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9/4 W01/March 2017 Award in General Insurance

Key features of principle-based rules include the following:
• They are drafted at a high level of generality (stating the substantive policy objective or goal).
• They are largely behavioural standards and concerned with, for example, ‘integrity’, ‘skill, care and
due diligence’, ‘reasonable care’ and ‘fair treatment of customers’. It follows that breach of a principle
must involve an element of fault.
• They contain terms that are qualitative not quantitative (usually using evaluative terms such as ‘fair’ or
‘reasonable’ or ‘suitable’, rather than bright-line performance standards such as ‘within XX days’ or ‘X
size firm’).
• They have a broad application to a diverse range of circumstances (this is generally recognised as
their key strength).
• They express the reasons behind the rule.
It is believed that principles-based regulation achieves benefits for consumers by fostering a more
innovative and competitive financial services industry. Principles-based regulation also offers effective
protection as senior managers drive the changes necessary for their firms to meet the principles.
A1C Risk-based regulation

Risk-based regulation evaluates the major risks faced by a company and assesses how well these risks
Risk-based regulation
evaluates the major are being mitigated. This helps both regulators and companies to identify and, importantly, to pre-empt
risks problems. Well-managed companies have greater flexibility, with less well-managed ones subject to
closer scrutiny.
In this type of regulatory system, regulators work with insurers to set standards for market conduct, and
then track a number of key indicators, such as consumer complaints, to determine how well individual
companies are performing against those standards. If the key indicators suggest that a company is high-
risk, the regulator investigates further and takes any necessary action. In this way, insurance companies
that deal fairly with their customers are free of excessive regulatory intervention, and regulators are able
to devote their attention to the few non-compliant companies that need it.

Question 9.2 Reference copy for CII Face to Face Training

Which are the three types of regulatory approach? Briefly describe them.

A2 Prudential and market conduct regulation

The principal task of all insurance supervisory authorities is to establish a means of ensuring high
standards of financial soundness and conduct of all insurers under their supervision. The main
objectives of such measures are to provide a high degree of security to the policyholders and to maintain
confidence in the industry.
Principles for the conduct of insurance business can be expected to improve insurer, intermediary and
consumer relationships and thereby strengthen consumer confidence and protection. A set of common
principles should provide basic standards of business conduct, which should facilitate cross border
business, encourage competition and protect the integrity of the market. Such a framework provides
guidance as to what are legitimate and acceptable market practices and can be used to test types of
behaviour and provide guidance for setting local rules, so that those adversely affected by market abuse
have a facility to seek appropriate redress.
9 The following principles form the basis for specific standards of market conduct. These standards may
Chapter have statutory backing or be supervised and enforced by industry associations.

Integrity: insurers and intermediaries should at all times act honestly and in a straightforward
1.
manner.
2. Skill, care and diligence: in conducting their business activities, insurers and intermediaries should
act with due skill, care and diligence.
3. Prudence: insurers and intermediaries should conduct their business and organise their affairs with
prudence.
4. Disclosure of information to customers: insurers and intermediaries should pay due regard to the
information needs of their customers and treat them fairly.
5. Information about customers: insurers and intermediaries should seek from their customers
information which might reasonably be expected before giving advice or concluding a contract.
6. Conflicts of interest: insurers and intermediaries should avoid conflicts of interest.