Underwriting Electronic Commerce

House of Commons - Trade and Industry - Appendices to the Minutes of Evidence

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Select Committee on Trade and Industry Appendices to the Minutes of Evidence

APPENDIX 35 Memorandum submitted by the International Underwriting Association of London AN INTRODUCTORY NOTE TO EXPLAIN OUR PARTICULAR INTEREST IN ELECTRONIC COMMERCE The International Underwriting Association of London (IUA) was formed on 31 December 1998, from the merger of two predecessor bodies, the London International Insurance and Reinsurance Market Association (LIRMA) and its marine counterpart, the Institute of London Underwriters. The IUA is the world's largest representative organisation for international and wholesale insurance and reinsurance companies. It has 107 Ordinary members mainly based in London or in the rest of the European Economic Area (EEA) and 80 associate members, from around 40 different countries. In the UK, we are the body which represents the London insurance company market. In 1996, gross written premiums for the London insurance company market were over £7 billion for UK

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and worldwide risks, a major part of which contributed to the UK's invisible earnings from the export of insurance (£6 billion total in 1996). This business accounts for approximately 60 per cent of the international wholesale insurance and reinsurance market centred on London, Lloyd's accounting for most of the balance. The IUA and its predecessor bodies have been active in promoting the use of information technology by underwriters. It owns the London Processing Centre (LPC), the centralised policy signing and claims processing bureau for the international insurance company market in London. LPC processes member companies' claims and premiums worth up to £10 billion per annum and operates a central settlement system for members' and brokers' accounts known as LIPS (the LPC Irrevocable Payment System). IUA companies settle almost all claims electronically, using LPC's Claims and Loss Advice and Settlement System (CLASS). The IUA offers full membership to insurance and reinsurance companies throughout the European Economic Area and Switzerland, without their needing a UK office, so enabling them to transact business electronically through the LPC on a cross-border basis. Access to the association's systems is also open to brokers worldwide, excluding North America. The IUA also owns half of LIMNET (the London Insurance Market Network—an EDI system), the body that develops shared electronic standards across the market and operates the physical communications link between London company market underwriters,

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Lloyd's brokers, the LPC and LPSO (the Lloyd's Policy Signing Office which fulfils similar functions for Lloyd's to the services provided by the LPC to the insurance company market). LIMNET is currently in discussions with WIN (the World Insurance Network, set up by the large international insurance brokers) and RINET (an international reinsurance company network) about a possible coming together of international insurance systems to create a single private web for international insurance business worldwide. THE INTERNATIONAL DIMENSION Globally, the new technologies are propelling us towards economic and industrial convergence. There can be no doubt that the proportion of electronically traded business is set to increase exponentially and that much of it will be cross border. Any new legislation must clearly take into account this international reality. For the UK, this particularly means Europe and North America, but commercial relations with every continent must be considered. Electronic commerce, as is so often emphasised, knows no geographical limitations, because it can be conducted more or less instantly between parties anywhere in the world. This is particularly the case for financial services where no physical product needs to be delivered. Hence the general assumption that electronic commerce is fundamentally international. In order to track such business, the regulators of the different jurisdictions across the world need to be able to work together. Their procedures and the regulation of trade need to match in one way or another.

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Otherwise, financial and information flows will tend to circulate, scarcely traceable, towards places outside the reach of appropriate and equitable supervision. Moreover, the electronic marketplace will not lend itself easily to a variety of incompatible regulatory regimes. Consumers and large purchasers will look for best value. They will seek abroad for the most costeffective alternatives to what they can find locally. Incompatible regimes will not be helpful and will not work in practice. Companies in countries which inhibit electronic commerce will find themselves losing out in the race to introduce new world-wide marketing skills, networks and empires. At best, countries which ignore this reality will be bypassed and trading activity and investment will go elsewhere; at worst people will flout national laws which will fall into disrepute. This is not to suggest, on our part, that regulators should be considering harmonising their regimes to the extent that there is only one system of supervision. That might occur over the very long term as cultures evolve together, side by side, in the same economic and technological environment, but it does not seem feasible or desirable in a world of many varying traditions, values and legal systems. Some national laws in different countries may need to be adapted to respond effectively to the implications of the advent of electronic commerce across borders. In particular, existing legislation regarding electronic writing, contracts and signatures, as well as encryption, is generally out of date. Overall, however, what we are advocating is dialogue and co-operation between authorities and between the authorities,

