Copies will be distributed.
I think it would be a useful exercise, before setting out in detail the provisions of the Bill, to outline the role of the Minister for Industry and Commerce in relation to the insurance industry and also to refer to the range of actions taken to improve the overall environment affecting the Irish insurance market. The first duty of the Minister in relation to insurance companies is the supervision of insurers to ensure that they are capable of meeting their liabilities and that they are solvent and to take appropriate action to remedy the situation if they are not.
It is not the function of the Minister to run insurance companies, to make commercial decisions for them or to exercise business acumen on their behalf. The directors and officers of an insurer are responsible in the first instance for the direction of the insurer's affairs and for compliance with the law. Others, such as auditors and actuaries, who are charged with specific statutory duties must also play their part.
In this Bill, I am taking power to require that those appointed as directors or officers of an insurer are suitably qualified or experienced to handle the task. Of course, these powers do not of themselves guarantee the effectiveness of such persons in discharging their duties. No amount of legislation could achieve that. They are nevertheless an important additional safeguard in the supervisory process.
What preoccupies most people in relation to insurance are the issues of cost, availability and coverage, particularly in the motor and liability classes. There is widespread agreement that the cost of insurance in this country has been too high and for far too long. It is also generally accepted that the high cost of insurance is directly related to the number and level of claims, the under-writing losses sustained by insurers and the enormous expenses which arise in the claims process, particularly when the courts are involved.
The Government in their Programme for National Recovery pointed out that Irish liability insurance rates place many Irish firms at a cost disadvantage, particularly in comparison with their United Kingdom competitors, and they under-took to move quickly to facilitate a reduction in insurance costs. The Government over the past 18 months have tackled this area vigorously and with a sense of urgency.
The most important commitment given by the Government was to abolish the use of civil juries in personal injury and fatal accident cases in the High Court.
The Courts Act, 1988, came into force on 1 August 1988. Jury trials in personal injury and fatal accident cases are no longer available to parties in litigation from that date. The object of this change is to bring greater consistency and predictability into the awards of damages in these cases, and to enable a much greater proportion of cases to be settled at an earlier stage in legal proceedings.
The insurance industry, supported by bodies such as the CII and FUE, have for long cited the availability of jury trial as a principal cause of the high cost of motor and liability insurance in this country. The Government have now delivered on their commitment to do away with the jury system. There is, therefore, a clear onus on the insurance industry in Ireland to translate the benefits arising from that important change in the legal framework into lower insurance premiums for the general public and for industry. I have already emphasised to the insurance industry the necessity for premium reductions to be passed on to the insuring public and I have asked my Department to monitor premium levels to ensure that they do so.
I am glad to say that there are signs already of an improvement in this regard. It is apparent that premium levels in motor insurance have been reducing in recent months as a result of increased competition in the marketplace and in anticipation of the effect of the abolition of juries and of the other Government measures to improve the overall environment for insurance. Indeed, the initial results of a survey on motor insurance premium levels carried out by my Department indicate that decreases of between 3 per cent and 4 per cent for third party motor rates have already occurred within the last 12 months or so. Certain insurers have also introduced much more attractive premium ratings for young drivers.
The cost reduction measures already taken will have a general beneficial effect on the downward pressure on insurance costs and will also apply to the other liability insurance classes, including employers' and public liability insurance. My Department, with the co-operation of the CII and other relevant organisations, are currently monitoring developments in this area.
The most recent CII survey indicates that, on average, employers' liability insurance rates have fallen from 2.78 per cent of payroll costs in 1986 to 1.85 per cent of payroll costs in 1988. While the cost of employers' liability insurance may in some cases in the past have acted as a disincentive to employment, the latest encouraging trends are reducing its importance in this regard. I will continue to press for across-the-board reductions resulting from an improved operating environment for insurers and not just reductions concentrated in the better risk areas.
