Financial Services Regulation and Compliance - Insurance Dec 2020
Central Bank publishes interim report of differential pricing review
On 14 December 2020, the Central Bank of Ireland (CBI) published an interim report on its review of differential pricing practices in the Irish private car and home insurance markets.
The report details the extensive market analysis and research undertaken by the CBI to date. In the report, the CBI indicates that it is working towards further analysis in order to ensure a "full market" perspective and to allow the CBI to make evidence-based conclusions. The CBI intends to publish further findings and recommendations in 2021.
Some of the key findings of the CBI set out in the report are:
- a number of differential pricing (DP) practices have been identified
- new and renewing consumers are paying different premiums for reasons other than risk and cost of service across the car and home insurance markets
- customers of the longest tenure are paying the most for insurance, relative to their expected cost
- insurance providers have failed to demonstrate a consideration of how these pricing practices impact consumers differently
CBI publishes insurance quarterly newsletter for December 2020
The CBI has published its quarterly insurance newsletter for Q4 2020.
This edition focuses on:
- the proposed Senior Executive Accountability Regime (SEAR)
- contract uncertainty
- sustainable insurance
SEAR: the CBI outlined the key elements of SEAR and noted that it expects firms to begin to focus on making it clear to individuals the standards expected of them, irrespective of when the proposed reforms become law.
Contract Uncertainty: insurance undertakings should consider the need for a review of policy wordings, including definitions of the risks covered to ensure clarity for policyholders. The CBI noted that insurers should undertake this review within the context of the product oversight and governance framework.
Sustainable Insurance: it is expected that firms devote adequate time and resources to assessing their own key risks and opportunities, so they can make informed choices about how they are going to adapt, and ultimately safeguard the long term viability of their business models.
Department of Finance establishes office to promote competition in the insurance market
On 17 December 2020, the Department of Finance announced the establishment of a new government office (the Office) to promote greater competition in the Irish insurance market. The Minister of State, Seán Fleming TD, chaired the first meeting of the Office on 15 December to establish the Office's terms of reference.
The Office is charged with developing the government's insurance competition reform programme which is aimed at bringing down the cost of insurance.
CBI webpage on the Temporary Run-off Regime
The CBI's webpage dedicated to the Temporary Run-off Regime (TRR) is now available. The TRR permits certain UK and Gibraltar insurers and insurance intermediaries to administer their existing portfolio, for up to a maximum period of 15 years from 31 December 2020, to ensure the orderly termination of their activities in Ireland and ensure minimum disruption for policyholders. The CBI's webpage provides
- the forms and reports that need to be completed by relevant insurers and intermediaries
- a link to a register of insurers and intermediaries that have notified the CBI that they satisfy the conditions of the TRR
- a set of FAQs on the TRR
EIOPA publishes first report on sanctions under the Insurance Distribution Directive
On 16 December 2020, the European Insurance and Occupational Pensions Authority (EIOPA) published a report on the sanctions imposed by national competent authorities under the Insurance Distribution Directive (the IDD) since it came into effect. While eight countries imposed sanctions, the most sanctions were imposed in Germany. The CBI did not report any sanctions.
Approximately 75% of the sanctions were imposed for breaches of Article 10 (Professional and organisational requirements) of the IDD, with 20% of sanctions imposed for breaching Article 3 (Registration) of the IDD. Administrative pecuniary sanctions amounted to an aggregate value of €945,710. This was the second most common sanction following measures to withdraw the registration of the intermediary.
EIOPA publishes discussion paper on methodology on potential inclusion of climate change in the natural catastrophe standard formula
On 2 December 2020, EIOPA published a discussion paper following up on the 2019 Opinion on Sustainability within Solvency II. The opinion noted:
- further work is needed to investigate whether additional climate change-related perils such as drought and wildfire could be better captured in the Solvency II framework under the natural catastrophe risk submodule
- a regular recalibration of the standard parameters for the natural catastrophe risk module of the standard formula should take into account future developments, as well as the potential effect of climate change
The discussion paper examines how climate change can be included in the Natural Catastrophe Solvency Capital Requirement (the Nat Cat SCR) calibration in the standard formula. It also outlines a potential method and process changes to include climate change in the Nat Cat SCR calibration.
EIOPA is seeking responses to the discussion paper by 26 February 2020.
EIOPA publishes monthly update of the symmetric adjustment of the equity capital charge for Solvency II
On 3 December 2020, EIOPA published updated technical information on the symmetric adjustment of the equity capital charge for Solvency II purposes with reference to the end of November.
EIOPA updates representative portfolios to calculate volatility adjustments to the Solvency II risk-free interest rate term structures- December 2020
EIOPA has published updated representative portfolios to be used in calculating the volatility adjustments (VAs) to the relevant risk-free interest rate term structures for Solvency II. These updated portfolios will come into use from the end of March 2021 and updated VAs will be published at the beginning of April 2021.
