Archive for the ‘Risk Management’ category

New EU insurance sector block exemption adopted

18 May, 2010

On 24 March 2010, the European Commission announced that it has adopted a new insurance sector block exemption regulation (BER). The new insurance BER came into force on 1 April 2010 and will last until 31 March 2017. The insurance BER exempts certain aspects of the insurance industry from the EU prohibition on restrictive agreements.

The headline points of the new insurance BER are that it:

  • renews exemption for joint compilations, tables and studies;
  • renews exemption for co-(re)insurance pools, subject to some amendments;
  • no longer exempts standard policy conditions; and
  • no longer exempts agreements on security devices.

This should not come as a surprise as it is effectively what the European Commission set out in its consultation draft of the insurance BER in October 2009, although there were some slight amendments.

The Commission observed that standard policy conditions are used in other sectors, such as banking, without the need for a specific block exemption. It reasoned that to give the insurance industry special treatment could result in unjustified discrimination against other sectors which do not benefit from a sector-specific BER. Security devices and their installation were found to fall into the general domain of standard setting.

Standard policy conditions

The exclusion of standard policy conditions and provisions on security devices from the BER does not mean that they are necessarily illegal – rather a regular competition analysis is required. This will consider whether the particular arrangements do actually comprise a restriction of competition, whether any other block exemption could apply (e.g. the vertical agreements block exemption) and/or whether the particular arrangement merits an individual exemption.

Associations and their members will need to carry out a self-assessment in relation to proposed standard policy conditions and their terms of use as for any other association activity.

The Commission plans to offer more guidance on standard policy conditions for all sectors (not just insurance) in its guidelines on horizontal agreements which it is currently reviewing and on which it plans to consult “in the first half of 2010”.

Joint studies

Key changes to the exemption regarding joint compilations, tables and studies are:

  • a new right of access to the results for customer and consumer organizations, subject to an exception on the grounds of public security (e.g. where information is related to the security systems of nuclear plants or the weakness of flood prevention systems); and
  • clarifications to the scope of the exchange of information covered by the BER.

Pools

Key changes to the pools exemption are:

  • market share calculation now covers gross premium income earned within and outside the pool by participating undertakings – bringing this area into line with other general and sector-specific competition rules; and
  • a broadening of the definition of “new risks” to cover risks the nature of which has changed so materially that it is not possible to know in advance what subscription capacity is necessary in order to cover such a risk.

The Commission emphasized that the pools exemption is not a “blanket” exemption and that careful legal assessment is required of whether a pool complies with the conditions of the BER. It intends to monitor their operation closely.

Subscription market co-(re)insurance agreements

The Commission has also underlined that ad-hoc co-(re)insurance agreements on the subscription market have never been covered by the insurance BER and remain outside the scope of the new regulation.

Transitional provisions

It is useful to note that there is a 6 month grace period until 30 September 2010 for agreements which comply with the expiring insurance BER but not the new insurance BER. This gives industry a little more time to adapt their agreements to bring them into line with the new rules.

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New Mediation Rules in Russia

16 May, 2010

On 11 March 2010, draft regulations establishing mediation as alternative procedure for the settlement of disputes were introduced to the Russian Parliament. Assuming they are accepted, they will come into force on 1 January 2011.

Mediation has not previously been expressly provided for in Russian legislation nor has any law contained a detailed description or procedure for it.

In most cases, mediation allows parties to reach the best possible, and a mutually beneficial, compromise without involving judicial bodies or reducing the effectiveness of the settlement process.

The draft regulations contain complex and detailed legal mechanism for mediation, as well as various amendments and additions to civil law, civil procedural law and arbitration procedural law.

It is assumed that mediation can be initiated by agreement between the parties. A mediator may arrange meetings with both sides jointly or individually. This may culminate in the resolution of their dispute, which may be formalized in a civil law contract or an amicable settlement approved by a judge if the dispute has been already submitted to the court.

If the dispute is not resolved, the participants may not disclose during judicial proceedings any information provided by another party to conclude a mediation agreement or about their intentions to do so. They are also prohibited from disclosing any opinions or suggestions made by the parties during the mediation process and any information about a party’s readiness to accept any suggestions. The mediator may not provide the parties with legal counseling or other help.

The individual or organization providing mediation services is not authorized to disclose any information about the mediation procedure unless it is expressly permitted by the parties.

The draft regulations also contain certain quality requirements and procedures for the provision of mediation services, as well as some features of mediation in the course of initiated proceedings in arbitration tribunals and courts of common jurisdiction.