Another matter that has become linked with the jury issue is concern about high legal costs in insurance cases. Until recently, virtually every personal injury case in the High Court — no matter how straightforward — involved at least eight lawyers, including three counsel on each side. That was regarded, quite properly as a gross extravagance, and there is a commitment in the Programme for National Recovery to reduce legal representation in Superior Court cases. In line with that commitment, the Government decided to include a provision in the Courts Act, 1988, that empowers the Minister for Justice to regulate the number of counsel whose fees can be recovered by a successful plaintiff in a personal injury case.
Independently of this statutory intervention — though some would say because of it — the Bar Council announced it would abandon the long-standing "three counsel" practice in personal injury cases when jury trials ceased. On the other hand, in response to my call for rationalisation of legal representation levels, spokesmen for the insurance industry have suggested that most personal injury cases could be pleaded before a judge by one counsel and, of course, this is the position in Britain where most personal injury cases are pleaded by one junior counsel. I would expect that, as the largest consumer of legal services in the country, the insurance industry are in a strong position to influence the number of legal rep-resentatives that are briefed in these cases. I am aware that discussions with representatives of the Bar Council are continuing and both I and the Minister for Justice will be monitoring developments. The Minister for Justice intends to wait until the position has settled after the abolition of civil juries in these cases, before considering the question of regulations under the new power vested in him by the Courts Act, 1988.
Arising from another commitment in the Programme for National Recovery, the Government have asked the Minister for Justice to consider how best a Book of Quantum of Damages might be drawn up. For people who may not be familiar with the concept, a Book of Quantum of Damages is a term used to describe a legal publication which contains information on the amounts of damages awarded by the courts in personal injury cases, classified by types of injury, together with statements of the law and practice in relation to the assessment of damages. Such a Book of Quantum of Damages is published in Britain and used there as a guide for the insurance industry, the legal profession and the judiciary in settling and deciding cases.
The Minister for Justice has recently stressed that the production of a Book of Quantum of Damages geared to Irish circumstances is not primarily a matter for the State. It would not, of course, prescribe a statutory tariff of damages. In his view, it is really a matter for private enterprise, as in Britain, and it is likely that as judges start deciding personal injury cases and issue reasoned judgments, interest will develop in law reporting in this area, leading eventually to publications similar to the Book of Quantum of Damages used in Britain. Indeed, one such project enterprise has already been mooted.
Apart from that, the Minister for Justice has referred the question of a Book of Quantum to the Incorporated Council of Law Reporting for Ireland for consideration by them. The Minister for Justice is represented on the council, which includes members of the Judiciary and representatives of the legal profession. The council are currently considering this matter and expect to conclude their examination later this year.
Another development in this area worth mentioning is a recent initiative by the Irish Insurance Federation in arranging that member companies will maintain a record of major categories of injury, will collate data on award settlements and circulate the results to members and to my Department. Such data will complement data on court awards in injury cases and help to provide an overall view of the quantum of damages in personal injury cases.
Another commitment in the Programme for National Recovery is the question of introducing a system of pretrial procedures in the High Court to enable subsidiary issues to be disposed of by agreement between the parties before a trial. The aim would be to limit the issues going to court to those that remain in dispute between the parties. Such a procedure would eliminate the need to call witnesses to prove various matters which are not in dispute between the parties, such as road maps, plans, photographs and certain evidence about injuries sustained in connection with an accident.
As well as reducing legal and expert witnesses costs, such a facility could have a major influence on personal injury cases by providing new procedural machinery to advance the prospects of settlements in cases that go all the way to trial at present. The Minister for Justice hopes to put proposals to the Government shortly in the context of a Court Officers Bill — which is at an advanced stage of preparation in his Department — to facilitate the introduction of a system of pre-trial procedures in the High Court.
Also, the Minister for the Environment is proposing to introduce new legislation to strengthen the road traffic code and to deal more effectively with certain aspects of uninsured driving and other offences. The measures proposed could include the impounding of motor vehicles to deal with uninsured driving.
The Minister for Labour will be introducing legislation shortly to give effect to the main recommendations of the Barrington Commission of Inquiry on Safety, Health and Welfare at Work. I also understand that ongoing discussions are taking place between the Department of Labour, the FUE and the Irish Insurance Federation on the question of the introduction of safety audit arrangements by insurance companies. I have given my full support and encouragement to these developments which are in the interest of the whole community.
