The Bermuda Monetary Authority (BMA) has published a consultation paper (CP) on proposed amendments to the Insurance Code of Conduct (Code), which was last amended in July 2015, implementing a conduct of business regulatory regime for insurers registered in Bermuda. The proposals would align Bermuda’s regulatory regime more closely with the core principles promoted by the International Association of Insurance Supervisors.
The proposals were initially the subject of a discussion paper, issued by the BMA in August 2020. This was followed by a consultation paper in December 2020. The BMA published a stakeholder letter on 23 April 2021 providing feedback on comments from industry.
The proposed changes are a pragmatic and proportionate approach to conduct issues. They involve a bifurcation of rules applicable in the “retail” and non-retail arenas, recognizing that inequalities of bargaining strength and sophistication in markets for products for individuals and small and medium-sized entities (SME) are not replicated in the wholesale sector.
In particular, the BMA’s approach is to implement high-level requirements of integrity and management of conflicts of interest applicable to all insurers, and more granular obligations applicable to insurers writing retail business.
According to the proposals, “retail business” will be defined as insurance products that are designed for and bought by individuals, although the CP notes that this should encompass insurance products sold to SMEs.
The proposed Code will apply to all insurers (both retail and non-retail) focuses on dealings with “clients”, which encompasses policyholders, insureds, cedents, intermediaries and other stakeholders. The retail rules apply to dealings with policyholders.
As with all elements of the Code, the BMA will assess compliance according to its “proportionality principle”.
The feedback period closes on 25 October 2021.
The new Code applies to all aspects of the insurer’s business, including business intermediated by agents and brokers with policyholders outside Bermuda and business written through overseas branches of the insurer. This is different from the approach to conduct in other jurisdictions. For example, the UK Financial Conduct Authority’s Insurance Conduct of Business Sourcebook rules do not apply to an insurer if the intermediary in touch with the customer is not established in the UK and the customer is not habitually relevant in and the state of risk is outside the UK and does not apply to overseas branches of an insurer.
For international insurers in Bermuda, retail customers are generally outside Bermuda and business will have been placed via agents overseas. Furthermore, many of them have places of business outside Bermuda where they are already subject to conduct of business rules.
In its letter to stakeholders of 23 April 2021, the BMA indicated that it will take an outcomes-based approach to determine if an entity is subject to similar conduct standards overseas after discussions with foreign regulators but that, at a minimum, registrants and licensees must comply with the BMA’s requirements as set out in the Code.
We anticipate that feedback on the draft Code may invite the BMA to consider whether guidance might be given on the conflict of interests rules, recognizing that there is frequently nothing wrong with parties of equal commercial sophistication transacting on a commercially adverse basis, in which each is permitted to give priority to its own interests exclusively.
An overview of the proposed code follows:
For all insurers
All insurers must:
- Conduct business with integrity.
- Exercise duties prudently and competently and administer clients’ affairs in accordance with the law.
- Deal honestly, professionally and fairly with all clients and seek to ensure they are not misled as to services provided.
Conflicts of interest
All insurers must:
- Have clearly documented and established policies and procedures to manage or avoid situations in which a conflict arises between insurer’s and client’s business.
- Not enter into transactions in which they have a material interest without disclosure.
- Always keep adequate records where conflicts of interest arise.
For insurers writing retail business
Due regard for the interests of policyholders
- Fair treatment of policyholders. Conduct business in such way as to treat policyholders fairly. Fair treatment is to be an objective considered in the design of the business strategy, product design and product distribution.
- Skill, care and diligence. Act with skill, due care, and skill and diligence in the conduct of its business and in its dealings with policyholders.
- Staff competence and performance management. Staff are to have sufficient qualifications, experience and training.
- Product governance. Internal policies to address fair treatment of policyholders throughout product life cycle
- Applicable where the insurer gives advice.
- Vulnerable policyholders. Establish and implement policies and procedures to accommodate and afford reasonable care to vulnerable policyholders who identify themselves as such to the insurer.
- Cancelling a service or transferring service providers. Should not unduly limit policyholder’s ability to cancel or transfer a product or service.
- Sales practices. Policies and procedures to prohibit and prevent mis-selling, misrepresentations, aggressive sales tactics and discrimination. Staff to understand products.
- Claims handling. Address claims in a timely, fair and transparent manner, avoid aggressive and/or coercive claims handling tactics and discrimination.
- Dealing with authorised intermediaries to ensure fair treatment of policyholders. Where insurer grants terms of business to an intermediary relating to retail business, ensure the terms of business agreement warrants that the intermediary will clearly explain risks inherent in products to policyholder and ensure take measures to monitor performance with respect to advice or sales (and claims).
Communication requirements with policyholders
- An insurer should ensure that communications with policyholders are fair, clear and not misleading.
- This section remains largely as before.
- Disclosure prior to providing services. Key facts document.
- Document and provide copy of terms of business to policyholder except where impractical.
- Policy servicing. Includes key facts to be provided to policyholders buying products with an investment element.
- Notices to the policyholder.
Safeguarding client assets
Complaint and error handling
- The insurer shall handle complaints and errors in a manner that is fair and expedient. The insurer shall implement a documented complaints management framework.
- Establish claims dispute resolution procedures that follow a balanced and impartial approach.
Communication of the policyholder’s responsibilities
- An insurer shall ensure that policyholders are aware of their responsibilities within the business relationship and have access to appropriate informational resources. Remind policyholder to read all terms and conditions and to make relevant disclosures to the insurer.
- Policyholder awareness. Where appropriate, develop programmes and resources to assist policyholders with developing knowledge and skills necessary to understand risks and make decisions.