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9/4 W01/March 2018 Award in General Insurance

Key features of principles-based rules include the following:
• They are written at a very general level (stating the principal 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 (using terms such as ‘fair’, ‘reasonable’ or
‘suitable’, rather than clearly-defined performance standards such as ‘within XX days’ or ‘X size firm’).
• They can be applied to a wide 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 promote 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 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. 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
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 so strengthen consumer confidence and protection. A set of common
principles should provide basic standards of business conduct, which should facilitate international
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 the means of seeking appropriate compensation.
The following principles form the basis for specific market conduct standards. These may have statutory
9 backing or be supervised and enforced by industry associations.
Chapter 1. Integrity Insurers and intermediaries should at all times act honestly and in a

straightforward 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.