PERG 5.3 Contracts of insurance

A person who is concerned to know whether his proposed activities may require authorisation will wish to consider whether those activities relate to contracts of insurance or contracts of reinsurance, or to insurance business or reinsurance business, which is the business of effecting or carrying out contracts of insurance or reinsurance as principal.

The Regulated Activities Order does not attempt an exhaustive definition of a 'contract of insurance'. Instead, article 3(1) of the order (Interpretation) makes some specific extensions and limitations to the general common law meaning of the concept. For example, article 3(1) expressly extends the concept to fidelity bonds and similar contracts of guarantee, which are not contracts of insurance at common law, and it excludes certain funeral plan contracts, which would generally be contracts of insurance at common law.

One consequence of this is that common law judicial decisions about whether particular contracts amount to 'insurance' or their being effected or carried out amounts to 'insurance business' are relevant in defining the regulatory scope of the Act.

As with any other contract, a contract of insurance that is not effected by way of a deed will only be legally binding if, amongst other things, it is entered into for valuable consideration. Determining what amounts to sufficient consideration in any given case is a matter for the courts. In practice, however, the legal definition of consideration is very wide. In particular, just because a contract of insurance is 'free' in the colloquial sense does not mean that there is no consideration for it. In the vast majority of cases, therefore, 'free' insurance policies (such as policies that act as loss leaders for an insurance undertaking) will be binding contracts and will amount to specified investments and therefore be subject to regulation under the Act.5

The Regulated Activities Order does not define a reinsurance contract. The essential elements of the common law description of a contract of insurance are also the essential elements of a reinsurance contract. Whilst the IDD3 addresses insurance and reinsurance separately, throughout this guidance the term 'contract of insurance' (italicised or otherwise) also applies to contracts of reinsurance.

Guidance describing how the FCA identifies contracts of insurance is in PERG 6 (Guidance on the Identification of Contracts of Insurance).

Article 72B of the Regulated Activities Order (Activities carried on by a provider of relevant goods or services) excludes from FCA regulation certain regulated activities carried on by providers of non-motor goods or services3 and services related to travel in relation to contracts of insurance that satisfy a number of conditions. Details about the scope of this exclusion can be found at PERG 5.11.13 G to PERG 5.11.14G (Activities carried on by a provider of relevant goods or services).

Large risks situated outside the EEA are also excluded (described in more detail at PERG 5.11.16 G (Large risks)). The location of the risk or commitment may be determined by reference to the EEA State in which the risk is situated, defined in article 13(13) of the Solvency II Directive1 or the EEA State of the commitment, defined in article 13(14) of the Solvency II Directive.1Broadly put, this is:

1. (1)

   for insurance relating to buildings and/or their contents, the EEA State in which the property is situated;

2. (2)

   for insurance relating to vehicles, the EEA State of registration;

3. (3)

   for policies of four months or less duration covering travel or holiday risks, where the policy was taken out;

4. (4)

   in all other cases (including those determined by reference to the EEA State of the commitment), the EEA State where the policyholder has his habitual residence, or if the policyholder is a legal person, where his establishment, to which the contract relates, is situated.

For an activity to be a regulated activity, it must be carried on in relation to 'specified investments' (see section 22 of the Act Regulated activities) and Part III of the Regulated Activities Order (Specified investments)). For the purposes of insurance distribution activity3, specified investments include the following 'relevant investments' defined in article 3(1) of the Regulated Activities Order (Interpretation):

1. (1)

   rights under any contract of insurance (see article 75 (Contracts of insurance)); and

2. (2)

   rights to or interests in rights under life policies (see article 89 (Rights to or interests in investments)).

'Relevant investments' is the term used in articles 21 (Dealing in investments as agent), 25 (Arranging deals in investments) and 53(1)2 (Advising on investments (except P2P agreements)2)

of the Regulated Activities Order to help define the types of investment to which the activities in each of these articles relate.

A person will have rights under a contract of insurance when that person3 is a policyholder. The question of whether a person has rights under a contract of insurance may require careful consideration in the case of group policies (with reference to the Glossary definition of policyholder). In the case, in particular, of general insurance contracts and pure protection contracts, the existence or otherwise of rights under such policies may be relevant to whether a person is carrying on insurance distribution activities3.

A person may also have rights to or interests in rights under a life policy where he is not a policyholder, but this will again depend on the terms of the individual policy.