Travel Insurance

The sale of Connected Travel Insurance (CTI) products will be regulated by the Financial Services Authority from 1 January 2009.

Below are two articles of interest to firms selling Connected travvel Insurance products. The first examines the options open to such firms. The second gices a detailed technical overview of the FSA's consultation paper and final rules.

TRAVEL INSURANCE - THE OPTIONS

The regulation of the sale of Connected Travel Insurance (CTI) is rapidly approaching. It will be an offence after 1 January 2009 to sell CTI without authorisation.

There are 4 options if you wish to continue selling CTI

1. Unregulated Introducing

Unregulated introducing is allowable in certain circumstances, but it is important to obtain specialist advice to ensure that a firm’s activities – taken as a whole – do not amount to the conduct of regulated activities. Advising and arranging must not take place. Please remember that the unauthorised conduct of Insurance Mediation activities is a criminal offence.

2. Become an Introducer Appointed Representative

Under this option all you can do is;

Distribute leaflets (or the web-equivalent) about travel insurance - you are not allowed to discuss it, advise, arrange or assist in any way in completing sale of this product
Pass the name and contact details to your insurance provider for them to follow up with your client - with the clients permission under the Data Protection Act
Have a link to the insurance provider’s web site as long as it clearly shows that you are referring the enquiry to XXXX Insurance as an Appointed Representative of them
Receive commission for business accepted by the broker

Advantages:

Virtually no costs involved
You can still receive commission on income generated by your principal.

Disadvantages:

Potential reduction in number of sales
Loss of control over the sales process
Monitoring by the Principal
Cannot advise customers or assist with proposal form completion
You will need to sign an agreement with your principal detailing what you can and cannot do
Potentially lower earnings

If travel insurance represents only a very small percentage of your income this may be the best route for you to follow

3. Become a Full Appointed Representative

Under this option you can:

In many cases, and subject to the agreement of your Principal, carry on selling insurance, advise customers and issue policies as you have done in the past. HOWEVER:

You will need to sign an agreement with your principal detailing what you can and cannot do
You can usually only represent one insurer
You will need to put in place certain systems including
- sales scripts
- written procedures
- training plans for all staff involved in dealing with insurance
- handle insurance monies received in a certain way
- be subject to regular internal and possible external audits from your insurance supplier
- maintain a complaints’ system.
You may well be charged by your principal for the responsibilities he is taking on, on your behalf
A Director or Partner of the business will need to apply to the FSA to become an Approved Person.
Your Principal will almost certainly find the cost of his Professional Indemnity Insurance will rise which he may well pass on to you

There is a place within the market for the Appointed Representatives and you should discuss this with your Principal.

A typical example of this is the motor trade where main dealers have designated a team member to deal with all parts of the business that are regulated so that potential purchasers need to see two or more persons as part of the sales process.

As an Appointed Representative, your future ability to continue to sell travel insurance is wholly dependent on the agreement of your Insurance provider to continue to take full responsibility for you working in a compliant manner.

There will inevitably be costs associated with this for your principal and you will also need to adopt your principal’s compliance systems and paperwork which will inevitably add to your own costs. This may be reflected in the costs to you of the Insurance and or commission payable.

Advantages:

May be a cheaper route initially than becoming fully authorised

Disadvantages:

You are not in control of your destiny and could lose the facility at any time.
Your Principal is putting his authorisation on the line and may insist on onerous checks and controls
Businesses with full control in all areas are likely to be more valuable in the event of a sale.
Potentially lower earnings
An Approved Person will need to be agreed by the Principal and the FSA

4. Become Fully Authorised

Under this option it is “business as usual” as in the past although in a regulated environment.

So what is involved?

To become fully authorised you will need to take the following action;

Make an application to the FSA – they have created a short form to assist here. ICS have experience of helping many insurance firms through a similar process in 2004/5
Understand the detailed rules now published by the FSA
Decide if all/or only some staff members will handle the compliant areas of your business

Set up a Compliance Manual detailing what you do
Appoint an Approved Person(s)
Incorporate compliant practices within your business

What are the costs?

