In a new consultative paper (CP15-02) about the conduct of insurance business, the Isle of Man's Insurance and Pensions Authority is pressing ahead with its two-year-old plans to upgrade its rules.

The first suggestion for a rule-change came two years ago this month in a discussion paper that drew on the International Association of Insurance Supervisors' core principles and developments elsewhere in the world. The Isle of Man has a large offshore insurance and pensions sector of which many high-net-worth individuals from the United Kingdom and elsewhere take advantage.

The paper builds its recommendations on responses to the earlier paper, most of which were favourable to the regulator's suggestions. The regulator, always touting for international business, notes that the paper is of interest to existing 'and prospective' insurance companies. It does not touch on the regulation of general insurance, which is the subject of a separate upgrading exercise. The emphasis is on the fair treatment of customers, especially retail ones such as HNWIs.

Retail or not retail?

In the UK, HNW business is classified unequivocally as 'retail' unless the individual in question is experienced in trading on the markets, in which case he belongs to a separate (and rather obscure) category of 'skilled' investors. On the Isle of Man, thinking on this subject appears to be more muddled and there seems to uncertainty about whether a HNWI's experience on the markets affords him a separate classification in tandem with his net worth or whether his net worth alone does. Section 2.3 of the paper states: "In most instances authorised insurers consider their target policyholder groups to be retail in nature, although a number of respondents indicated that for certain products typical policyholders could be considered “High Net Worth” according to their available financial means, rather than financial literacy/capability."

The paper, for its part, uses the term “retail” to describe a customer’s financial capability and investment expertise. In other words, it does not consider retail policyholders to possess the required expertise, experience and knowledge to adequately understand the features and risks associated with the regulated entity’s product and services being offered to them. Many HNWIs, unfortunately, answer to this description.

The regulator attaches a proposal for a “Conduct of Business Code (Long Term Insurers)” which is so tentative that it refers to it not just as a draft but as an initial draft. It is destined, one day, to become binding in a statutory instrument issued under the Insurance Act 2008. It draws, in its turn, on ideas in the Corporate Governance Code of Practice for Regulated Insurance Entities, which itself is likely to be amended soon (and even might become the vessel that houses the new code-to-be) but - and the regulator is at pains to point this out - not made less onerous.

The consultative paper applies to long-term business, i.e. the effecting or carrying out of contracts of insurance to do with life, annuity, marriage, birth, linked long-term, permanent health, tontines and 'capital redemption' i.e. five-year contracts or longer.

The IPA seems to be going ahead with its idea of inserting a set of principles in the forthcoming code to govern product development, marketing and promotion, rather than approve products and promotion exercises on a case-by-case basis as many European regulators do. These begin as they mean to go on - vaguely and broadly. The first such principle states: "A regulated entity must establish and implement product development oversight and governance arrangements designed to treat policyholders fairly. Such policies and procedures should aim to minimise the risk of potential policyholder detriment, provide for a proper management of conflicts of interests and ensure that the interests and characteristics of policyholders are duly taken into account."

The KIDs are all right

When it comes to the provision of information to prospective policy-holders at the point of sale, the proposal is for the code-to-be to compel firms to draw up short key information documents or KIDs.

If the draft becomes regulatory policy, each firm will have to draw up a KID for each long-term insurance product with an investment element that it produces, although not necessarily in the case of contracts under which benefits are payable only on death or in respect of incapacity due to injury, sickness or infirmity. Every KID will have to a stand-alone document that is accurate, fair, clear and not misleading. It should not contain cross-references to marketing material or be merged with it. It may contain cross-references to other documents including a prospectus, but only if it is related to the information that the rules say must be included in the KID.

Firms might be interested to know that if any product of theirs offers policyholders a range of options for investments, with a concomitant volume of information that cannot go into a concise document, the KID can provide at least a generic description of the underlying investment options and state where and how more detailed pre-contractual information and documentation relating to the investment products backing the underlying investment options can be found.

There are rules about colours and corporate logos not being allowed to obscure the writing on a KID and (unusually for a regulator) an insistence on "language...that is clear, succinct and comprehensible." It will have to be headed up with a warning that states that "this document provides you with key information about this insurance investment product, it is not marketing material."

In a section entitled "What is this product?" the firm will be obliged to write about the nature and main features of the product, including:

(i) the type of product;
(ii) its objectives and the means for achieving them, in particular whether the objectives are achieved by means of direct or by means of indirect exposure to the underlying investment assets;
(iii) a description of the policyholder type to whom the product is intended to be marketed, in particular in terms of the ability to bear investment loss and the investment horizon;
(iv) where the product offers insurance benefits, details of those insurance benefits, including the circumstances that would engender them; and
(v) the term of the product, if known.

There are to be other sections, entitled "Could I lose money?" and "What are the risks and what might I get back?" and "How long should I hold it and can I take money out early?" Details of the cooling-off/cancellation period for the product are to be included.

Firms overseeing advice

The Isle of Man's life assurance sector relies on brokers or independent financial advisers (not defined in the same way as IFAs in the UK) for the distribution  of its products and advice. How should firms oversee the efforts of these third parties? The regulator plans to add to the existing rules with new requirements for firms that grant terms of business to them and more 'ongoing monitoring.' The code-to-be proposes to make every regulated entity write down and stick to procedures for the appointment and granting of terms of business to brokers. Each broker ought to complete an onerous questionnaire. He must even, according to one bizarre clause, prove that he has not been 'terminated' - one suspects that this is one of the easier requirements for him to fulfil.

Catch-all clauses

Terms of business set by regulated firms with brokers must, as a minimum, require the applicant for terms of business to warrant:

• that the introduction of business by the broker to the regulated entity pursuant to the agreement does not breach any other legal obligation or laws of any competent authority in any relevant jurisdiction;
• that the applicant will at all times observe the conditions of the agreement, acting only as the agent of policyholders and not for or on behalf of the insurer, while maintaining every obligatory licence, authorisation and registration and making his officers and agents comply with all applicable laws and regulations of jurisdictions in which they operate; and
• that the applicant will comply with all anti-money-laundering and anti-terrorist rules

Claim-related procedures

For long-term insurance businesses, the regulator expresses a vauge desire for every regulated entity to handle claims promptly and fairly, publish and provide reasonable guidance or a summary of its claims procedures for the benefit of policy-holders, provide them with 'timely' updtates about the progress of claims, make sure that they do not reject claims unreasonably, and settle them promptly after agreeing to the terms.

The code-to-be considers it unreasonable for a firm to reject a policyholder's claim (as long as it is not fraudulent) if it does so:

a) under contracts requiring the disclosure by the policyholder of material facts, the non-disclosure of a fact material to the risk which the policyholder could not reasonably be expected to have disclosed; or
b) non-negligent misrepresentation of a fact material to the risk; or
c) for breach of warranty or condition unless the circumstances of the claim are connected to the breach and unless:
(i) under a 'life of another' contract, the warranty relates to a statement of fact concerning the life to be assured and, if the statement had been made by the life to be assured under an 'own life' contract, the insurer could have rejected the claim under this rule; or
(ii) the warranty is material to the risk and was drawn to the policyholder's attention before the conclusion of the contract.