Insurers are calling on the FSA to relax its rules on block transfer. Michael Faulkner reports
The pressure on the FSA to change its rules on block transfer is mounting. The Building Societies Association, representing 63 UK lenders, has recently emerged as the second major trade body to challenge the regulator over its rules governing the transfer of blocks of white label business from one insurer to another.
Already, the ABI, heavily supported by Norwich Union, has been pressing the FSA to change its stance since before Christmas. But the regulator is holding firm and is not persuaded by insurers' proposals.
The argument put forward by insurers centres on the uncompetitive nature of the rules. They argue that the requirement to obtain the express permission of policyholders before their policies can be transferred will create an administrative burden that will preclude many transfers.
Ultimately, they say, the FSA's rules will act against the interests of the consumers that it is supposed to be serving. Consumers will lose out on the benefits they would potentially gain from the free movement of books of business, namely better terms, lower prices and better service, they argue.
But throughout the debate, the FSA has maintained a hard line, arguing that it is bound by European directives and that it would be a "retrograde step" to change the rules.
As one senior source puts it: "Brokers are required to obtain the permission of the client before changing insurers, so why should different rules apply in relation to blocks of business placed through a bank or building society?"
Yet it is easy to see why insurers would wish the rules to be relaxed. The ABI estimates that 20% of the total personal lines market is affected by the block transfer rules, which equates to about £4bn of premium, a significant volume of business by any measure. There are clearly huge commercial rewards at stake, and an unfettered transfer procedure would make it easier to poach books of business from other providers.
And it's not just insurers who would benefit from a change. Affinity providers, such as banks and retailers, would find it easier to change underwriting partner, allowing them to search for the best service and rates.
Insurers and the ABI are now searching for ways around the problem. After taking legal advice, the ABI says that in the longer term a solution can be found by inserting appropriate clauses into contracts, known as prior request clauses. These clauses inform the customer at the outset of the policy that the intermediary might change insurer when the policy is renewed.
The problem is many affinity arrangements are based on three or five year contracts so providers would need to wait for these to expire in order to change the wording.
In the meantime, the ABI is attempting to get the FSA to agree to a 24-month waiver of the rules, giving the necessary short-term flexibility before existing contracts can be amended. But sources say the FSA is "not interested" in this approach and is standing firm. Yet the ABI continues to press its case and is looking to make a last-ditch effort in a meeting this week.
Meanwhile, insurers are looking for other ways round the issue. A different approach being explored involves a complicated and arduous procedure known as a Part 7 transfer. This process, which transfers liabilities from one insurer to another, has traditionally been used to consolidate run-off
operations within a group of companies. But it can also be used to transfer blocks of policies between insurers - in effect a block transfer. The difficulty for those attempting to use this procedure is that it requires court approval, a high level of FSA involvement and policyholders to be contacted.
Jonathan Davies, a partner at law firm Reynolds Porter Chamberlain, says: "The FSA has to be involved at every stage and has a right to object. In every scheme that has been approved by the court the FSA has given its approval."
In addition, Davies says, every policyholder has to be notified and has a right to object. It differs from the block transfer rules in that express consent is not required.
While some question whether the FSA would be prepared to approve a scheme that allows its rules on block transfer to effectively be bypassed, others see it as an option. ABI head of market regulation Chris Hannant says: "The FSA is not opposed to block transfers in principle. The problem is that current market practice does not fit in with the rules." IT
What is block transfer?
The rules on block transfer stem from Europe: the Distance Marketing Directive and the Insurance Mediation Directive. If an intermediary wishes to transfer a block of policies underwritten by one insurer to another it needs to obtain the explicit consent of the policyholders. Only those that consent are transferred.
Insurers are looking closely at how the rules will operate in practice and the potential pitfalls. One concern is that they may leave some policyholders uninsured if they do not realise they need to consent to the transfer thus leaving them without cover.
Intermediaries providing white-labelled products are concerned of the potential damage to their brand if customers are left uninsured. One way of limiting damage could be to require the new insurer to provide an indemnity covering any loss to an uninsured policyholder. Insurers may not be keen to do this if they fear a large potential exposure.