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Q&A: THE INSURANCE SECTOR IN ITALY
DLA Pipers Milan-based head of litigation, Bruno Giuffré, discusses the rise in insurance and reinsurance claims in Italy, how regulation is developing the market, and how the sector is increasingly international in scope.
HAVE YOU SEEN A RISE IN INSURANCE AND REINSURANCE CLAIMS IN ITALY AS A DIRECT RESULT OF THE ECONOMIC DOWNTURN?
We have seen a steady rise in insurance claims in the last three to five years and this is due in part to the success of our insurance litigation practice and in part to the economic downturn. The reform of Italian bankruptcy law in 2006 aimed at reducing the volume of insolvency procedures, but the economic crisis had the opposite and much stronger effect. Insolvency is still a huge source of litigation and of insurance and reinsurance claims in this country. The recent reform of the composition with creditors (concordato preventivo) following the model of the US Chapter 11 came into force in September this year. It has been designed to de-regulate the process and reduce court controls, but it is still too soon to say if it will reduce insolvencyrelated litigation. More generally, difficulties in fulfilling one's payment obligations are more noticeable than ever (foreclosures have increased by 22.8 % this year) and this, too generates disputes, at least for those who can afford it.
Obviously, the rise of claims is also an indirect, but more desirable, consequence of the evolution of the market in Italy, which is traditionally under-insured. Premium rates per capita are still low compared to the other top European countries.
ARE CLAIMS INCREASINGLY LEADING TO DISPUTE RESOLUTION?
The sluggishness and high degree of unpredictability associated with the Italian judicial system (both civil and criminal) discourages litigation and is a serious hindrance to foreign investment. Attempts have been made in recent years to improve the situation, but they have been weak and somewhat contradictory and concrete results are yet to come. Quite often, wellintentioned reforms are immediately called into question and regressive measures are proposed by lobby groups or special interest groups. For example, the recently enacted mandatory mediation in, among others, several business-related matters (including insurance), have been declared unconstitutional by the Constitutional Court. Equally, the recent proposal to introduce a fourth instance of jurisdiction, which was fortunately stopped by the government, would have been totally contradictory to another reform recently implemented by the government introducing an appeal filter in civil cases.
In this context, litigation is and must be the last resort and alternative dispute resolution methods have been enhanced, although costs limit their use in major business matters. Nonetheless, arbitration is increasingly the standard dispute resolution method in business insurance, even if third-party claims often drag liability insurers into courts as added parties by their insureds, thus giving rise to those long tail claims that are a nightmare for international insurers writing Italian risks.
HAVE DISPUTES IN THIS SECTOR BECOME MORE INTERNATIONAL IN FOCUS?
We have seen increasingly complex disputes, large in size and international in focus. In this connection, DLA Piper's global reach and widespread insurance/reinsurance capabilities put us in a pretty unique position to deal with cross-border and multijurisdictional cases providing advice internationally and capitalising on local knowledge of business practices, legal and regulatory frameworks.
HOW FAR HAVE REGULATION AND COMPLIANCE, AND PARTICULARLY ISSUES SUCH AS DISCLOSURE AND TRANSPARENCY, BECOME MORE PRESSING ISSUES IN THE WAKE OF THE DOWNTURN?
The attention to regulatory and compliance issues has increased dramatically in recent years, partly as a consequence of the economic downturn, partly as a general trend towards a wider intervention of the regulators in strategic sectors like financial intermediation, banks, insurances and, in general, capital markets. In the insurance sector, these interventions have included corporate governance, internal audit and risk management, technical reserves and segregation of assets, certain kinds of products and services (payment protection, bank insurance), anti-money laundering, intermediaries, and bodily injury and anti-fraud in motor TPL, with a view to reducing claims costs and consequently applicable tariffs that are still among the highest in the world.
WHAT HAVE BEEN THE MOST SIGNIFICANT REGULATORY DEVELOPMENTS IN THIS SECTOR RECENTLY?
The transformation of the insurance regulator ISVAP into a division of the Bank of Italy so as to ensure integrated regulation of the financial and insurance sectors by linking them to banking regulation under the auspices of the Bank of Italy is significant.
However, the biggest challenge of all is Solvency II, the EU legislative programme introducing a new harmonised EU-wide insurance regulatory framework and replacing 13 existing EU insurance directives. The key objectives of Solvency II include the improvement of consumer protection, the modernisation of supervision, a further EU market integration and the increasing international competitiveness of EU insurers. Uncertainty regarding the final implementation date remains (the industry is pressing for a further extended timetable of 2015 or later) while the discussions among parliament, the council and the commission about the text of Omnibus II directive (which shall amend Solvency II Directive including the implementation date) are still ongoing.
HOW FAR HAVE YOU SEEN A GROWING PROMINENCE OF INTERNATIONAL COMPANIES ACTIVE IN ITALY AND ACROSS EUROPE?
In a market like Italy, affected by a persistent economic crisis and by extraordinary events, GWP (gross written premiums excepting Motor TPL) and profitability have dropped.
However, the Italian market shows high growth potential, due to the low premium rate per capita both in life and non-life business and to the historically low penetration rate of life insurance, despite consistently high saving propensity. Italy ranks first among the top six European countries in terms of GWP per company, due to the high concentration of the domestic market (242 companies in 2010, with two of the largest, Unipol and Fondiaria Sai, merging this year). The most diluted market in the EU, the UK, has 1,314 companies. This gives rise to opportunities in Italy particularly for international insurers to develop and exploit niche, high-margin markets by offering specialist products and services to sophisticated clients.
The major international players, much more than their Italian competitors, set themselves apart for their capacity to scout business opportunities and identify insurance solutions for complex risks such as professional liability, D&O, product liability and recall, pollution, political risks, crimes and cyber crimes, transactional risks, and litigation buyouts. The legal implications of these risks, of the insurance policies covering them, and of the claims which may ensue are so delicate and, to some extent, new, that they require an equally sophisticated provider of legal services.
WHICH SECTORS WITHIN INSURANCE AND REINSURANCE HAVE SEEN GROWING LEVELS OF ACTIVITY?
We have seen a growing level of activity throughout our insurance and reinsurance practice, from regulatory to insolvency and run-off, from M&A to development of new policy wordings, from coverage advice to claims and dispute resolution. We have also noticed that, besides being cross-border, insurance is a typically cross-practice sector, as it increasingly requires skills and know-how that go beyond the boundaries of a single area and require deep knowledge of the industry.
Handling a claim related to a capital market transaction or giving advice in connection with the underwriting of a warranty and indemnity policy in the context of an M&A operation brings in the whole set of competencies that a full-service law firm like DLA Piper can offer.
IN TERMS OF THE RUN OFF MARKET, HAVE YOU SEEN A RISE IN COMPANIES SEEKING ADVICE REGARDING INSOLVENCY ISSUES?
Historically, Italy has not been a big run off market, but Solvency II will push insurance companies to de-risk their balance sheets for the purpose of securing their stability and this will certainly lead many players to consider this option. Our firm is perfectly equipped to deal with all the regulatory, financial, tax and contractual implications of this kind of transactions in the forms of a sale of closed books of business or of a reinsurance contract.