Insurance Legal and Regulatory Principles
Insurance legal and regulatory principles tests whether you can place a policy inside the UK statutory framework: who may carry on insurance business, how the contract is formed, how it can be avoided, and what conduct standards attach to selling and administering it. Questions are scenario-based and usually turn on one rule, so knowing which Act applies to which customer matters more than general knowledge.
The regulatory architecture
- FSMA 2000 (as amended by FSMA 2023) prohibits carrying on a regulated activity without authorisation. Dual regulation: the PRA covers prudential soundness, the FCA covers conduct and markets.
- Threshold conditions must be met continuously; SM&CR allocates prescribed responsibilities; appointed representatives operate under a principal firm's permission.
- Solvency UK has replaced Solvency II, keeping risk-based capital, the ORSA and public reporting for insurers.
Formation and the disclosure duty
- Offer, acceptance, consideration and intention; insurable interest is needed at inception for life policies and at the time of loss for indemnity covers.
- Consumer business: CIDRA 2012 requires the consumer to take reasonable care to answer questions honestly and accurately, while the insurer must not ask questions in a misleading way. Remedies are graded - proportionate remedy for careless misrepresentation, avoidance and refusal for deliberate or reckless.
- Commercial business: Insurance Act 2015 s.3 duty of fair presentation - disclose every material circumstance the insured knows or ought to know, with enough information to put a prudent insurer on notice to enquire.
Terms and remedies
- Warranties (s.10) are suspensive: cover is suspended while breached and revives automatically. Section 11 bars reliance on a term unrelated to the actual loss. Fraudulent claims (s.12) let the insurer refuse, recover sums paid and terminate with notice.
- Section 13A implies a term that claims are paid within a reasonable time, with damages for breach.
Worked example
A commercial property owner renews at a £25,000 premium without mentioning a fire at another premises. The breach is careless. The insurer proves it would have charged £40,000. A £100,000 claim is reduced to £100,000 × 25/40 = £62,500. Had the non-disclosure been deliberate or reckless, the insurer could avoid from inception, refuse the claim and keep the premium.
Traps that cost marks
- Applying CIDRA remedies to a commercial risk, or Insurance Act 2015 to a consumer.
- Saying a breached warranty voids the policy from inception rather than suspending cover.
- Forgetting that the proportionate remedy can also impose the terms the insurer would have applied, not just a percentage.
- Confusing FOS (complaints) with FSCS (insurer insolvency).
- Treating Consumer Duty as a separate rulebook - it sits in PRIN 2A and is delivered through PROD, ICOBS and fair value assessments.