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Select Committee on Trade and Industry Appendices to theMinutes of Evidence

APPENDIX 35

Memorandum submitted by the International Underwriting

Association of London

AN INTRODUCTORY NOTETO EXPLAINOUR PARTICULAR

INTERESTIN ELECTRONIC COMMERCE

The International Underwriting Association of London

(IUA) was formed on 31 December 1998, from the

merger of two predecessor bodies, the LondonInternational Insurance and Reinsurance MarketAssociation (LIRMA) and its marine counterpart, theInstitute of London Underwriters.

The IUA is the world's largest representative

organisation for international and wholesale insuranceand reinsurance companies. It has 107 Ordinary

members mainly based in London or in the rest of theEuropean Economic Area (EEA) and 80 associatemembers, from around 40 different countries. In theUK, we are the body which represents the London

insurance company market.

In 1996, gross written premiums for the Londoninsurance company market were over 7 billion for UK

Page 1 of 13House of Commons - Trade and Industry - Appendices to the Minutes of Evidence

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and worldwide risks, a major part of which contributedto the UK's invisible earnings from the export of

insurance (6 billion total in 1996). This businessaccounts for approximately 60 per cent of the

international wholesale insurance and reinsurancemarket centred on London, Lloyd's accounting for mostof the balance.

The IUA and its predecessor bodies have been active

in promoting the use of information technology byunderwriters. It owns the London Processing Centre(LPC), the centralised policy signing and claimsprocessing bureau for the international insurance

company market in London. LPC processes membercompanies' claims and premiums worth up to 10billion per annum and operates a central settlementsystem for members' and brokers' accounts known as

LIPS (the LPC Irrevocable Payment System). IUA

companies settle almost all claims electronically, usingLPC's Claims and Loss Advice and Settlement System

(CLASS).

The IUA offers full membership to insurance andreinsurance companies throughout the EuropeanEconomic Area and Switzerland, without their needing

a UK office, so enabling them to transact businesselectronically 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 LondonInsurance Market Networkan EDI system), the bodythat develops shared electronic standards across the

market and operates the physical communications linkbetween London company market underwriters,




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Otherwise, financial and information flows will tend tocirculate, scarcely traceable, towards places outside

the reach of appropriate and equitable supervision.

Moreover, the electronic marketplace will not lenditself easily to a variety of incompatible regulatoryregimes. Consumers and large purchasers will look forbest value. They will seek abroad for the most cost-effective alternatives to what they can find locally.

Incompatible regimes will not be helpful and will notwork 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 ignorethis reality will be bypassed and trading activity andinvestment will go elsewhere; at worst people will floutnational laws which will fall into disrepute.

This is not to suggest, on our part, that regulatorsshould 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 culturesevolve together, side by side, in the same economicand technological environment, but it does not seemfeasible or desirable in a world of many varying

traditions, values and legal systems.

Some national laws in different countries may needto be adapted to respond effectively to the implications

of the advent of electronic commerce across borders.In particular, existing legislation regarding electronicwriting, contracts and signatures, as well asencryption, is generally out of date. Overall, however,

what we are advocating is dialogue and co-operationbetween authorities and between the authorities,




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industry and consumers. In our view, the outcomeshould be a level-playing field across the world, with

effective co-ordination between the differentregulators. In the interests of security and fairness,

electronic commerce should be trackable by theauthorities, while, in the interests of growth andcompetition, it shoud also be as free-flowing aspossible.

A major question to resolve, and which has alreadybeen discussed at length at the European level, iswhich country's regulation should apply to eachtransaction and to the rules of information and

advertising for electronic pages. This issue extendsbeyond Europe. One can scarcely imagine onecompany, particularly a small one, sellingcompetitively from out of one jurisdiction into

hundreds of others. Given the impossibility of keepingabreast of hundreds of sets of rules, we would suggestthat transactions should come under the law of country

of the jurisdiction of the seller. Purchasers would beable to pick and choose on the basis of the reputationfor trustworthiness of each company and eachjurisdiction, or perhaps of voluntary kitemarkassociations.

Another suggestion we wish to make is that no newnational legislation affecting elctronic commerce shouldbe introduced which does not take account of the

international dimension. It would seem essential toanticipate the danger that, over the next few years, anumber of countries might introduce new measureswhich would prove to be incompatible in the longer

term.




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We would also submit that no national planningshould proceed without specific reference to the

initiatives currently being discussed in variousinternational fora, such as WTO, UNCITRAL and OECD,

and, most importantly of course for the UK, the draftdirectives being prepared by the European Union.

NEUTRALITYOF NEW MODELS

We believe that the effects of regulation on electroniccommerce should be neutral not only in theinternational dimension, but also at home. Despite itsdramatic potential effects, electronic commerce is still

a form of commerce and should be subject to the samerules as other forms of trade. Only in the few possiblecases where there is a clear practical need shouldlegislation 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 itdoes off-line, with the result that each person isresponsible for their own acts and omissions. Changesin the channels through which trade is conducted will

inevitably lead to redesigning of the legal framework,but the underlying principles of trade regulation andthe conduct of business should not necessarily be

modified significantly.

