The change in Spain

Spain implemented the EU Insurance Intermediaries Directive (Directive 2002/92/EU) last July. One of the main practical consequences is that London market insurers writing business in Spain on a freedom of services (FOS) basis, by means of a delegated authority granted to a Spanish licensed broker, cannot continue to do so.

Leaving aside banks acting as intermediaries for insurance sales ("bank-assurance"; a newly-recognised category under the Act), there are now two types of intermediary regulated by the Act.

The agent's role
The insurance agent proposes or performs certain tasks with a view to completing an insurance contract. Agents assist in its management and performance, particularly in the event of a claim.

Insurance agents are classified as follows:

• Exclusive insurance agents, who represent a single insurer or, with their permission, another single insurer for other classes of business. Exclusive insurance agents cannot simultaneously act as linked insurance agents, insurance brokers or so-called external assistants to them.

• Linked insurance agents, who are entitled to represent several insurers but cannot simultaneously act as exclusive insurance agents, insurance brokers or external assistants to them.

Both have to be registered with the Spanish Supervisory Authority (DGS) and represent insurers.

The broker's role
The insurance broker performs tasks with a view to completing an insurance contract and to assist in its management, but without making any contractual link with an insurer.

Insurance brokers must offer independent, professional and impartial advice to prospective policyholders/insureds. The broker carries out an objective analysis of insurance contracts available in the market and recommends the contract most suitable to the needs of the client, in accordance with his professional criteria. The broker has carried out an objective analysis when:

• He has analysed insurance contracts offered by at least three different insurers for the risk(s) concerned.

• He has specifically designed the insurance product in order to offer it to his client on an exclusive basis, and has negotiated terms with at least three different insurers dealing in the risk(s) concerned.

Insurance brokers cannot be insurers, insurance agents or employees of either; loss adjusters (except on behalf of their own insurance clients); bankers or employees of financial or credit institutions. They must be fully licensed and registered with the DGS (Spanish regulators). Insurance brokers only represent insureds or policyholders.

If a London market insurer delegates his underwriting to a broker, it will, according to the DGS, hinder the broker's independence. It is therefore contrary to the Spanish Intermediaries Act for an insurer to delegate his underwriting authority to a broker.

The large number of British insurers operating in Spain in this way are therefore doing so unlawfully and need to reconsider their approach.

Underwriting agencies
Could a British insurer to delegate underwriting authority to a Spanish insurance agent as defined above? The answer, alas, is no. Such a delegation may amount to a permanent presence of the British insurer in Spanish territory, and the insurance agent may be regarded by Spanish regulators as a branch which should comply with FSA and DGS regulatory requirements.

The new Insurance Intermediaries Act regulates a new vehicle known as "Agencias de Suscripción" - that is, underwriting agencies.

Under the Act, underwriting agencies can underwrite risks for and on behalf of the insurers they represent. An underwriting agency is not an insurance intermediary between the policy-holder/insured and the insurer, however. The Act expressly provides that acts of an underwriting agency are directly performed by the insurers they represent.

Any underwriting agency intending to underwrite risks located in Spain must comply with the following rules:

• It can only underwrite risks for and on behalf of insurers or reinsurers which are fully licensed to transact insurance business in Spain.

• Before commencing activities, the underwriting agency must supply the Spanish Insurance Supervisory Authority with a copy of the representation powers granted by the insurer, specifying which activities the underwriting agency will perform.

• All commercial documentation such as letterheads, brochures and invoices must identify it as an agency and disclose the name of the insurer or reinsurer it is representing.

• Underwriting agencies must notify the Insurance Supervisory Authority of the revocation of powers by the insurer/reinsurer.

There is obviously a risk that an underwriting agency, to which authority has been delegated by a British insurer, may be regarded as a permanent establishment of the insurer in the Spanish jurisdiction. This will certainly happen where all of the following occur:

• The underwriting agency is subject to the direction and control of the insurer it represents.

• The underwriting agency has been given authority to bind the insurer.

• The underwriting agency has been given ‘a permanent mandate or brief' to bind the insurer, ie the authority is not limited in time.

Time constraints
To minimise this risk, it is vital to ensure that the agent is independent. Representation of a sole insurer would indicate that the UA is subject to the direction and control of the insurer.

Likewise, it is recommended that the delegation of authority has clear time constraints to avoid falling foul of point three above.

The FSA rules indicate that insurers can only appoint coverholders which are approved/ registered as licensed insurance intermediaries. Given that underwriting agencies under the IIA are expressly regarded as non-intermediaries, a British insurer delegating its authority to a Spanish underwriting agency is breaching the FSA rules.

This anomaly has no legal, practical or commercial logic. Common sense indicates that since the DGS keeps a copy of binding authorities under which British insurers delegate their underwriting authority to Spanish underwriting agencies, that record should amount to a formal license. One can only hope that the FSA and the DGS will treat it as such, but this remains to be seen.

Passporting
UK coverholders registered with the FSA have insurance intermediary status and are entitled to obtain so-called "passported" license into EU member states. But this is not the case for Spanish coverholders acting as underwriting agencies. They do not have access to the special register kept at the DGS. They are not, therefore, entitled to passporting rights.

Again, this contradiction does not make legal, practical or commercial sense. One can only hope that European regulators would be sensible about this and allow Spanish underwriting agencies to carry out their activities without any further requirement, so long as the insurers they represent have been properly passported. Otherwise, Spanish coverholders will be discriminated against.

Time to act
It is an urgent priority for British insurers to review any delegation of authority currently given to Spanish brokers, ensuring that any such delegation of authority is brought to an end, or that the Spanish broker is replaced by an underwriting agency. The wording of any binding authority granted to a Spanish underwriting agency should be carefully drafted to ensure it cannot be regarded as a permanent establishment of the British insurer in the Spanish territory.

The FSA needs to clarify whether British insurers are legally entitled to delegate their underwriting authority to Spanish agencies, given that they are not licenced intermediaries.

Spanish coverholders should not be discriminated against, and all European insurance regulators ought to accept their right to passporting. IT

Pablo Wesolowski is a Madrid-based senior partner and Kenneth McKenzie is head of insurance at Davies Arnold Cooper