UK developments on climate change risks disclosure

13 February, 2010

In the UK there is a growing scrutiny of how climate change and environment issues are managed and reported.

1. The Companies Act 2006 (the “Act”)

The Act requires directors to carry out their duties in a way which is most likely to promote the success of the company for the benefit of its members as a whole. The Act also obliges most companies to produce a business review. Directors of listed companies must understand the likely consequences of any decision in the long-term and disclose the main trends and factors likely to affect the future development, performance or position of the company’s business in their business review. Large quoted companies must also report on environmental risks, policies and key performance indicators (KPIs). Environmental risks encompass a wide range of issues, not purely climate change although climate change may be an inherent factor. In order to assist with the reporting process the Accounting Standards Board has issued a statement of best practice and DEFRA has issued guidance on KPIs.

2. Recent Guidance for Auditors

In September 2009 the Environment Agency and the Institute of Chartered Accountants for England and Wales (ICAEW) launched new guidance on annual reporting in annual financial statements, entitled “Turning Questions into Answers: Environmental Issues and Annual Financial Reporting 2009”. The report provides guidance to assist preparers, users and auditors of annual financial statements to identify sufficiently relevant environmental issues, which affect company financials warranting disclosure. The aim being that the disclosure of management policies relating to environment matters and companies’ corporate commitment to these issues will assist in avoiding financial risks and prompt internal change. The report is expected to be of interest to directors and users of annual reports in addition to auditors.

Whilst particular obligations are placed by the Act on large and quoted companies to report on environment related risks, policies and KPIs, the report advocates voluntary reporting for all companies in excess of the required standards in order to generate information on environment performance.

3. Calls for harmonized climate change disclosure framework

The ICAEW, the Climate Disclosure Standards Board and Prince’s Accounting for Sustainability Project and others including 12 accountancy institutes from around the world have called for a single set of universally accepted standards for climate change related disclosures in mainstream financial reports.

In 2009 the Climate Disclosure Standards Board (CDSB) consulted on a Draft Reporting Framework designed for companies to use in evaluating the type and extent of disclosures that should be made about climate change in their mainstream reports. The Framework is to apply to disclosures made in or connected to information provided outside financial statements – such as the business review – that assists in the interpretation of a complete set of financial statements or improved users’ ability to make efficient economic decisions. A response to the public consultation is expected in the first quarter of 2010.

Ceres report on survey of asset managers practices

A recent report by Ceres entitled “Investors Analyze Climate Risks and Opportunities: A Survey of Asset Managers Practices” (January 2010) is also of significance. The report is the result of a survey conducted in 2009 of the world’s 500 largest asset managers asking them to describe how they are considering climate risks in short and long-term decisions. The report examines best practices that asset managers are using to incorporate climate and environment risks into their due diligence, corporate governance and portfolio valuation. The key findings reveal that many companies are still developing protocols for reporting on their carbon emissions and the risks and opportunities that they face. Whilst these disclosures are more prevalent, they are still voluntary and lack consistency.

The report notes that five of the world’s largest financial institutions have adopted the Carbon Principles, a roadmap for banks and utilities to evaluate and mitigate climate risks in lending to electricity generation projects. These financing entities acted out of concern about long-term viability of high-emission electricity generation. This means that the Carbon Principles initiative could increase the cost of financing high-emission enterprises if lenders demand more favorable terms to compensate them for potential liability, or if they simply avoid financing high-emitting projects. Ceres identifies that utilities that are investing in energy efficiency and cleaner renewable energy may not only face fewer material risks related to climate change regulation, but may also benefit from lower financing costs and higher market share, as emission regulations and renewable portfolio standards take effect.

Conclusion

Increasingly climate change impacts, sustainability issues and environmental compliance are being considered in making investment decisions. The emergence of new guidance on requirements for disclosures on climate change risks is indicative of heightened awareness of how environment related legislation, policy and risks should be factored into business decision making in a cohesive way.  More developments in this area should be expected.

For UK Hotels — A duty to reduce carbon emissions

8 December, 2009

(This article first appeared in Hotel Report.)

In April 2010, a new regime designed to improve energy efficiency and reduce the amount of carbon dioxide emitted by businesses will be implemented in the United Kingdom. As well as the large hotel chains, this will also affect owners of unbranded hotels that exceed the relevant electricity usage thresholds and all owners of branded hotels.

To be known as the Carbon Reduction Commitment (CRC) scheme, it is a mandatory scheme and will apply to organizations whether in the public or private sector who have at least one electricity meter settled on the half hourly market and whose annual UK electricity usage exceeded 6,000 MWh which represents an annual electricity bill of roughly $985 million at current rates.

