewed.
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26
Q

What information does Lloyd’s provide the FSA with?

A
  1. Assessments of risks posed by managing agents and syndicates to the Lloyd’s market;
  2. Operational risk review report;
  3. Performance Management team reviews and assessments on live and run off managing agents;
  4. An overview of the progress of reviews of syndicate ICAs; and
  5. Thematic syle review.
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27
Q

What does prudential mean?

A

Taking care in business to ensure the safety of investors funds and the stability of the overall financial system.

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28
Q

When the FSA is replaced in the UK, which two regulatory authorities will supervise individual institutions (Micro supervision)?

A
  1. The Prudential Regulation Authority - which will be a subsidiary of the Bank of England will be responsible for prudential regulation of deposit taking institutions, insurers and investment banks.
  2. The Financial Conduct Authority - will regulate business conduct in wholesale and retail market with the objective of protecting and enhancing confidence in the UK financial system.
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29
Q

When the FSA is replaced, who will regulate:

  1. Insurance companies
  2. The Society of Lloyd’s and
  3. Managing agents?
A
  1. The Prudential Regulation Authority (PRA) for prudential regulation.

AND

  1. The Financial Conduct Authority (FCA) for the business conduct regulation.
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30
Q

When the FSA is replaced, who will regulate brokers and members agents?

A

The Financial Conduct Authority (FCA).

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31
Q

What is the IAIS and when was it establised?

A
  1. The International Association of Insurance Supervisors (IAIS).
  2. It was established in 1994 and has members in more than 120 countries.
32
Q

What are the IAIS’s objectives?

A
  1. To promote cooperation among insurance regulators.
  2. To set guidelines for insurance supervision.
  3. To provide training to its members.
  4. To coordinate work with regulators in other financial sectors and international financial institutions.
33
Q

What are the five difficulties of obtaining licences to transact insurance business in other countries?

A
  1. Insurance laws can make it difficult or impossible for a foreign insurer to become licensed.
  2. Some local insurance regulators may expect a foreign licensed insurer to deposit assets in their territory.
  3. Insurance laws are usually drafted with the local market in mind.
  4. Different countries have varying requirements relating to point of sale information and language in which documents must be produced.
  5. Although Lloyd’s has licences or authorisations to carry on business in over 70 countries, which may be used by all the syndicates in the Lloyd’s market, other London Market insurers may have a more restricted range of licences and may seek to transact direct insurance business on a “non-admitted basis”, such as in the USA.
34
Q

What is the primary objective of the EU?

A

The creation of a single European market by removing the barriers between the member countries on the movement of people, goods, services and capital.

35
Q

Which institutions oversee the EU single market?

A
  1. The Council of the European Union
  2. The European Parliament
  3. The European Commission
  4. The European Central Bank
  5. The European Court of Justice
36
Q

Which three countries are part of the European Economic Area (EEA) but ARE NOT part of the EU?

A
  1. Iceland
  2. Liechtenstein
  3. Norway
37
Q

What is the key legislation relating to the insurance industry?

A
  1. What an insurer must do if it wants to enter the market (authorisation).
  2. What is needs to do to maintain an operational status going forward.
38
Q

What does the European Systemic Risk Board (ESRB) do and what are its objectives?

A

Concentrates on marco level regulation.

Its objectives are:

  1. Developing a European macro-prudential perspective.
  2. Enhancing the effectiveness of early warning mechanisms
  3. Allowing risk assessments to be translated into action by the relevant authorities.

The ESRB has no authority to impose measures on Member states or national bodies.

39
Q

What does EIOPA stand for?

A

European Insurance and Occupational Pensions Authority (EIOPA).

40
Q

What is the “single passport system”?

A
  • An insurer operating in the London Market can accept business from anywhere in the EU…
  • provided the insurer is authorised by its home State regulator.
41
Q

What sorts of rules can EU Member States set in relation to products sold in their country?

A

Rules relating to:

  1. Contract law - A Member State may insist in its own contract law being applied to certain contracts sold on its territory.
  2. Marketing, advertising and the selling process.
  3. Tax
  4. The “general good” - The host country retains the right to apply its own laws if it can show that these are necessary to protect “the general good”.
42
Q

What is establishment?

A

Insurance business carried via a branch office or other physical presence (known as ‘establishment’) in the other Member State.