I would hope for repaid progress on most, if not all, of the areas still outstanding so that we can maintain the momentum already created to tackle and get under control these component elements of insurance costs. Already, the signs are encouraging but much remains to be done. All these actions are proof positive of this Government's determination to overcome the problems which have built up over many years. Changes do not happen or take full effect overnight but I am confident that the decisive action being taken will in time prove instrumental in reducing insurance premiums.
The reduction in insurance premium rates is also very much in the insurance industry's interest particularly in the context of the liberalisation of the insurance market within the European Community. It is critically important for our economic well-being that insurers here be able to compete on an equal footing with potential EC services insurers in both efficiency and price. The programme of measures adopted by the Government is designed to assist insurers in this regard. There is no doubt that, once the non-life insurance Freedom of Services Directive gets underway in the nineties, there will be much greater competition, particularly for the better quality large industrial and commercial risks. There will also be greater freedom of choice for consumers and some policyholders will, undoubtedly, get cheaper insurance abroad. It is quite clear, then, that the combined effects of the Government's cost reduction measures and the liberalisation of insurance services will be of benefit to insurers and policyholders alike.
I now want to turn to the content of the Insurance Bill before the House and to describe briefly its main provisions. Part I contains the usual preliminary matters to be dealt with in any Bill. However, I would refer specifically to sections 3, 7 and 9.
Section 3 provides for substantial penalties for offences under the Act and increases existing penalties for breaches of insurance law to meaningful modern day levels. Stronger provisions are also being laid down in respect of penalties for the deliberate supply of false or misleading information. This is an important deterrent since the authorisation and supervision of insurers depend upon true and accurate data being submitted to the Minister.
Section 7 confers fee-charging powers on the Minister. Fees of this nature are now common in many other jurisdictions. Levels of fees have yet to be drawn up but I would emphasise that the intention is to charge for supervision of companies purely on a break-even basis. My Department have in recent years built up a considerable body of expertise in dealing with insurance. The calibre of staff is high. We are a small administration, however, and we cannot afford the levels of staff resources employed in other countries.
Having said that, I am happy that the provisions in this Bill to allow for the charging of fees for supervision will ensure that the required level of staff resources and expertise will continue to be made available. The computerisation of the insurance branch of the Department is now well established — in the case of non-life insurance supervision — and has been progressing satisfactorily in relation to life assurers. This is contributing to the efficiency of the supervisory service.
Section 9 of the Bill repeals some provisions of earlier insurance law, which are long spent. These are non-contentious in nature.
Part II of the Bill is concerned with the supervision of insurance companies. The core provisions of this Part relate to the keeping of records and submission of regular information by insurers, supplemented by specific requests for additional data or special examinations and to the specification by the Minister of the essential rules regarding the estimation of insurance liabilities and the nature, spread and valuation of assets to meet such liabilities. This is, of course, the system we have been operating for several years past. The annual returns of insurers are currently made pursuant to various regulations made between 1976 and 1986 under the European Communities Act, 1972. The powers now being taken in sections 11 and 12 will, for the first time, enshrine these rules and requirements in substantive insurance law.
Section 13 obliges an insurance company to keep records of its business in the State at its registered office or place of business here.
Under section 14 life assurers must ensure that policyholders and shareholders funds are kept separate.
In the interests of consumer protection, restrictions on the use to which the assets representing the combined life assurance fund may be put are set out in section 15. These are prudential requirements in the supervisory process to protect policyholders.
In Section 16 the Minister is being empowered to require information, both in relation to insurers themselves and in relation to defined categories of bodies which may be connected with insurers. Practical experience suggests that this extension of powers is necessary. Insurers, of their nature, will have many and diverse investments in, and relationships with, other commercial concerns. The fortunes of such connected bodies may be intimately bound up with those of the insurer.
