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Regulatory burden likely to pressure insurance companies further Back  
The raft of new regulations facing the insurance industry is placing an increasing strain on companies’ resources to fulfil their statutory obligations, writes Brian Clavin, who advises regulators to be aware of the cumulative effect of their changes.
2005 promises to be a very challenging year for the finance and compliance departments of many insurance companies. The combination of changes in Irish and international accounting standards and Irish, EU and US regulations is putting significant pressure on companies’ ability to fulfil their statutory duties. And this looks like it may get worse before getting better. Skilled resources are now at a premium and both industry and the accounting profession are going to be faced with difficulties in building and maintaining the necessary teams over the next 18 months.

So what is changing? The most significant change is the introduction of IFRS for publicly quoted companies in 2005 and for others who voluntarily opt to change. This has been flagged for some time but we are still facing a number of unresolved issues in applying IFRS to insurance companies, which is causing difficulty for companies trying to apply the standards in a timely manner. In particular we are facing questions surrounding what will be the final version of IAS 39 that will apply this year, questions around revenue recognition on some products such as trackers and some very complex tax issues.

What has not been as widely flagged is that the ASB’s convergence strategy with IFRS is now picking up pace and that there are seven new accounting standards to be applied this year for companies not adopting IFRS which introduce many of the concepts of IFRS into Irish accounting standards.

Of particular note in the introduction of FRS 27 – Life Assurance and FRS 25 and 26 on financial instruments which are in effect introducing the provisions of IAS 39 into Irish GAAP. FRS 27 introduces a new Capital Statement into the financial statements of companies involved in life assurance – both direct and reinsurance.
This statement will involve some fairly significant disclosure on regulatory capital and the sensitivity of liabilities. It also introduces extensive additional disclosures where companies have guarantees or options.

Our experience to date is that the transition to IFRS takes significantly longer than companies expect. Issues are arising in the expected quarters such as extracting of historical data and the development of new actuarial and accounting systems to deal with new required calculations.

However, issues are also arising in unexpected quarters such as product development. With the likely delay of the Phase II insurance standard under IFRS until 2010, many companies are now revisiting product structure to try to develop products which give a sensible revenue recognition pattern under the new standards.

These changes are major for many companies and are requiring the allocation of significant internal resource and by themselves would be an issue for companies. However, when combined with the increasing regulatory burden the position for many companies becomes extremely difficult to manage as often the same resources are called upon. The recent deferral of the application for SOX404 reporting to 2006 for foreign registrants was a very welcome development as it requires major internal and external resources to complete properly and was clashing for many companies with the introduction of IFRS in 2005. However, it will apply in 2006 and annually thereafter.

Of broader relevance to many companies is the imminent commencement of IAASA. At this stage we would anticipate that this will apply in 2006 for most companies and will introduce into Irish law extremely onerous compliance reporting for directors. To fulfil their responsibilities under this Act companies will need to expend significant internal time in the initial period to ensure they are in a position to make the necessary statement and to allow their auditors to form a view on that statement.

The Irish Financial Services Regulatory Authority (IFSRA) continues to introduce new requirements to both the life and non-life sectors, both in cross-sector developments such as the increasing focus on consumer protection, in addition to insurance specific issues such as revised solvency requirements and the implementation of the Insurance Mediation Directive.

Many of the recent regulatory changes affecting the insurance industry have come as a direct result of developments at a European level through the continued implementation of the Financial Services Action Plan. As the plan, at least in its current guise, enters the final straight, a number of significant developments have recently come into effect.

The Insurance Mediation Directive introduces a single market for intermediaries selling insurance products within the EU. Whilst a number of the requirements were already in force in Ireland, additional requirements have been implemented by the European Communities (Insurance Mediation) Regulations 2005, which came into law on 14th January of this year. The regulations require registration (with some exemptions) when providing services cross-border and forms for this purpose are available from the Financial Regulator. The regulations also introduce additional requirements for the protection of consumers concerning issues such as professional indemnity insurance, information to be provided to customers and premium handling rules.

Another piece of European legislation, the Distance Marketing Directive, applies cross-sector, but it will have particular impact on the retail insurance sector. The Directive, implemented through the European Communities (Distance Marketing of Consumer Financial Services) Regulations 2004 came into force on the 15th February. It aims to promote a high level of consumer protection for retail financial services products purchased by remote means (for example, by phone, mail, internet or other). The regulations require firms to disclose certain information to customers and potential customers, provide for a mandatory ‘cooling off’ period with limited exceptions and introduce limits on 'cold calling' and other such unsolicited services.

In addition to the recently implemented legislation referred to above, significant additional requirements are currently subject to consultation by both IFSRA and the European Commission. In the domestic arena, IFSRA have recently published consultations on increased requirements concerning the fitness and probity of the senior management and directors of firms under its authorization, a revised and enhanced sanctions and enforcement regime and of particular importance to the retail sector, a draft code for consumer protection incorporating specific insurance-sector requirements (which would replace the current interim code of conduct). Meanwhile at the European level, the Solvency II project to fundamentally review capital requirements in light of developments in areas such as insurance, risk management and financial reporting continues at pace with second and third calls for advice being issued by the Commission to representative bodies.

All of the above change takes place against a backdrop of increasing competition and reducing margins in many sectors.

The overall impact of the level of change that the insurance industry is faced with is going to be a challenge that should not be underestimated. What is clear is that regulators and standard setters need to be conscious of the combined effect of their changes and try to manage their implementation in a way that does not result in the intended benefits being outweighed by major disruption to companies businesses and the possible long-term effects on competitiveness.

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