43
Q

What are services business?

A
  • Insurance business directly carried from their home state, on a cross-border basis.
  • This is the basis on which most of the London Market’s business is transacted where the risk is located in an EU Member State outside the UK.

In these circumstances, everything from the underwriting to the issuance of any documents from the insurers are done in London.

44
Q

What is Solvency?

A

Making sure that your assets exceed your liabilities by a prescribed margin.

45
Q

What is the purpose of solvency margins?

A

The purpose of a solvency margin is to ensure that an insurer has sufficient assets to meet its liabilities and protect its customers.

46
Q

What are the key facts about solvency margins?

A
  1. The non-life solvency margin is calculated as the higher of two figures:
    - one approximately between 16% and 18% of annual premiums and
    - the other between 23% and 26% of claims average over the last three financial years.
  2. There is 50% loading for three classes of business judged to be particularly volatile - marine, aviation and general liability.
  3. In life assurance, the solvency margin is calculated as 0.3% of sums assured at risk plus an uplift depending on the type of business involved.
47
Q

What is Solvency II?

A

A solvency system which combines the pure review of assets in relation to liabilities with elements of risk management and public disclosure.

It introduces a new harmonised EU-wide insurance regulatory regime.

48
Q

What are the key objectives of Solvency II?

A
  1. Improved consumer protection.
  2. Modernised supervision: The “Supervisory Review Process” will shift supervisors’ focus from compliance monitoring and capital to evaluating insurer’s risk profiles and the quality of risk management and governance systems.
  3. Deepened EU market integration.
  4. Increased international competitivesness of EU insurers.
49
Q

What is the first Pillar of the “Three-Pillars” of Solvency II?

A

Pillar 1: Quantitative Requirements

  • measurement of assets, liabilities and
    capital.
  • an insurers Solvency Capital Requirement (SCR) is calculated by a standard formula or a supervisor-approved internal model.
50
Q

What is the second Pillar of the “Three-Pillars” of Solvency II?

A

Pillar 2: Governance & Supervision

  • effective risk management system.
  • Own Risk & Solvency Assessment (ORSA)
  • Supervisory review & intervention
51
Q

What is the third Pillar of the “Three-Pillars” of Solvency II?

A

Pillar 3: Disclosure & Transparency

  • detailed public disclosure requirements.
  • Improve market disclosure by facilitating comparisons
  • Regulatory reporting requirements.
52
Q

In the USA, insurance regulation is principally:

A

At each state level.

Each of the 50 states (as well as the District of Columbia and USA dependant territories) has its own legislative body, its own insurance law and regulations and its own insurance department responsible for insurance regulation.

53
Q

What is the NAIC?

A

The National Association of Insurance Commissioners (NAIC).

It is the U.S. standard-setting and regulatory support organisation created and governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories.

54
Q

What must insurers and insurance intermediaries wanting to do business in a particular U.S. state do?

A
  1. Obtain licences to do so from the state insurance department.
  2. Subsequently comply with the requirements in the local insurance law and regulations for licensed entities.
55
Q

How can non-admitted insurers do business in the U.S.?

A

Non-admitted insurers can conduct business in U.S. states on a surplus lines basis.

This means that if the locally licensed insurers refuse to underwrite a risk it may be offered to a surplus lines insurer.

56
Q

What is the Financial Services Compensation Scheme (FSCS)?

A

The UK’s statutory fund of last resort for customer of authorised financial services firms.

It is an independent body, created under the FSMA and is funded by levies on FSA authorised firms.

The FSCS can pay compensation if a firm is unable, or unlikely to be able, to pay claims against it. For example, if the firm is insolvent.

Insurance policies written by Lloyd’s underwriters can also be covered by FSCS.

57
Q

What does the Financial Services Compensation Scheme (FSCS) protect against?

A
  1. Deposits
  2. Insurance policies
  3. Insurance broking (for business on or after 14 January 2005)
  4. Investment business
  5. Mortgage advice and arranging (for business on or after 31 October 2004)
58
Q

As a fund of last resort, what rules are there regarding compensation payments by the Financial Services Compensation Scheme (FSCS)?