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industry and consumers. In our view, the outcome should be a level-playing field across the world, with effective co-ordination between the different regulators. In the interests of security and fairness, electronic commerce should be trackable by the authorities, while, in the interests of growth and competition, it shoud also be as free-flowing as possible. A major question to resolve, and which has already been discussed at length at the European level, is which country's regulation should apply to each transaction and to the rules of information and advertising for electronic pages. This issue extends beyond Europe. One can scarcely imagine one company, particularly a small one, selling competitively from out of one jurisdiction into hundreds of others. Given the impossibility of keeping abreast of hundreds of sets of rules, we would suggest that transactions should come under the law of country of the jurisdiction of the seller. Purchasers would be able to pick and choose on the basis of the reputation for trustworthiness of each company and each jurisdiction, or perhaps of voluntary kitemark associations. Another suggestion we wish to make is that no new national legislation affecting elctronic commerce should be introduced which does not take account of the international dimension. It would seem essential to anticipate the danger that, over the next few years, a number of countries might introduce new measures which would prove to be incompatible in the longer term.

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We would also submit that no national planning should proceed without specific reference to the initiatives currently being discussed in various international fora, such as WTO, UNCITRAL and OECD, and, most importantly of course for the UK, the draft directives being prepared by the European Union. NEUTRALITY OF NEW MODELS We believe that the effects of regulation on electronic commerce should be neutral not only in the international dimension, but also at home. Despite its dramatic potential effects, electronic commerce is still a form of commerce and should be subject to the same rules as other forms of trade. Only in the few possible cases where there is a clear practical need should legislation distinguish between one form and another. Otherwise, artificial trading patterns will appear, leading to distortions of competition. In this regard, we agree with the Government's stated principle that the law should apply on-line as it does off-line, with the result that each person is responsible for their own acts and omissions. Changes in the channels through which trade is conducted will inevitably lead to redesigning of the legal framework, but the underlying principles of trade regulation and the conduct of business should not necessarily be modified significantly. Legislation must also be technologically neutral. We believe that national and international authorities need to be very wary of prescriptive regulation, which ties business and consumers into using a particular technology. However difficult this may be, they should

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also be careful not to lay down legislation which is linked to an approach which may be appropriate in the context of one ephemeral generation of technology, but will not be in the next. A regulatory environment which is not adapted to technological potential will restrict innovation, distort competition and impede foreign trade. With regard to taxation, we believe that electronic commerce should not be subject to special taxes. No new or special taxes should be levied, because, as we have already suggested, electronic commerce is a new channel for trade, not an end-product in itself (unless one is selling technological systems, in which case normal taxes should apply). Moreover, taxing electronic commerce will merely drive away the commerce and make it more difficult for businesses licensed in the country concerned to maintain or enhance their international competitiveness. We also believe that double taxation and ambiguity in tax systems can have no place in the age of electronic commerce. States which do not institute a minimum of clarity, so that people and companies know exactly where they are, will attract the opprobrium of consumers and will deter free competition and trade. In our view, technical compatibility between the systems used by consumers, business, government and service providers alike is also very important. We would suggest that governments have a natural role in promoting compatibility and in encouraging industry to ensure easy communication between different systems. Legislation, however, would generally be inappropriate, because enforced harmonisation would

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restrict innovation, commercial choice and competition. DEDICATED CLOSED NETWORK Our market's LIMNET system provides a dedicated closed network which is accessible only to subscribing insurance underwriters and brokers. When the merger with WIN and RINET occurs, the resulting network will be restricted to subscribers with a specific commercial need to access it. All subscribers to our systems must adhere to an interchange agreement, under which they agree to recognise the contracts formed through the system and each others' electronic signatures. When the underwriting process is conducted outside the UK, the business is deemed to take place in the place where it is conducted. On the other hand the contract is generally deemed to be formed in London. This is an advantage for insurers and clients in that the accumulated body of UK insurance law (from cases arising from contracts written in the London insurance market) and arbitration services are unique in their breadth and depth, so that generally brokers, underwriters, claims managers and the courts themselves are able to concur on the intended meaning of a contract wording written in London and the issues of when, where and at what time contracts are incepted and formed. We would hope that any changes to UK, European and international law and regulations would not upset this recognised framework. Our members and the brokers with whom they work are sophisticated companies which can normally look after their own