Section 17 entrusts formal powers of investigations to the Minister and enjoins on insurers full co-operation in these exercises. The practice of special examinations of insurers' affairs is not unusual. As a matter of routine, a number of insurers are selected each year by my Department for study by outside consultants, particularly in relation to any special aspects that have arisen from the examination of the insurers, annual returns.
Section 18 of the Bill provides the Minister with the power to intervene in the running of the business of an insurer which has encountered financial difficulties and whose solvency is in doubt. The powers of intervention include directions to cease taking on new business, to dispose of investments, to limit premium income, or to localise assets in the State. The powers are also exercisable on a number of other grounds specified in the section. While not directly related to solvency, these grounds are obviously of importance in a financial context — namely the power to intervene where unsatisfactory reinsurance is in force, or where the level and nature of business being written is radically different from the financial projections set out in the business plan submitted by the insurer when seeking authorisation. Insurance supervision cannot guarantee an insurer's solvency. It is important that the Minister should have the powers to take immediate action when problems come to light.
With the indulgence of the House, I will pass over section 19 for the moment. Section 20 deals with the qualifications of directors and managers and is relevant in completing this overview of insurance supervision. At present, under EC directives, insurers seeking authorisation are required to submit details of proposed directors and managers. The Minister does not authorise the insurer if he has an objection to any such person proposed.
Section 20 retains this system in that the Minister may decide not to grant an authorisation if he is unhappy with the suitability of any such person. However, it also extends the Minister's powers of requiring information to existing office-holders in insurers already authorised and to any new appointments to such offices. The Minister may object to any person holding a position of responsibility with an insurer if it appears to him that the person is not suitable. The Minister may require the insurer to take certain measures, along the lines set out in connection with section 18, for as long as the person in question holds the position with the insurer.
Additionally, the Minister may veto the appointment of any director, chief executive or authorised agent, if the person to be appointed is not in the Minister's view a suitable person. The powers in section 20 are new in an Irish context but they are a common feature of supervision abroad. It is vitally important that those responsible for directing the affairs of an insurer should be open to the tests of suitability and competence which this Bill provides. A very heavy duty falls on the shoulders of such persons. The public should know that an independent mechanism exists to weed out those who are unsuitable or not qualified for the task.
While my first role is the supervision of insurers from a solvency point of view, I have also a function to play in the supervision of the insurance market — in seeing how insurers operate and how they meet the demands put on them by those seeking insurance. The provisions in sections 19 and 21 fall under this heading of market supervision. Section 19 gives me the power to monitor the pricing practices of insurers and the contractual terms on which business is offered.
I am also taking power to require insurers, by order, to display premium rates and to provide information to consumers on policy conditions and rates in specified classes of insurance. The candidates for such orders are motor and household personal lines insurance. I am sure the taking of these powers will be welcomed.
Section 21 deals with a different problem. The possession of an insurance authorisation means a responsibility to write business in the class of business authorised. Authorisations are valuable peices of paper. Unfortunately, isolated cases can arise where insurers make little or no use of the authorisation in specific classes or temporarily withdraw from underwriting. There may be very good reasons for insurers doing so. We cannot force insurers to write insurance but we should certainly be able to act to withdraw or suspend authorisations in classes where no business is being done or where the scale of business has been so reduced as to amount in effect to a cessation of business.
The central focus of insurance supervision is on direct insurance, that is insurers who accept business from the public rather than from other insurance companies. Insurers themselves in taking on risks seek to minimise their risk exposure by reinsuring risks, or parts of risks, with other direct insurers and with specialist reinsurers.
Reinsurance is an international and specialised form of insurance. It is regulated in many countries abroad, but not here, except to the extent that it is engaged in by direct insurers authorised by the Minister. To attempt purely local supervision of specialist reinsurance in an Irish context would be ineffective.
However, there are measures we can take to regulate a limited aspect of reinsurance and to promote a degree of transparency in the operations of specialist reinsurers in the State. This is the purpose of section 22. First, on grounds of commercial prudence it prohibits direct insurers from accepting reinsurance except in a class for which they are authorised. Ancillary risks which form part of a reinsurance "basket" of risks, are, however, exempted from this prohibition so as not to cut across normal commercial practices in the market. The second requirement of this section is for specialist reinsurers established in the State to identify themselves to the Minister and to publish accounts in such form as the Minister specifies on grounds of transparency.
