The secondary insurance market

Who is in the market?

The promotion and sale of insurance products are no longer the exclusive province of the businesses traditionally associated with them, such as insurers and insurance brokers. Many other companies and organisations have recognised the potential of insurance products to make money. Banks and building societies have appreciated that they can profit from their standing as financial services providers by selling (or permitting the sale of) a wider range of financial services and products. Many retailers and utility providers have realised the potential to market financial services products, including insurance, to their existing customers. Property managing agents and freight forwarding companies are often involved in arranging insurance in the course of their other business. Charities have realised that ‘diversification’ into insurance might be a way to increase funds: pet charities, for example, offer insurance for pets. 5 Since only an insurance company authorised by the FSA (or a friendly society or a Lloyd’s syndicate) can underwrite insurance, these secondarymarket organisations must team up with insurers to offer insurance products to customers. Often the alliance will be known as an ‘affinity’ or ‘corporatepartnership’ arrangement.

In many affinity arrangements, there is an inherent link between the insurance product and the core business of the partner. Sales of pet insurance by vets, or of home insurance by mortgage lenders, flow naturally from the primary activities of those businesses and it may be relatively easy to achieve a policy sale in the course of another transaction. Similarly, a car dealer may include the sale of motor insurance and warranty insurance in the process of selling a car, and a department store that is signing up a customer to a store card may find that the customer is willing to take out credit insurance.

Sometimes, however, the link between the seller and the policy or product is not obvious; insurance product ranges offered by corporate partners are tending to expand. Companies are realising that where their brand is strong, people might be prepared to buy insurance products unrelated to their primary area of business.

What is in it for insurers?

This route to the market has a number of benefits for insurers. First is the partner’s customer list. This will include details of people they might otherwise be unable to access. If the corporate partner has a strong brand they may be able to attract those who do not usually buy insurance. Younger consumers, for example, might be more likely to buy insurance if it is endorsed by a football club or mobile phone company.

Further, the corporate partner may be able to carry out some of the marketing, sales and even claims handling activities on behalf of the insurer. This provides the insurer with an infrastructure without the involvement of its own staff. An insurer will typically pay only for the services of a partner that sells policies on its behalf through commissions on policies sold. This reduces financial risk, since the insurer has to pay the producer of the business only for ‘done deals’, and is not required to invest capital in the venture.

There may be other practical advantages. Where the corporate partner is itself authorised by the FSA, it will be directly responsible to the regulator for policy sales and so may relieve the insurer of much of the day-to-day compliance task. It must, however, be remembered that an insurer can never escape regulatory responsibility by outsourcing its activities in this way: the

FSA has made it clear in its guidance that a regulated firm cannot outsource its own regulatory requirements.

How does FSA regulation affect the secondary market?

The FSA regulates various activities in relation to the marketing and sale of insurance policies, as well as assistance in the administration and sale of insurance. Authorisation from the FSA is required before these activities can be conducted. You cannot arrange insurance or make arrangements with a view to insurance contracts, advise on the merits of buying cover or deal in insurance contracts as agent for the insurer or the policyholder unless you are either authorised by the FSA to do so or are the appointed representative of a firm that has the relevant FSA permissions.

If a shop selling store credit cards wishes to introduce its customers to an insurance company for the sale of credit insurance, it is likely to be carrying on the regulated activity of making arrangements with a view to contracts of insurance. A retailer that goes further than this and signs customers up to insurance cover in store with the authority of an insurance company would be likely to be carrying on the regulated activity of dealing in insurance as agent of the insurer.

In some circumstances, however, activities that would otherwise be regulated may be carried out without FSA supervision. This is because the rules allow for a number of exclusions and exemptions.

What exclusions are available to secondary intermediaries?

Below we look at the exclusions most frequently relevant to the activities of secondary intermediaries.

Connected contracts – non-motor goods (article 72B Regulated Activities Order)

In the run-up to FSA regulation of the general insurance market, the government was persuaded to introduce an exclusion for activities by a supplier of non-motor goods in relation to a ‘connected contract of insurance’.

Typically, this exclusion will be available to a supplier of goods who wishes to offer extended warranty cover. It will only apply, however, if the warranty insurance satisfies a number of conditions. Essentially, suppliers will only be excluded if:

- the policy is not a contract of long-term insurance (that is, it does not provide life assurance or similar cover);

- the total duration of the policy is five years or less;

- the annual premium is R500 or less, or the equivalent amount in sterling or other currency;

- the policy covers the risk of breakdown, loss of, or damage to, nonmotor goods supplied by the provider;

- the insurance does not provide cover in respect of the liability of the insured person to third parties;

- the insurance is complementary to the non-motor goods being provided by the supplier;

- the insurance is of such a nature that the only information that a person requires in order to carry on the insurance mediation activities is the cover provided by the contract.