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interests. They would not welcome fresh regulations. We would like to request on their behalf, that new regulations should either have a neutral effect on the status quo, or should bring clarity in cases where it may be lacking. We would, of course, be pleased to arrange meetings with government representatives to discuss the delicate issues which could possibly arise in relation to contractual matters. We would certainly wish to avoid a situation where, at the UK or European level, new regulations designed to protect consumers could disrupt the normal conduct of our members' business. As noted above, we agree with the Government's stated principle that the law should apply on-line as it does off-line, with the result that each person is responsible for their own acts and omissions. As we see it, the law of contract and the responsibilities of the contracting parties should not be affected by regulation of electronic commerce, except where the legislators have specifically decided that it is inadequate as contract law and needs reform. ELECTRONIC WRITING, CONTRACTS AND SIGNATURES What would assist us, as a market offering electronic services to the world, would be the ability to trade with any part of the globe, including the UK, in the certainty that contracts and agreements entered into and signed by the contracting parties would be accepted in any court of law. At present, this is not the case. There are many jurisdictions where electronic writing is simply not admissible as evidence of an agreement. We have expressed our views in the past to the Law Commission on the importance of electronic writing and it appears to us from our discussions with them

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that there is general support for the notion that electronic writing must acquire equivalent status to writing on paper. We would like to see full admission in every court in the world of electronic writing, contracts and signatures. It seems astonishing to many businessmen in international markets that this is not already the case. We do not believe that such recognition can or should be tied to any particular technology, because the pace of change would quickly put it out of date. Nor do we believe that some kind of special licensing regime should be introduced. Our existing interchange agreement, which is freely entered into by our members, operates effectively as it stands. If it were licensed it would be more complicated and there would be the problem of the status of foreign subscribers. If it were not licensed, its validity in law might appear to have been weakened. The main requirement, from our point of view is that electronic writing and contracts should be admissible in court. We recognise that it might be necessary to demonstrate in court the security of the electronic writing, but proof of reliable or agreed systems might well suffice; the main issue is that electronic writing and signatures be recognised in the first place. This problem will remain until there is a change in the law governing the many courts across the world, including in Europe, which are legally barred from accepting electronic signatures and writing. We would urge the British Government to speak loudly in favour of general adoption of the basic principle that electronic writing and signatures should be recognised in law. For governments to allow availability of the most

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powerful forms of crytography to service providers, including the providers of networks such as our own, would also be helpful to all users of systems, whether dedicated networks or the Internet. THE GOVERNMENT'S VARIOUS STATEMENTS AND PROPOSALS IN FAVOUR OF A NEW UK REGIME We agree with the Government's stated principle that "Companies and consumers should have access to tools enabling them to protect themselves". We also agree with the general view that this principle will be satisfied, provided: that the source of messages and documents is verifiable; that information can be exchanged in confidence; and that the legislative framework does indeed lay down: that the law will apply in exactly the same way off-line as well as on-line; and that the courts will recognise electronic contracts and signatures. We also agree with the Government's stated principle that "Service providers should take voluntary action to uphold the law on-line". However, we would suggest that current technology would enable all of these principles and requirements to be satisfied within a quite limited legislative framework, without the need for licensing, and with the industry itself providing the necessary tools and voluntary action in response to market demand.

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We would, in fact, support the views expressed, firstly, by the Federation of the Electronics Industry that: the licensing model, which envisages that third-party organisations would be licenced either to provide digital signature authentication and encryption key archiving or nothing has been overtaken in the marketplace; and, secondly, by the Internet Service Providers Association that: a key escrow regime (entrusting an encryption key to a thirdparty organisation) is not currently sensible; and that licensing of certification authorities for digital signatures and the archiving of encryption keys used for simple confidentiality are wholly separate issues and should not be confused. On the other hand, as an insurance association, we fully understand the need to prevent and combat criminal activity. We must co-operate with police agencies and regulators to fight crime, irrespective of the medium of trade, but would seek frameworks that do not compromise individual liberty or commercial confidence. INSURANCE COVER FOR TRUST SERVICES While we have indicated that we do not believe that a licensing regime is appropriate or necessary, it would seem useful to comment on the problem of insurance cover for trust services for encryption and authentication. Whether or not these are to be licensed, there is and will continue to be demand for insurance cover for service providers and parties to agreements.

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Initial discussions lead us to conclude that insurance cover would be likely to be available to wellestablished existing providers with internal security procedures to prevent fraud, such as banks, credit card operators, the Post Office, Securicor and the major telecommunications and network providers. For such organisations, the additional new insurance costs of liabilities arising from trust services would probably not be excessively onerous. New providers, lacking a track record, would need to demonstrate to insurers satisfactory abilities to ensure security of systems and procedures for combating fraud In the absence of a history of claims and unless the insured is prepared to pay an appropriately high premium, responsible insurers should not underwrite risks which cannot readily be assessed. In this case, however, mixes of existing covers with established major providers, coupled with innovative adaptation of other types of policy, should be sufficient to develop suitable forms of insurance. 26 February 1999 the trade and industry committee289

© Parliamentary copyright 1999

Prepared 19 May 1999

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