Sanctions market review
In November 2012, Sean McGovern, Director of North America, General Counsel and Risk Management announced that Lloyd’s would be undertaking a Sanctions Market Review during 2013.
Legislators and regulatory bodies in the EU and US are increasingly focusing on (re)insurance and broking transactions as a subject of sanctions and export control legislation. This has been driven by the realisation that, in addition to banking restrictions and restrictions on export, (re)insurance prohibitions can seriously debilitate a country’s ability to trade internationally, either as a whole or within certain industry and product sectors.
As a result, increased (re)insurance and broking prohibitions under EU and extra-territorial U.S sanctions have been directed at EU (re)insurance and broking companies preventing them from broking or providing (re)insurance for a number of transactions including to key industry sectors like oil, petrochemical and gas within jurisdictions such as Iran and Syria.
This in turn had led to increased regulatory scrutiny of (re)insurers’ and brokers’ compliance with international sanctions, and resulted in a greater number of enforcement actions directed at the insurance industry both in the UK and U.S. The FSA has shown more focus on sanctions and financial crime compliance in their ARROW visits and it is expected that the Financial Conduct Authority will take the same approach.
It is therefore essential that Lloyd’s ensures that managing agents are reacting to these challenges appropriately and that sanctions and financial crime risks including bribery and money laundering are being managed effectively. Lloyd’s considers that a comprehensive review of the market will help to achieve that goal.
Lloyd’s has appointed Deloitte LLP to assist with scoping and planning the review. Their role is to design and develop a review plan that can be implemented across the market and remains flexible enough to take into account the different sizes and business models of the various managing agents within the market. In addition, law firm Hogan Lovells will work with Deloitte and Lloyd’s to ensure that all relevant legal and regulatory issues in respect of sanctions are considered in the development of the review plan. In particular, managing agents’ ownership or the type of business underwritten might increase their exposure to sanctions risk and therefore determine the scope of the review to be carried out. In addition, Lloyd’s is consulting with the LMA’s Internal Audit Panel to ensure that managing agents’ feedback about the design of the review is captured.
The review programme will be ‘piloted’ in the first quarter of 2013 with three managing agencies, which Deloitte will execute with assistance from Lloyd’s. This pilot phase will enable Lloyd’s to test the proposed review approach, to ensure it is effective and proportionate before it is implemented across the market. Three managing agencies have been identified to take part in the pilot phase.
Market Wide Review in 2013
Lloyd’s plans to review the managing agents in the final three quarters of 2013 (although this may extend into 2014). It has contacted managing agents about the review programme and suggested that managing agents discuss their internal audit programme for 2013 with them so that Lloyd’s schedules its visits accordingly.