What is the CRC scheme?

Under the CRC scheme, participating organizations must purchase “allowances” sold by the government for each ton of carbon dioxide that they emit.  The initial price will be nearly$20 per ton. So there is a direct incentive for these organizations to reduce their emissions and therefore their energy bills.

Additionally, the better a participating organization performs at reducing its emissions, the higher its ranking in the annual performance league table that the Government plans to publish showing the comparative performance of all participants. Government proceeds from selling allowances will be handed back to those organizations that feature most highly in the league tables.

What constitutes an ‘organization’?

Group organizations will be treated as a single entity under the CRC scheme and all members of that group will be required to participate. There are two main groupings that constitute ‘organizations’:

  1. Corporate groups, i.e. all parent companies and subsidiaries, including subsidiaries of foreign parent companies; and
  2. Franchise groups, which include not only the franchisor’s corporate group, but also all franchisees of the franchisor.

It is important to note that there are significant financial penalties for non-compliance and liability for compliance with the CRC scheme will be joint and several and attach to all entities within the CRC organization.

The implication for the hotel industry

The implications depend on whether the hotel in question is leased, managed or franchised. Whilst a managed hotel is distinguished from a franchised hotel in the hotel industry, any managed hotel that is operated under the manager’s brand will be treated as part of a franchise for the purposes of the CRC scheme.

Leased hotels

Under a standard lease, a hotel operator as tenant is likely to be the counterparty to the energy contract in place as opposed to the owner as landlord.  Under the CRC regime as currently envisioned, CRC liability for energy use will attach to the hotel operator itself if it is a single entity or where the hotel operating company is part of a group, all of the companies in the group (subject to certain exceptions) which together will constitute the CRC Organization.

In the less common situation where the landlord is the energy contract counterparty (perhaps where the hotel is part of a larger mixed-use building), then the CRC liability will reside with the landlord. The commercial lease arrangement between the landlord and the tenant will determine whether the landlord can recover the cost of the allowances through the service charge and/or whether the tenant is entitled to share in any rebates – the CRC regime does not govern this private matter.

Franchised or branded managed hotels

The definition of a franchisee is where the franchisee “presents or equips [the hotel] premises to a standard or specification which results in that premises having an internal appearance which is substantially uniform with premises belonging to other franchisees of that franchisor or of the franchisor itself.” This means that:

  1. The owner of a branded hotel is associated with the operator under the CRC scheme.
  2. The operator’s corporate group will be aggregated with all its franchisees’ hotels for the purposes of determining the ‘CRC Organization’.
  3. The parent of the operator’s group (or the UK group company nominated by the parent) will need to purchase allowances for the whole CRC Organization.
  4. The management agreement will need to determine whether the operator can recover the cost of purchasing allowances as an operating expense and, if so, how rebates given back to the CRC Organization will be re-credited to individual owners.

Unbranded managed hotels

Normally the owner will have the liability to purchase allowances, if it is large enough to qualify. However, if the manager has a single contract for electricity under a group-purchasing scheme for all hotels managed by it, and it pays the bill with a re-charge to owners, then the manager may become responsible for purchasing the allowances. If the manager contracts with the electricity provider, but merely as agent for the owner, then that contract will be considered to be the owner’s and the owner will be responsible for purchasing allowances.

Next steps for owners and operators

Hotel operators, who may be aware of the need to measure their own electricity usage in owned and leased hotels and their head offices, may need to ensure that they are in a position to measure usage of all UK hotels operated under one of their brands, whether on a managed or franchised basis. On the basis that no management agreements expressly deal with this issue, operators should ensure that they agree a protocol with their owners as to how the system will operate in terms of re-charging for allowances and re-crediting of rebates.

Owners of branded hotels should challenge their operators/franchisors to explain what they intend to do to minimize the cost of the scheme by maximizing emissions reductions and therefore the rebates available under the scheme.

There will also be implications for investors, purchasers and developers of hotels who, together with owners and operators, will need to seek advice on how the CRC scheme will affect their involvement in the sector.

U.K. Directors’ and Officers’ Programs Should Be Reviewed

27 October, 2009

With legal and economic risks increasing for businesses in 2009, many in the U.K. are expected to look at their insurance programs in more detail.

It’s set to be a tough year for anyone running a business. As well as the difficulties created by the economic slowdown, the introduction of more legislation will heighten the risk of legal action and financial penalties.

For those involved in insuring those risks, 2009 will bring a mixture of challenges and opportunities.

