Sébastien Gros and Ghina Farah of Hogan Lovells, Paris explore the challenges facing insurance lawyers in France.
As a major actor in the economy, the insurance sector has been impacted by the follow-on from the financial crisis and its repercussion for the eurozone.
In France, the answer to the crisis has been found to a certain extent in increased supervision and regulation. This evolution in the supervisory landscape gives rise to new challenges in terms of consistency of supervisory practices and in particular in relation to the level of convergence of the rules protecting retail consumers in the different areas of the financial sector.
We will focus on some key trends in the French insurance supervisory landscape, largely influenced by the EU initiatives affecting the insurance sector.
Market trends and overview of the financial results for 2012 in the French insurance sector
According to the figures published by the Association of Insurance Undertakings (FFSA), in 2012 investments made by the insurers in the economy have exceeded the threshold of €1 trillion (including €4.2 billion in SMEs and mid-tier firms) and insurers were the largest holders of French public debt. The assets of insurance companies amounted to €1,881 billion and the turnover of the French insurance sector amounted to €182.3 billion.
It clearly appears from these figures that the French insurance market has remained resilient and the insurance industry has been able to maintain a strong role in the economy.
New faces in the supervision of insurance
In order to reduce the risk of another financial crisis, one of the remedial measures has been to redefine the supervision landscape in the financial sector. The mechanisms of the supervising authorities have been modified and their supervisory powers increased.
In France, supervising authorities for the banking and insurance sectors merged in 2010 into a new single supervisory authority, the French Prudential Supervisory Authority (ACP) which was granted enhanced powers, including new powers to issue recommendations and take positions. The economic turmoil changed the corresponding economic environment, as well as the preoccupations of the French regulator, which now carries out a more diversified and coordinated control of the industry.
Financial services providers in France must also now become familiar with new players on the scene at a supervisory level, namely the pan-European supervisory authorities for banks, insurance and the securities markets. Although day-to-day supervision of financial services provider remains at a national level, these pan-European authorities, with a view to working towards a common rulebook, develop technical standards where necessary and draw up interpretative guidelines to assist national authorities. Although there are no current projects to set up a single supervisory mechanism for insurers (unlike for banks), the pan-European authority for insurers, the EIOPA takes an active part in the control of the insurers. By way of example, on 6 December 2012, it published procedures as to how it will issue warnings and temporary prohibitions and restrictions regarding financial activities. This results in insurers now clearly being subject to a two-layered control.
On top of that, recent developments at a global level are likely to impact the supervision of the insurers in the future. In October 2012 the International Association of Insurance Supervisors released for consultation policy measures for global systemically important insurers proposing mainly to enhance supervision on these insurers, to separate traditional insurance activities from non-traditional, non-insurance activities and to adopt a cascading approach in relation to higher loss absorption capacity.
Increasing prudential requirements
Since the beginning of the financial crisis, regulation of insurance companies and the need for regulators to oversee financial operations has been a prominent feature of recent EU and French legislation. We will only mention here Solvency II and the regulation of financial groups.
In the insurance field, an allegedly outdated and fragmented regulatory regime has motivated the review of the prudential standards at EU level. Although the discussions around the Solvency II Directive started early before the beginning of the crisis, the financial crisis has undeniably influenced the final text that was voted in 2009. Indeed, Solvency II in particular aims at securing a level of capital consistent with the risks European insurers underwrite and insurers will have to face a change in the reporting and disclosure requirements that they must comply with (though the detailed implementation measures have not yet been published because they are currently being discussed). Emphasis is placed on rationalisation and increasing operating efficiencies. As implementation of Solvency II draws closer, it is worth noting that restructurings and consolidation projects proliferate through “branchifications”, joint ventures or intragroup restructuring.
Though the Solvency II Directive has incorporated many lessons from the past, certain concerns still exist as the debate around the Omnibus Directive (which is intended to consolidate financial services directives which currently overlap or conflict) has shown and which has generated fierce discussion (including in France) as the implementation date of Solvency II approaches.
Current discussions around Solvency II in particular include the long-term guarantees. In this respect on 28 January 2013 the EIOPA launched a technical assessment of the long-term guarantee package agreed by the European Parliament, the Council of the EU and the European Commission. The aim is to test various options contained in the Solvency II Directive in order to assess the impacts that the implementation of such measures may have on policyholders, beneficiaries, insurance and reinsurance undertakings, supervisory authorities and the financial system as a whole. It is indeed crucial for the policyholders’ protection and financial stability that Solvency II accurately reflects the long-term financial position and risk exposure of insurance undertakings offering long term guarantees (such as life insurers in France).