Section 23 of the Bill imposes a minimum paid-up share capital of £500,000 on insurers seeking authorisation and empowers the Minister to regulate the form and value of the share capital. This section incorporates into law present administrative practice and requirements in relation to the authorisation of insurers.
Section 24 deals with the attachment of conditions to authorisations and requires insurers to adhere to such conditions on penalty of suspension or revocation of authorisation.
Section 25 of the Bill relates to industrial assurance, which originated under completely different social conditions in the last century and is paid for by weekly premiums which are collected door to door and where the individual sums assured tend to be low. Over the last ten years this sector of the business has declined spectacularly while, at the same time, ordinary life assurance business has experienced substantial growth. New industrial branch business now accounts for only 1 per cent of all new business written each year.
The decline in this business can be attributed to changing social patterns, better social welfare provisioning, increased use of building society and bank accounts and the expansion of credit unions and post office savings. In addition, the expenses related to this business use up so much of the premium that, after providing for death claims, there is little left for investment on behalf of the policyholder. This is bad value for money and the Government, conscious of the position of the policyholder, feel that changes are required now in order to ensure that industrial assurance business continues to be written and that policyholders get a better return for their premiums.
In order to enable the industrial assurance companies to continue to under-write this business, the current legal requirement which stipulates that industrial and ordinary life assurance funds are kept separate is being removed. This will enable life assurers to write mixed business where the premium could be either collected at home or paid via a direct debit at the choice of the insured or in certain cases at the requirement of the insurer. The amalgamation of these funds will now be permitted under section 25 (1) and this does not have any solvency implications because, while the funds had to be kept separate, there was no requirement to keep the assets separate.
Section 25 (2) will permit insurers to reduce the frequency of collection in areas where collection costs are too high although a frequency of not less than two months is still required.
I should add that the changes are permissive rather than mandatory and insurers are not required either to amalgamate funds or revise collection periods unless they so wish. We cannot allow this business to fade away and I feel that we have struck the right balance in the change without prejudicing the rights of policyholders in general.
Section 25 (3) increases to more meaningful amounts — in current terms — the sums which can be assured under industrial assurance policies.
As with industrial assurance, section 26 is rooted in the past. Its purposed is to remove certain impediments to the writing of group policies of insurance contained in 18th and 19th century Insurance Acts. These provisions are uncontroversial.
The remaining sections in Part II of the Bill are a rather mixed bag. Section 27 extends to the Industrial Credit Company and Fóir Teoranta certain facilities to conducted suretyship and guarantee business which were extended to licensed banks in the State by the Insurance (Amendment) Act, 1978. The effect of the present section is to place the ICC and Fóir Teoranta on a similar footing. Licensed banks have also represented to me recently that there are certain problems remaining for them in this whole area and discussions are continuing with a view to resolving matters in this Bill if at all possible. An amendment on Committee Stage can be brought forward as appropriate.
Sections 28 and 29 are technical in construction but straightforward in intent. They are designed to close off a possible loophole whereby, under present legislation, a friendly society could be formed to conduct commercial insurance activity without being supervised under the Insurance Acts. Section 28 will mean that the insurance activities permitted to be carried on by friendly societies, and in section 29 by trade unions, will be strictly mutual self-help activities — of the sort which one associates with the raison d'être of these organisations anyhow.
Sections 30 and 31 deal with the unfortunate aspects of insurance resulting from the demise of an insurer. Section 30 is merely a precautionary measure to ensure that no petition can be presenated for the winding-up of an insurer without the Minister being involved or heard. There are a number of courses open to the Minister which could, in particular situations, be preferable to a winding-up — for example, the promotion of a takeover by another insurer. In any event, it is right that the Minister, as insurance supervisory authority, should at least be aware of any proposed moves in the area of winding-up.