EIOPA shares pilot dashboard on insurance protection gap for natural catastrophes
On 4 December 2020, EIOPA shared the first pilot dashboard depicting the insurance protection gap for natural catastrophes. EIOPA's aim is to represent the drivers of a climate-related insurance protection gap in order to identify measures that will help in decreasing society’s losses in the event of natural catastrophes. In addition, EIOPA hopes that the dashboard will help to:
- increase the awareness of the protection gap issues for all stakeholders
- promote a science-based approach to protection gap management and decision-making
- identify at-risk regions and identify the underlying protection gap risk drivers
- develop pro-active prevention measures based on a granular assessment of risk drivers
- identify the potential for synergies between national policies to improve protection against natural catastrophes across borders at European level
EIOPA recommends actions and best practices to national supervisory authorities to improve supervisory practices regarding cross-border activities
On 8 December 2020, EIOPA published the results of the peer review of the cooperation between national supervisory authorities (NSAs) in the European Union on the supervision of cross-border activities of insurance undertakings. The peer review focused on how NSAs approach:
- insurance cross-border activities
- the exchange of supervisory information
- data storage
- practices regarding portfolio transfers
Following the conclusion of the review, EIOPA issued 60 recommended actions and four best practices, all addressed to NSAs.
Sensitivity analysis of climate-change related transition risks: EIOPA’s first assessment
On 15 December 2020, EIOPA published its sensitivity analysis of climate-change related transition risks in the investment portfolio of European insurers. The report provides an initial assessment of the corporate bonds and equity, presently held, which are linked to sectors with a key impact on climate policy. These sectors include fossil fuel extraction, carbon‐intensive industries, vehicle production and the power sector. EIOPA notes that while losses in high-carbon sectors are usually offset through diversification and/or investment in renewable energy, they remain high in the sector. The report also assesses climate-change related transition risks which may arise as economies move away from production methods dependent on fossil fuels.
EIOPA publishes discussion paper on non-life underwriting and pricing in light of climate change
On 10 December 2020, EIOPA published a discussion paper on non-life underwriting and pricing in light of climate change. The paper presents the challenges associated with current non-life underwriting practices, and outlines the solutions available to ensure the availability and affordability of insurance products, as the impact of climate change becomes more apparent.
EIOPA noted that non-life undertakings do not factor climate-related risks into their pricing methodology because annual repricing usually takes place. EIOPA noted that, since climate-related losses are expected to grow, which in turn will impact premiums, there is the risk that insurance coverage will become too expensive for policyholders.
EIOPA is seeking comments on the paper from stakeholders until 26 February 2021.
Gabriel Bernardino speech: Sustainable finance from policy to practice
On 16 December 2020, Gabriel Bernardino delivered a speech at the fourth roundtable on sustainable finance. Mr Bernardino noted that sustainability is a top priority for all, and outlined how it has featured on EIOPA's agenda since 2018, when it set out its expectations for insurers and pension funds. He went on to state that there needs to be a move from policy making to implementation, and that stakeholders must accelerate activities and their scope of ambition to achieve sustainability goals. Mr Bernardino noted that work needs to be done to deepen the high-level concepts, and the framework must be supported by supervisory scrutiny and market monitoring.
EIOPA issues opinion on the 2020 review of Solvency II
On 17 December 2020, EIOPA provided its technical advice on the 2020 review of Solvency II in the form of an opinion. EIOPA states that from a prudential perspective, the Solvency II framework is working well and no fundamental changes are needed. However, EIOPA notes that a number of adjustments are required to ensure that the regulatory framework continues as a well-functioning risk-based regime. Among other things, EIOPA proposes:
- adjustments to the treatment of interest rate risk
- improvements to the volatility adjustment to better align the design to its objectives and increase its effectiveness in curbing short-term volatility
- refinements to the calculation of the risk margin of insurance liabilities
- revising the criteria for the ability to hold equity long-term, by making a link with long-term illiquid liabilities with the aim of better reflecting risks and further encouraging long-term investments
Gabriel Bernardino on four important Solvency II reforms
On 22 December 2020, EIOPA's Chair, Gabriel Bernardino, discussed the main proposals to amend Solvency II with InsuranceERM. Mr. Bernardino addressed, among other things:
- new proportionality measures, which will benefit low-risk insurers
- harmonisation of the recovery and resolution/ insurance guarantee scheme frameworks
- greater flexibility in the qualifying criteria for long term investment
- increased reporting requirements for larger and more complex insurers which use internal models
EIOPA consults on ORSA in the context of COVID-19
On 23 December 2020, EIOPA published a consultation on the Supervisory Statement on Own Risk Solvency Assessment (ORSA) in the context of COVID-19. EIOPA notes that the statement promotes convergence by guiding undertakings through common supervisory expectations on the ORSA in the current situation triggered by the pandemic, taking into account that the impact on each individual undertaking can differ depending on its specific risk profile.
EIOPA invites stakeholders to complete the survey before 15 March 2021.
For more information on these topics please contact any member of A&L Goodbody's Insurance & Reinsurance team.
Date published: 7 January 2021