In addition to these regulations, the globalisation of financial markets acted as a facilitator for the development of financial groups spanning multiple jurisdictions. This has obviously not escaped the notice of the European Commission, which has decided to review the financial conglomerates directive in order to encompass in the most efficient manner not just individual insurance companies but rather insurance groups and financial conglomerates as a whole. Financial conglomerates are exposed to various group risks such as the risks of contagion and the risk of concentration and specific concerns including the complexity of managing different legal entities, potential conflicts of interest, and the challenge of allocating regulatory capital to all the regulated entities, which are part of the financial conglomerate, thereby avoiding the multiple use of capital. The Directive 2011/89/EU closes loopholes and ensures appropriate supplementary supervision of financial entities in a financial conglomerate. The new Directive (which entered into force on 9 December 2011) also adapts the supervision of financial conglomerates to the EU’s new supervisory structure.
Increasing protection of investors and consumers of financial products
Since the creation of the ACP, there has been a considerable increase in consumer protection regulations including the emergence of codes of conducts, guidelines, communications and binding recommendations issued by the ACP, which are all mainly focused on crisis-related issues with a strong emphasis on the practices of marketing financial products.
The ACP has made an active contribution to developing and defending France’s positions on customer protection, both at international level (OECD High-Level Principles on Financial Consumer Protection) and European level (EIOPA Committee on Consumer Protection). At national level, and in line with its statutory objective being, among others, the protection of customers, the ACP has issued a large number of recommendations in particular in the life insurance sector, including on advertising for unit-linked insurance plans based on bonds and other debt securities, the marketing of life insurance policies linked to funeral payment plans, and complaints handling. More recently, the ACP has issued a recommendation dated 8 January 2013 with best practice rules aiming at improving the collection of information related to the knowledge of the customer in the context of the duty to advise in life insurance.
This “soft law” adds to the obligations that already exist and to which insurance undertakings (and insurance intermediaries) are already subject. This requires French insurers to adapt and align their strategies (particularly in relation to the launch and advertising of new products – such as investment-related insurance products) taking into account the changes in the market environment. The general trend of increase in regulation also requires additional resources and procedures to be put in place with a view to ascertaining compliance with these new sets of rules. Indeed, the ACP recently reiterated that, as part of its supervisory duties, it will make sure that financial institutions (including insurers) have adequate resources and appropriate procedures in place to comply with these rules. For this statutory objective, it cooperates with the Financial Markets Authority (AMF) through an entity, the Joint Unit, common to both institutions.
Still in relation to customer protection, in addition to the national rules, insurance companies must prepare for the various reforms that are in the pipeline at EU level and which may affect their business. These in particular include IMD 2, MIFID II, and the packaged retail investment products (PRIPs) initiative. The purpose of these reforms is to further increase consumer protection in the financial sector by creating common standards across insurance sales and ensuring proper advice is given, though feedbacks from the stakeholders in relation to these texts show that it is indeed difficult to adopt a text which would not add unnecessary burden on the market player and would at the same time achieve an adequate level of protection for consumers.
The emphasis put on customer protection by the ACP is very much in line with the global approach taken at EU level by EIOPA, which likewise considers that protection of consumers is a fundamental goal and that it is important to have a consistent approach in the various projects which impact the distribution of financial products. It closely monitors the legislative projects and therefore plays a key role to ensure that the final texts which are in the pipeline can effectively be supervised both at EU and national level. As such, EIOPA also actively participates in the consumer protection legislation and has recently issued a new approach to information disclosure for defined contribution schemes. This report is unique in that it integrates the “human characteristics” in the study and provides policymakers with advice on how information should be given to the customers in order to help scheme members make appropriate financial decisions. For the first time a supervising authority does not add a new layer to the information obligation to which market players are already subject but provides hints and tips as to how market players should integrate the information and present it to the customers.
It appears from the above outline that the supervisory landscape in France is constantly evolving largely in line and as a result of initiatives at European level.
Insurance market players in France have had to adapt and will undoubtedly have to continue to adapt to changes at supervisory level and to an increasing prudential and notably consumer protection regulation. The lessons learned from the past indeed appear to be that further regulating market players and putting emphasis on consumer protection are considered necessary remedial measures in the current economic turmoil; the various initiatives at national, EU and international level converge towards a more regulated approach of the insurance activities.
The future will show whether increased regulation achieves these objectives while leaving insurance market players room for innovation and generally whether customers indeed benefit from such increase in supervision and regulation.