Provision is being made in Section 31 to alter the applicability of the insurance compensation fund. The fund will continue to be available to the two existing companies under administration but no future administrator of a non-life insurer will have access to the fund. The appointment of any further administrator is not foreseen but the legislative framework, which is in the Insurance (No. 2) Act of 1983, will stand.
At present, in addition to administrators the fund can be used to meet claims arising in the liquidation of a non-life insurer. In future, in any such liquidation the fund would support only non-commercial personal claimants, and in their case a limit of £650,000 or 65 per cent of the claim, whichever is the lesser, will be applied. Furthermore, only liabilities in respect of policies issued in the State to cover risks situated in the State will be provided for. Refunds of premiums will not be covered.
These changes represent a significant reduction in the present levels of protection offered by the compensation fund. For that reason they are not lightly proposed. The changes are, however, absolutely necessary because the present arrangements are quite simply too generous, exposing the fund to a potentially unlimited liability. Adequate arrangements have been made to cater for all foreseeable demands arising from the present administration of two companies but it would be completely untenable to continue to leave the fund so exposed to any further demands.
The current statutory arrangement under which the Minister strikes a maximum levy of 2 per cent on non-life premium income each year is the most that could reasonably be demanded of or borne by policy holders to provide against insolvencies on the part of insurance companies. Because of the proposed restrictions on who can benefit from the fund, in the interests of equity and consistency the 2 per cent levy will now be payable only on policies issued in the State to cover risks situated in the State.
Section 32 provides, in the event of the winding-up of an insurer, for the granting of priority to the insurers' policyholders over those assets which the insurer is obliged to maintain to cover its liabilities to policyholders.
Section 33 is simply a declaratory statement to confirm that an administrator appointed under section 2 of the Insurance Act of 1983 has the power to sell all or part of a company under administration and to run off any remaining part of the business, including the settlement of liabilities.
Important new requirements in relation to actuaries are contained in section 34. In future all life insurers with head offices in the State will be required to appoint an actuary to the company, if they do not have one already. In practice most, if not all, such life companies already have an appointed actuary and actuarial staff. All new life insurers, upon authorisation, will be similarly required to appoint an actuary. Section 34 further gives formal statutory recognition to the status of the actuary in the company. The Minister is also empowered to specify the qualifications and experience of the appointed actuary, and in this way to add to the existing actuary qualification rules set out in regulations made in 1940.
The purpose of section 35 is to ensure that auditors notify my Department when they become aware of any difficulties, or potential problems, facing a client insurer. I should stress that we are referring here to problems or difficulties which are likely to materially affect either the company's obligations to policyholders or their financial requirements under the Insurance Acts. In deciding on the final provisions of this section, account was taken of the views expressed during our discussions with the bodies representing both the insurance industry and the accountancy professions.
Part III of the Bill is concerned with commissions paid to insurance intermediaries. The provisions in this part are based on similar provisions in the Insurance Bill, 1982, which was not proceeded with at that time because insurers arrived at a self-regulatory agreement on life insurance commissions.
The reason the State should have the power to legislate for arrangments on remuneration between insurers and insurance intermediaries is obvious. It is the policyholder who ultimately pays for the commissions paid to intermediaries.
Excessively high levels of commission entail higher premiums or reduced benefits. There is also the danger that excessive commission levels can cause policies to be sold to unsuspecting clients on the basis of the return to the intermediary rather than on their intrinsic merit or appropriateness to the very needs of the client.
There have been a number of infractions of the Commissions' Agreements over the years, mainly arising from extra monetary and other inducements such as holidays in the sun offered to intermediaries by insurance companies, in order to increase market share. If this had proliferated, the consumer's interest would have been seriously threatened. For that reason I intervened in the most recent breakdown of the agreement following which there was a very welcome response from the industry. This resulted in a new commission agreement being drawn up with effect from 1 August 1987. This agreement has the support of all the life offices operating in the marketplace. In the Government's view it is highly preferable that the insurance industry should regulate themselves and that regulation must be effective and must be seen to be so. This is the philosophy which underlies Part III of this Bill, the provisions of which are enabling. It is not the intention to invoke these provisions unless the industry fails to regulate itself properly, in which event the Minister can have recourse to a range of highly effective measures. Given the extremely sensitive nature of commissions agreements and the difficulty of maintaining and enforcing them, the insurers concerned accept that the powers now proposed are an essential back-up to the maintenance of voluntary market self-regulation.