One insurer, Zurich Insurance, says that there’s going to be increased demand for directors’ and officers’ cover this year as more people think about their responsibilities. Yet after seeing prices fall, often substantially, over the last three years, there will be pressure on price as claims start to come through.

Certainly, claims are on the up. At the end of 2008, insurance research firm Advisen revised its forecast for D&O losses, taking it up to $5.9bn from the $3.6bn it had forecast in February. Its revision resulted from “the mushrooming of the credit crisis into a global financial calamity”. It also reflected an increase in securities class-action lawsuits, securities fraud lawsuits brought by regulators and law enforcement agencies, bankruptcies, and shareholder derivative lawsuits.

The number of securities lawsuit filings in the U.S. reportedly has increased sharply in the last two years. There were 119 filings in 2006, 176 in 2007 and 210 in 2008. It is widely held that the statistical average is 200, so we have moved to a position where filings are above that number. Additional concern for some insurers is that it takes three to five years for a lawsuit to reach the filing stage.

See you in court

With new legislation coming into force this year, directors have additional rules to observe. Most recently, the Health & Safety Offences Act came into force on 16 January and will increase the penalties for companies that break health and safety law.

It is not just domestic U.K. regulation that directors need to be mindful of, either. A company can also face legal action from the U.S., regardless of where it is domiciled. A prime example is the German engineering company Siemens, which paid $800m to the US Justice Department and stock market regulator, Securities and Exchange Commission, in December to settle corruption charges. This was on top of the EUR395m it had already paid to German regulators.

There has also been an increase in regulatory risk. The Financial Services Authority and the Serious Fraud Office have become more aggressive in their approach to fraud over the last 12 months. The FSA has beefed up its criminal prosecutor and enforcement teams and sent out a clear message about its intentions by carrying out a series of dawn raids to combat insider dealing.

As well as action from the regulatory bodies, it is believed that there will be more claims brought against former directors this year. There’s been a lot of change in boardrooms and as the new directors settle into their roles, it’s not inconceivable that there will be claims brought against former board members.

And there has been a steep rise in the number of firms going into liquidation, which will also result in an increase in claims. Figures from the Insolvency Service show that 4001 companies went into liquidation in the third quarter of 2008, an increase of 10.5% on the previous quarter and a rise of 26.3% on the same quarter in 2007.

It is not uncommon to see more claims being brought against directors in a recession. If a company goes out of business, people, including the administrator, look to the directors for potential redress.

Colleagues of mine in the U.K. tell me these factors are starting to influence the market, with rates hardening and terms and conditions getting tougher on some cover.

The market is also very divided, with financial institutions facing very different conditions to companies in the commercial market. Rates are reportedly hardening for financial institution business because of the problems in this sector, whether it’s the credit crunch or the alleged Madoff fraud.

The extent to which premiums are rising does vary, with sectors like hedge funds and U.S. banks hit hardest. But while recent press reports have put a figure as high as 50% on the increases, this level of premium hike is still unusual.

But while the financial market may be having a tough time, it’s pretty much business as usual for the commercial market, with the 1 January renewal date passing relatively smoothly.

Insurers are fighting for market share and there’s plenty of competition for commercial D&O business. The loss ratios are low and profits are good. That market hasn’t really been affected by what’s happening in the financial market yet, in large part driven by segments like private companies being largely unaffected.

However, this is expected to change. As many insurers have exposure to both the financial and commercial markets, the problems facing financial customers are likely to have a knock-on effect for commercial customers. No longer is pricing falling, but rather many renewals are reported flat. Some are gradually moving up and it is expected that this will accelerate.

Additionally, Clients are paying more attention to the cover they purchase. Rather than buying purely on price, directors are giving more thought to their purchase and analyzing coverage as part of a broader risk management and corporate governance approach.

With a higher level of claims anticipated, capacity could come under pressure this year. It is likely that, although there will still be plenty of cover to go round, it will not necessarily be as easy to obtain. This will require insurers to adjust their pricing strategies.

Underwriters are still basing their pricing on financial stability and other financial factors, but that this does not give sufficient insight into the business which is why risk management can become an even more critical factor. Claims and bankruptcies can come from anywhere but it is more likely to be those companies that have poor controls in place as well as those with weak balance sheets.

In spite of the greater risks present in the market, new players may also be attracted to the market over the next 12 months. With rates hardening and demand for the product. An underwriter coming into the market now wouldn’t have a history of claims and, with a good risk management strategy, could maintain a clean and profitable book of business. It could be a very good time to be writing D&O cover.