Legislation must also be technologically neutral. Webelieve that national and international authorities needto 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 islinked 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 willrestrict innovation, distort competition and impedeforeign trade.

With regard to taxation, we believe that electronic

commerce should not be subject to special taxes. Nonew or special taxes should be levied, because, as wehave already suggested, electronic commerce is a newchannel for trade, not an end-product in itself (unless

one is selling technological systems, in which casenormal taxes should apply). Moreover, taxingelectronic commerce will merely drive away thecommerce 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 ofclarity, so that people and companies know exactlywhere they are, will attract the opprobrium of

consumers and will deter free competition and trade.

In our view, technical compatibility between thesystems used by consumers, business, government

and service providers alike is also very important. Wewould suggest that governments have a natural role inpromoting compatibility and in encouraging industry toensure easy communication between different

systems. Legislation, however, would generally beinappropriate, 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 subscribinginsurance underwriters and brokers. When the mergerwith WIN and RINET occurs, the resulting network willbe restricted to subscribers with a specific commercialneed to access it.

All subscribers to our systems must adhere to aninterchange agreement, under which they agree to

recognise the contracts formed through the systemand each others' electronic signatures.

When the underwriting process is conducted outsidethe UK, the business is deemed to take place in the

place where it is conducted. On the other hand thecontract 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 casesarising from contracts written in the London insurancemarket) and arbitration services are unique in theirbreadth and depth, so that generally brokers,

underwriters, claims managers and the courtsthemselves are able to concur on the intendedmeaning of a contract wording written in London andthe issues of when, where and at what time contracts

are incepted and formed.

We would hope that any changes to UK, Europeanand international law and regulations would not upset

this recognised framework. Our members and thebrokers with whom they work are sophisticatedcompanies 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 thestatus quo, or should bring clarity in cases where it

may be lacking. We would, of course, be pleased toarrange meetings with government representatives todiscuss the delicate issues which could possibly arise inrelation 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 agreewith the Government's stated principle that the lawshould apply on-line as it does off-line, with the resultthat each person is responsible for their own acts andomissions. As we see it, the law of contract and the

responsibilities of the contracting parties should not beaffected by regulation of electronic commerce, exceptwhere the legislators have specifically decided that it is

inadequate as contract law and needs reform.

ELECTRONIC WRITING, CONTRACTSAND SIGNATURES

What would assist us, as a market offering electronic

services to the world, would be the ability to trade withany part of the globe, including the UK, in the certaintythat contracts and agreements entered into and signedby the contracting parties would be accepted in any

court of law. At present, this is not the case. There aremany jurisdictions where electronic writing is simplynot admissible as evidence of an agreement. We haveexpressed our views in the past to the Law

Commission on the importance of electronic writingand it appears to us from our discussions with them




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that there is general support for the notion thatelectronic 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 andsignatures. It seems astonishing to many businessmenin international markets that this is not already thecase. We do not believe that such recognition can or

should be tied to any particular technology, becausethe pace of change would quickly put it out of date.Nor do we believe that some kind of special licensingregime should be introduced. Our existing interchange

agreement, which is freely entered into by ourmembers, operates effectively as it stands. If it werelicensed it would be more complicated and there wouldbe 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 ourpoint of view is that electronic writing and contracts

should be admissible in court. We recognise that itmight be necessary to demonstrate in court the

security of the electronic writing, but proof of reliableor agreed systems might well suffice; the main issue isthat electronic writing and signatures be recognised inthe first place. This problem will remain until there is a

change in the law governing the many courts acrossthe world, including in Europe, which are legally barred

from accepting electronic signatures and writing. Wewould urge the British Government to speak loudly in

favour of general adoption of the basic principle thatelectronic writing and signatures should be recognisedin 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, whetherdedicated networks or the Internet.

THE GOVERNMENT'S VARIOUS STATEMENTSANDPROPOSALSIN FAVOUROFA NEW UK REGIME

We agree with the Government's stated principle that

"Companies and consumers should have access totools 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 principlethat "Service providers should take voluntary action to

uphold the law on-line".

However, we would suggest that current technologywould enable all of these principles and requirements

to be satisfied within a quite limited legislativeframework, without the need for licensing, and withthe industry itself providing the necessary tools andvoluntary action in response to market demand.




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Initial discussions lead us to conclude that insurancecover would be likely to be available to well-

established existing providers with internal securityprocedures to prevent fraud, such as banks, credit

card operators, the Post Office, Securicor and themajor telecommunications and network providers. Forsuch organisations, the additional new insurance costsof liabilities arising from trust services would probablynot be excessively onerous. New providers, lacking a

track record, would need to demonstrate to insurerssatisfactory 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 topay an appropriately high premium, responsibleinsurers should not underwrite risks which cannotreadily be assessed. In this case, however, mixes ofexisting covers with established major providers,

coupled with innovative adaptation of other types ofpolicy, should be sufficient to develop suitable forms ofinsurance.

26 February 1999

the trade and industry committee289

Parliamentary copyright 1999 Prepared 19 May 1999


underwriting electronic commerce

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