Legal basis of insurance: regulatory guidance on ‘insurance business’
The FSA has recognised that the definition of insurance business has long been an area of difficulty and has provided further guidance on the identification of contracts of insurance. This is set out in its Perimeter Guidance (see PERG 6). The Prudential case (GIM1030) remains the basis of this guidance, which summarises the key points of an insurance contract as one under which a provider undertakes:
- in consideration of one or more payments
- to pay money or provide a corresponding benefit (including in some cases services to be paid for by the insurer) to a ‘recipient’
in response to a defined event, the occurrence of which is uncertain (either as to when it will occur or as to whether it will occur at all), and adverse to the interests of the recipient.The guidance identifies a range of factors which point to a contract being classified as insurance or non-insurance. For example, the following are unlikely to be contracts of insurance, namely those:
- under which the provider has discretion as to whether to provide benefits (for example, certain contracts made by Friendly Societies)
- where the provider assumes no risk
- under which the occurrence of the uncertain event lies within the control of the provider
- in which there is a prepayment for services to be rendered in response to a future contingency
- for the provision of periodic maintenance of goods and services.The guidance also gives examples which illustrate these factors in relation to a number of areas which commonly give rise to discussion as to whether the transactions amount to insurance. The examples given are discretionary medical schemes, disaster recovery business, manufacturers’ and retailers’ warranties, separate warranty transactions, tax investigation schemes, solicitors’ retainers, and so-called time and distance cover, where the uncertainty is merely over timing. Consideration of these examples may be helpful in cases where there may be doubt about whether a contract is one of insurance or not.
The guidance also makes the point that consideration for a contract of insurance does not have to be in the form of a discrete or distinct premium. It may be part of the purchase price of goods, and it may be in non-monetary form (for example, part of the service provided by an employee under a contract of employment).