The FSA considers that the last condition is likely to be satisfied where the insurance contract is a standard form, the terms of which (other than the premium) are not subject to negotiation.

The exclusion applies only to the supplier of the goods and not to anyone else who may be in a contractual chain between the supplier and the insurer, such as another intermediary from whom the supplier may source the cover. It does not exclude warranty insurance policies from the requirement that they be underwritten by an authorised insurer.

The Government’s decision to introduce this exclusion was in large part based upon a lengthy inquiry by the Competition Commission (including a public hearing) into the supply of extended warranties on domestic electrical goods in the UK. In 2003 the Commission concluded that a complex monopoly situation existed in the market for extended warranties, which operated against the public interest, and proposed a package of remedies. This was accepted in whole by the government and implemented in the form of the Supply of Extended Warranties on Domestic Electrical Goods Order 2005. Under the Order retailers must:

- show the price of the extended warranty alongside electrical goods, in store and in their printed advertising material;

- provide consumers with information about their statutory rights, cancellation rights and details of the warranty, including whether or not the warranty provides financial protection in the event of insolvency and terminates if a claim is made;

- give consumers 45 days to cancel the extended warranty, providing them with a written reminder of this right and the right to receive a refund;

- offer quotations to any consumer who does not wish to buy a warranty immediately, stating that the extended warranty remains available on the same terms for 30 days. (Any discounts tied to the purchase of the extended warranty must also be available for 30 days.)

Areview of the decision to exclude insurance warranties for domestic goods from FSA regulation was planned for 2008.

Connected contracts – travel insurance (article 72B Regulated Activities Order)

In certain circumstances, insurance activities by suppliers of travel services are excluded from FSA regulation. The exclusion is similar in format to that for non-motor goods described above but much more limited in scope. Rules effective from 1 January 2009 mean it now applies only to travel services booked with the supplier that:

1. relate to attendance at an event organised or managed by the provider, where the customer is not an individual acting in their private capacity, or a small business (ie one whose group turnover in the last financial year was less than £1m); or

2. comprise only the hire of an aircraft, vehicle or vessel that does not provide sleeping accommodation.

The conditions for this exclusion are broadly similar to those for warranty insurance relating to non-motor goods, but there are some differences. It will only apply if:

3. the policy is not a contract of long-term insurance (that is, it does not provide life assurance or similar cover);

4. the total duration of the policy is five years or less;

5. the annual premium is R500 or less, or the equivalent amount in sterling or other currency;

6. the policy covers the risk of damage to, or loss of, baggage and other risks linked to the travel services booked with the supplier;

7. the insurance does not provide cover for the liability of the insured person to third parties except where that cover is ancillary to the main cover provided by the contract;

8. the insurance is complementary to the service being provided by the supplier;

9. the insurance is of such a nature that the only information that a person requires in order to carry on the insurance mediation activities is the cover provided by the contract.

As noted above, the FSA considers that the last condition is likely to be satisfied where the insurance contract is a standard form, the terms of which (other than the premium) are not subject to negotiation. Like that for warranty cover, this exclusion applies only to the supplier of the travel services and not to any other parties who may be in a contractual chain between them and the insurer. It does not exclude travel insurance policies from the requirement that they be underwritten by an authorised insurer.

Previously, the exclusion for the travel industry was much wider, applying to all connected contracts meeting conditions 3 to 9 above, not just 1 and 2. In the run-up to FSA regulation, the Government was persuaded by the Association of British Travel Agents and other bodies to let the industry regulate itself. Travel agents could sell insurance to anyone booking a holiday and not have to worry about the FSA. The Government reversed its decision in 2006/7, following consumer-group complaints of poor selling standards by travel agents and claims that people were being sold insurance products they did not fully understand. The rules described above mean that exclusions for the travel business will now apply in only a handful of cases, namely car-hire firms and event-management firms in relation to commercial customers above the specified size.

Provision of information on an incidental basis (article 72C Regulated Activities Order)

This exclusion does not apply to all regulated insurance mediation activities but only to the arranging activities and the activity of assisting in the administration and performance of insurance contracts. It excludes any activities that:

- consist of the provision of information to the policyholder or potential policyholder;

- are conducted by a person in a profession or business that does not otherwise consist of regulated activities;

- amount to the provision of information that may reasonably be regarded as being incidental to that profession or business.

Several important points should be noted. First, the exclusion only extends to information given to the policyholder or potential policyholder and not to the insurer. Thus an intermediary who forwards a proposal form to an insurance undertaking would not qualify for it. Similarly, where a person does more than provide information (for example by advising a customer or helping a potential policyholder fill in an application form), they would be seen as carrying on a regulated activity.