Section 36 enables the Minister to require an insurer to reduce commission payments to intermediaries where he considers levels to be excessive.
Under section 37 the Minister has the power, when he considers it necessary in the public interest, to prohibit the payment of commission in the form of benefits in kind and indemnity commissions. This is essentially a reserve power and is not intended to cut across normal business relationships between insurers and intermediaries.
Convictions for offences under section 36 and 37 are grounds for the revocation of authorisation of an insurer under section 38.
Under section 39, a conviction under section 36 or 37 will result in a prohibition on the convicted party advertising his business for as long as commission levels are excessive.
Section 40 makes it an offence, subject to certain in-built defences, for an intermediary to accept from an insurer a commission payment which is in contravention of either section 36 or section 37.
Section 41 allows a person to seek a refund of premiums on a life policy where an excessive or prohibited commission was paid.
Section 42 enables the Minister to require information on commission payments from authorised insurers.
While the emphasis on Part III of the Bill is very much on self regulation in the whole area of insurance commissions, it will be perfectly clear from the foregoing that a wide range of measures is available if circumstances warrant ministerial intervention at any time in the future. The objective is to maintain order in this sensitive area, whether by voluntary market self-regulation or by statutory control in the public interest should this prove necessary.
Now we turn to Part IV which is the innovative Part of the Bill. At present there are no provisions in statute governing insurance intermediaries, a generic grouping which forms an important pivotal link in the insurance chain. The general thrust of what we are out to achieve here is the development of a self-regulatory framework for intermediaries, with the aim of raising standards in this area and the enhancement of mainly financial safeguards for customers in their dealings with intermediaries. Let me say from the outset that the vast majority of insurance intermediaries conduct their business in a capable and responsible fashion. However, there have been many calls in recent years from some quarters for provisions in law to deal with the difficulties that arise very occasionally in customers' dealings with insurance agents or brokers.
The raising of standards is an important issue which I am aware is being pursued vigorously by the two bodies representing the broking profession. High standards of integrity and professional competence are very desirable from the consumer's viewpoint and accordingly the efforts of the broker bodies are most commendable. The crucially important safeguard for the consumer, however, is financial protection in the event of failure on the part of the intermediary to meet such standards. This was the fundamental concern of the government in their consideration of how best to deal with the whole area of insurance intermediaries.
The primary concern is to protect the consumer as far as practicable. I emphasise "as far as practicable". Legislation cannot reasonably be expected to cosset the man in the street from every possible adverse circumstance. While, theoretically, a scheme of regulation could be designed to cater for all possible hazards in this area, in practice the direct and indirect costs and inevitable rigidity in any such system would result in a disservice to the consumer. By outweighing the benefits conferred, such a scheme would be open to as much objection as the features it sought to remove. The House will be aware of the many criticisms of this nature which have been levelled against the Financial Services Act in the UK for example, on the grounds that it is too doctrinaire and that the compliance costs involved are too high.
Part IV of the Bill includes the following provisions of a financial or accounting nature: first, the maintenance of separate client accounts by all intermediaries other than tied agents; second, the bonding requirements on intermediaries; third, the provisions in regard to the scope of an insurer's responsibility for his agents; fourth, the treatment of premiums paid to intermediaries, and fifth, the professional indemnity insurance provisions for brokers.
The intention is that Part IV of the Bill will for the first time establish minimum desirable criteria for persons wishing to act as intermediaries be they tied agents, agents or insurance brokers, so as to protect consumers.
Turning to the individual sections of Part IV, section 43 sets out the basic qualifications necessary for those wishing to act as insurance brokers and provides for recognition by the Minister of broker bodies. A broker will have to be in a position to arrange insurance with at least five life insurers to act in the life sector or with at least five non-life insurers to act as a general broker. These requirements are important and I am sure the House will accept that it is imperative for a broker to be able to offer an effective choice to the public. The minimum level of five agencies should ensure this.