A

The amount of compensation payable depends on the nature of the policy:

  1. Compulsory insurance are covered in full
  2. Non compulsory insurances are covered for 90% of their value if the firm is declared in default on or after 1st January 2010 with no upper limit.
59
Q

What is the Financial Ombudsman Scheme (FOS)?

A

The independent organisation set up under the Financial Services and Markets Act 2000 (FSMA) to help resolve individual disputes between consumers and financial firms. It operates independently of the FSA.

The Ombudsman tries to reach agreements between policy holders and firms by a process of mediation or conciliation.

The scheme is free to consumers, even if the Ombudsman find in the firm’s favour.

60
Q

What complaints can the Financial Ombudsman Scheme (FOS) deal with?

A
  1. A private individual.
  2. Businesses as long as they fall into the definition of micro-enterprise which is having fewer than 10 employees and a turnover or annual balance sheet that does not exceed €2M.
  3. A charity with a yearly income of under £1M.
  4. a trust with net assets of under £1M.
61
Q

What is the Data Protection Act of 1998?

A

An act that seeks to strike a balance between the rights of individuals regarding information held about them (data subjects)

and those with legitimate reasons for using personal information (data controllers).

62
Q

What seven rights do individuals have under the Data Protection Act of 1998?

A
  1. The right to subject access.
  2. The right to prevent processing.
  3. The right to prevent processing for direct marketing.
  4. Rights in relation to automated decision-taking.
  5. The right to compensation.
  6. The right to rectification, blocking erasure and destruction.
  7. The right to ask the Commissioner to assess whether the Act has been contravened.
63
Q

What is financial crime?

A

Any wrongdoing that is linked to the financial services industry.

64
Q

Name four examples of financial crime.

A
  1. Insurance fraud
  2. Money Laundering
  3. Bribery and corruption
  4. Sanctions
65
Q

What is insurance fraud?

A

Any situation where an insured or other party in the insurance chain seeks to obtain benefit from the insurers to which they are not entitled.

66
Q

What is money laundering?

A

Money laundering is a term used to describe the techniques, procedures or processes used to convert stolen funds obtained from illegal activities into other assets…

  • in such a way as to disguise their true origin so that it appears the money has come from a legitimate source.
67
Q

What does SOCA stand for?

A

Serious Organised Crime Agency

68
Q

What does PoCA stand for?

A

the Proceeds of Crime Act 2002 (PoCA).

69
Q

What are the three primary money laundering offences established under the PoCA?

A
  1. Concealing, etc.
  2. Arranging
  3. Acquisition, use and possession
70
Q

What is active bribery?

A

Offering, promising or giving a bribe.

71
Q

What is passive bribery?

A

Requesting, agreeing to receive or accepting a bribe.

72
Q

What are the four offences under the UK Bribery Act 2010?

A
  1. Active bribery.
  2. Passive bribery.
    (These already existed in English law)
  3. Bribery of a foreign official in order to retain or obtain business or an advantage in business.
  4. A corporate crime of failing to prevent bribery.
73
Q

What are the six principles of the UK Bribery Act 2010?

A
  1. Proportionality
  2. Top level commitment
  3. Risk assessment
  4. Due diligence
  5. Communication
  6. Monitoring and review
74
Q

For what five reasons might sanctions be imposed?

A
  1. Political reasons - to change policies.
  2. To acknowledge the importance of respecting democracy.
  3. To highlight the importance of respecting human rights.
  4. To maintain and restore peace.
  5. To strengthen the security of unions such as EU an UN.
75
Q

What type of sanctions can be imposed?

A
  1. Country specific
    - Financial - freezing funds or banning financial transactions.
    - Trade - import and export bans or specific bans on certain trade such as oil/diamonds or arms
  2. Smart - usually financial and involving specially designated lists of targeted entities and individuals.
  3. Terrorist related - specific terrorist financing sanctions targets.
  4. Diplomatic - expulsion of diplomats and severing of ties.
  5. Narcotics - relates to the US only and involves a designated list of narcotic traffickers.
76
Q

Who can impose sanctions?

A
  1. UN - Security Council decisions, binding on all members
  2. EU - may be binding resolutions of UN or separate EU sanctions.
  3. US - the Office of Foreign Asset Control enforces financial and/or trade sanctions
  4. UK - HM Treasury is responsible for financial sanctions
  5. Individual countries

Lloyd's Insurance Market (12 decks)

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