To handle your application the FSA require a fee of £1500 (30% discount if the application received by 30th September 2008)

In future years you will need to pay annual fees to the FSA - typically less than £1000 - dependent on commission income-for the average client
Development of compliant documentation
Potentially employ a compliance consultant to assist in the application and developing compliant processes, procedures and literature (one off £1500 - £3000) and then to provide on-going compliance services at say £300 + VAT per month for a firm of up to 10 staff. Most contracts are for a minimum of 2 years.

If your insurance income is substantial or is likely to become so we would recommend that you seek FSA authorisation.

Advantages:

You are independent and in control of your own destiny
Adds to the value of your business
Correctly implemented compliant procedures can turn the burden into benefit through increased sales and repeat business
Subject to appropriate competency levels, you will be able to sell other General Insurance products

Disadvantages:

The initial one off costs associated with setting up

Although there are costs involved both initially and annually the fact that you are fully authorised can add value to the business and enables you to retain your independence from relying exclusively on one supplier.

The changing face of travel insurance, with an aging population, greater independent travel by both the young and not so young (or healthy) and increased use of the internet means that firms will need to adapt and change quickly. Being directly authorised can give you the required flexibility to stay ahead of the market and a competitive edge over your competitors.

WHERE TO GO FOR FURTHER ADVICE

Insurance Compliance Services

Prospect House, 11-13 Lonsdale Gardens Tunbridge Wells Kent TN1 1NU

www.insurancecompliance.co.uk

01892 539600

enquiries@insurancecompliance.co.uk

Regulating Connected Travel Insurance

Feedback on Consultation CP07/22 and Final Rules

The FSA has now published its Final Rules for the regulation of Connected Travel Insurance (CTI) from 01/01/09. Following consultation, only minor amendments were made to the FSA’s proposals.

This document highlights the key issues of this new regime; changes from CP07/22 are highlighted in red.

CTI is exempt from the Insurance Mediation Directive (IMD), so the Treasury’s decision to implement regulation is “gold-plating” and none of the IMD requirements needed to have been applied. However, only a few have not been applied, and it is interesting to note where the FSA has felt that the IMD is in excess of what is required for an adequate regulatory structure for a non-investment insurance product which is not a “protection” product. Where not applied, these IMD Rules will mean that “stand-alone” travel insurance remains more highly regulated than CTI.

What is Connected Travel Insurance (CTI)?

A CTI is a non-investment insurance contract which covers the risk of damage to, or loss of, baggage and other risks linked to travel booked with the provider.

All such CTI is to be removed from the “connected contract” exemption, other than in two cases:

the insurance covers travel booked with the provider in relation to attendance at an event organised or managed by that provider for customers who are not individuals or small businesses;
the insurance covers travel booked with the provider only for the hire of an aircraft, vehicle or vessel with no sleeping accommodation

and b) remain within the exemption, and are therefore unregulated.

Who is affected?

The businesses most likely to be affected travel agents, tour operators, coach companies, event management firms and holiday accommodation firms.

What Choices are available to such Firms?

Firms have five options, as follows:

	Full Authorisation	AR of an authorised Firm	IAR of an authorised Firm	Unregulated Introducer *	Cease Insurance Activity by way of business
Arrange CTI	Y (assuming this permission is granted by FSA)	Y (subject to agreement by the Principal)	N	N	N/A
Advise on CTI	Y (assuming this permission is granted by FSA)	Y (subject to agreement by the Principal)	N	N	N/A
Display Generic Information (Leaflets or web-site)	Y	Y (will need to be approved by Principal)	Y (will need to be approved by Principal)	Y (may need this to be approved by an authorised firm))	N/A
Give Incidental Insurance Information to Customers	Y	Y	Y	Y	N/A
Handle Client Money	Y (assuming this permission is granted by FSA)	Only under strictly controlled circumstances as agreed by the Principal	N (transitional arrangements may apply)	N	N/A
PI required	Y	N, unless Principal requires it	N, unless Principal requires it	N	N/A
Application for Authorisation	Y	N (notification to the FSA by the Principal)	N (notification to the FSA by the Principal)	N	N/A
Sell other General Insurance	Y	N, unless Principal allows it	N, unless Principal allows it	N	N/A
Fees to the FSA	Y	N (Principal may charge)	N (Principal may charge)	N	N/A
Approved Person Required	Y (1 performing CF8)	Y (1 performing a governing function)	N	N	N/A
Training and Competence Rules	Y	Y (monitored by the Principal)	Y (monitored by the Principal)	N	N/A
Client Money Rules	Y	Only under strictly controlled circumstances as agreed by the Principal	N (transitional arrangements may apply – to be agreed by Principal)	N	N/A
Capital Resources Rules	Y	N (Principal must ensure solvency of AR)	N (Principal must ensure suitability of AR)	N	N/A
Reporting Rules	Y	N	N	N	N/A
ICOBS Rules	Y	Y	Y	N	N/A
Complaints Rules	Y	Y	Y	N	N/A