Under section 44 the Minister may require brokers to have professional indemnity insurance. Of course all reputable brokers are already carrying such cover on grounds of commercial prudence. It is not the intention to impose a mandatory requirement until at least two years after the enactment of this legislation which will allow the market time to adjust and gear up to the new régime.
Section 45 requires insurance companies to check both before initial agency appointments are granted and on a continuing basis in respect of payment of commission, for compliance by an intermediary with the provisions of the Bill or for membership of a recognised broker body.
Skipping section 46 momentarily, if I may, section 47 obliges all intermediaries other than tied agents to keep a separate client bank account in respect of both life and non-life business. Intermediaries will be required to lodge premiums entrusted to them by the public to such client accounts.
Returning to section 46 — this requires intermediaries, other than tied agents, to hold a bond. The idea of the bond is that moneys from it can be drawn down as compensation to clients of the intermediary in the event of the intermediary's collapse. This is an important "safety net" for consumers. The way in which the bond will work is that all insurance brokers and agents with an annual "defined" turnover of £25,000 (i.e. where a minimum of £25,000 is handled directly by an intermediary and passes through the new obligatory separate client bank account), will be required to hold a bond. The bond level has been set at £25,000 for non-life, and at £25,000 or 25 per cent of defined turnover for life and composite intermediaries. The bond levels reflect the differing risks to which client moneys are exposed.
The necessary basic qualifications for agents (including tied agents) and the obligations on them to identify themselves clearly to clients are set out at section 48. One of these stipulations is that in future an insurance agent may not hold, in the case of both life and non-life insurance, more than four agencies in either category. This limitation is one of the features of the Bill which serves to distinguish agents from brokers and high-lights the more limited scope of the service which agents will be able to offer the public following its enactment.
The maintenance of a register of appointed intermediaries by insurance companies for the purposes of public inspection is the subject of section 49.
Section 50 clarifies the scope of agency in the case of both an agent and tied agent. An insurer is liable for his agent where the latter completes or assists a client in completing an insurance proposal. The terms of the section also make an insurance company entirely responsible for the insurance-related activities of its tied agents as if such tied agents were its employees.
This high level of an insurer's responsibility is maintained on consumer protection grounds in section 51 where a premium paid to an intermediary in respect of an accepted proposal or a policy of renewal is deemed to have been paid to the insurance company.
Section 52 places restrictions on an intermediary conviction of an offence arising out of his business activities while section 53 lists the circumstances which disqualify a person from acting as an intermediary. These provisions, I believe, are quite reasonable and prudent and are aimed at those who have proven their past actions that they do not have the necessary standards of professionalism, integrity or competence to act in a position of trust as insurance intermediaries.
Under section 54 the Minister can lay down codes of conduct for brokers and agents for observance in their dealings with the public or with insurance companies. I am aware that the existing broker bodies already lay down codes of conduct for their members and they are to be congratulated for their efforts. However, the codes proposed under this section will be applicable to all intermediaries.
Section 55 exempts from the scope of Part IV reinsurance business and travel agents and tour operators in so far as they sell insurance as part of overseas travel packages. This is to avoid a duplication of statutory supervision and bonding in respect of this type of business.
That completes Part IV of the Bill. When enacted, it will put in place a very comprehensive and structured system of regulation for intermediaries. It will also facilitate the differentiation by the public between independent brokers and more limited agents.
Part V is comprised of miscellaneous provisions. Section 56 sets out the procedures which will be followed in relation to suspension or revocation of an insurer's authorisation and provides for an appeal by insurers to the High Court.
Sections 57 and 58 concern the appointment and powers of authorised officers who may be appointed in order to obtain information for use by the Minister in exercising his functions under the Insurance Act. These powers are enabling only and I do not envisage that they will be called into use in any immediate context or on any widespread basis. The final section in the Bill sets a fee of £10 for inspection of the register of authorisations kept under section 21 of the Insurance Act, 1936.
I commend this Bill to the House.