In the FSA’s view, to be ‘incidental’, the activity must arise out of, be complementary to or be otherwise closely connected with the profession or business. In other words, there must be an inherent link between the activity and the company’s main business. A simple example, given by the FSA, is that of a dentist: if they introduce dental insurance, they may benefit from the exclusion; if they introduce pet insurance, they do not. In addition, the activity must not amount to the carrying on of a business in its own right. The exclusion applies to a person whose business does not otherwise ‘consist of’ regulated activities. In the FSA’s view, the fact that someone carries on regulated activities in the course of a business (and may be authorised by the FSA in respect of them) does not, of itself, mean that the business consists of regulated activities. If the main focus of your profession or business is something else and the first two criteria above are met, you should qualify for the exclusion.

The fact that this exclusion applies to those whose core business is not insurance mediation makes it particularly relevant to secondary intermediaries. It is, however, important to remember its limited scope. It will be necessary to look at the activities of an intermediary in a proposed corporate partnership carefully; they could mean that the exclusion will not apply. In some cases, it may be possible to tailor the activities to fit the exclusion. Much will depend on the commercial deal between the parties.

Enabling parties to communicate (article 27 Regulated Activities Order)

This exclusion does not apply to all regulated insurance mediation activities – only that of making arrangements with a view to contracts of insurance. Its effect is that a person does not carry on the activity of making arrangements with a view to contracts of insurance merely by providing means by which one party to a transaction (or potential transaction) is able to communicate with other such parties.

This means that businesses such as internet service providers or telecommunications networks are excluded if all they do is provide communication facilities. The FSA says that the word ‘merely’ is crucial and, where a publisher, broadcaster or internet website operator goes beyond what is necessary for them to provide their service of publishing, broadcasting or otherwise facilitating the issuing of promotions, they may well bring themselves within the scope of the making-arrangements activity. So while this exclusion may be of relevance to a corporate partner who simply arranges links or other advertising on its website for an insurer or other intermediary, it is necessary to consider the particular circumstances carefully.

The FSA outlines situations in which a publisher, broadcaster or website operator who is carrying banner advertising from another intermediary or insurer, or who sets up links to their websites, would be unlikely to be able to use this exclusion. Aperson would probably be unable to qualify for it if, as part of the arrangements, they do one or more of the following:

- brand the investment service or product in their name or joint name with the broker or product provider;

- endorse the service, or otherwise encourage readers or viewers to respond to the promotion;

- negotiate special rates for their readers or viewers if they take up the offer;

- hold out the service as something they have arranged for the benefit of readers or viewers.

The FSA also says that the exclusion is unlikely to be available if the person concerned earns commission based on the amount of regulated business done as a result of the promotion. The existence of the financial interest will inevitably affect how the purpose of the arrangements is seen.

It should also be noted that when dealing with advertising materials, the FSA’s financial promotion rules are likely to apply. These should therefore be considered in addition to the question of whether authorisation is needed.

Claims management for an insurer (article 39B Regulated Activities Order)

Under this provision, among other things, claims management for a ‘relevant insurer’ is excluded from the activity of assisting in the management and performance of a contract of insurance. A ‘relevant insurer’ includes most insurers, but there are some minor exceptions (for example, an insurance company that underwrites certain limited types of motor breakdown cover for which FSA authorisation is not required).

Claims management for policyholders is not covered by this exclusion and is therefore a regulated activity within the assisting activity.

Exemptions

In addition to the exclusions described above, exemptions are available to certain types of people or firms who would otherwise be regulated. In certain circumstances, freight forwarders and storage firms are exempt from the requirement to be authorised for their insurance mediation activities.

Freight forwarders

A freight forwarder is someone whose principal business is transporting goods or arranging for them to be transported. They may be insured for loss or damage to goods in transit and will sometimes arrange for a customer to be covered under the same policy, so that the customer can make a direct claim if anything happens to their goods. Freight forwarders arranging insurance in this way will only need FSA authorisation if the customer is an individual. (Arranging a separate policy for a customer would not be within the scope of the exemption.)

Storage firms

The exemption for firms that store goods or arrange for them to be stored works in much the same way as that for freight forwarders. Like freight forwarders, storage firms may take out insurance to cover themselves if goods are lost or damaged. If they arrange for a customer to be included in the same policy they will not need to be authorised by the FSA – unless that customer is an individual.

The position described above reflects a change to remove a previous requirement for freight forwarders and storage firms to be FSA authorised. The FSA and the Government have worked with trade associations (the British International Freight Association, the British Association of Removers and the Self Storage Association) to develop codes of conduct binding on the Associations’ members to protect consumer (as opposed to commercial) customers in the light of the move to de-regulation of this sector.

The secondary insurance market

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