* unregulated introducing is a complex area, requiring specialist advice in determining whether the firm’s activities – taken as a whole – do not form a regulated activity

Knowledge, Ability and Good Repute

Rule MIPRU 2.3.1R will be disapplied for CTI intermediaries (but not for intermediaries conducting any other regulated activities, for example non-CTI products).

For directly authorised CTI firms, this means that there remains no specific rule requiring firms to ensure on reasonable grounds the knowledge, ability and good repute of the management and all those involved in Insurance Mediation.

However, the FSA makes the point that Principle 3, the Approved Persons’ structure and the requirement for competent staff affords them sufficient scope to enforce if necessary.

Professional Indemnity Insurance

For firms becoming directly authorised, PI will be required to be extended to include Insurance Mediation activities to the required Limits of Indemnity and excesses in line with the current GI Rules.

ARs and IARs are not required to hold PI cover, but the Principal’s insurance will need to be extended to cover it. Many Principals require their ARs to take out PI to protect their own PI claims’ record.

ICOBS

The FSA’s Guidance on eligibility will apply – all firms will need to take reasonable steps to ensure that customers only buy a policy under which they are eligible to claim benefits; they should let the customer know if there are any elements under which they cannot claim (perhaps as a result of pre-existing conditions of the customer or other third-parties)
Key Facts/Policy Summary not required, but product disclosure (including separate disclosure of price) must be provided in a clear, fair and not misleading way, with sufficient information for the customer to make an informed buying choice
Advised sales must be suitable, although Demands and Needs and Suitability Statements are not required
Detailed status disclosure (for example a Client TOBA) is not required. CTI firms need only provide details describing how a customer or third party may complain and confirmation of whether advice or information only is given. Fees must be disclosed. Stationery used for letters (or the electronic equivalent of letters) to retail clients must contact the regulatory disclosure.
It is not a requirement of CTI firms to provide details of scope of market (that is, single insurer, limited range or fair analysis)

Transitional Arrangements

IARs (but not ARs or unregulated introducers) will be allowed to continue handling Client Money and pass completed application forms to their Principals up to 31/12/09, PROVIDED the brochure advertising the holiday/insurance was submitted for printing on or before 15/11/08, AND their Principal accepts liability in writing for the IAR’s activities (this Transitional Arrangement does not apply to information on web-sites)
Firms applying for direct authorisation on or before 15/11/08 will be “interim approved” by the FSA up to 31/12/09; this is normally a disadvantageous position, as the firm has to tell its customers that it is only interim approved, and customers do not benefit from certain regulatory protections; early application is therefore advisable

Timetable

August 2006 Treasury announced review of CTI

December 2006 Treasury decided that CTI to be regulated from 01/01/09

December 2007 Treasury Consultation ended

December 2007 FSA Consultation Paper published

February 2008 Draft Applications Forms published

March 2008 FSA Consultation ends

May 2008 FSA Policy Statement and Final Rules

May 2008 Final Application Forms to be published

30/06/08 New Applications will be accepted by the FSA

30/09/08 Deadline for early application discount

15/11/08 Deadline for interim application

15/11/08 Deadline for potential IARs to submit for printing brochures to benefit from transition relief

01/01/09 Regulation of CTI commences

31/12/09 End of Transitional Arrangements for IARs and Interim Authorisation