Financial Services Regulation and Compliance - Insurance Jan 2022
- Central Bank of Ireland publishes paper examining the strength of the connectedness of Irish insurance sector and investment funds
On 20 January 2022, the Central Bank of Ireland (CBI) published a "Behind the Data" paper focused on the interconnectedness of the Irish insurance sector and investment funds.
The paper provides new insights on the underlying exposures of insurers and their policyholders from their investments in investment funds. In particular, the paper examines the underlying asset classes of funds to obtain a more accurate view of insurers' geographic exposures.
The paper identifies that Irish insurers primarily hold shares in equity, bond, and mixed funds; with hedge, property, and other specialised funds accounting for relatively small exposures. The most common categories of underlying asset classes for these funds are equities, government bonds, and corporate bonds. Interestingly, while almost half of Irish insurer investment fund shares are domiciled in Luxembourg, just over 5% of underlying assets are issued in Luxembourg.
The paper sets out that the majority of underlying equities were issued in the US, while government bonds held by insurers via funds are predominantly issued by euro area countries.
EIOPA publishes monthly technical information
On 6 January 2022, the European Insurance and Occupational Pensions Authority (EIOPA) published updated representative portfolios to be used for calculation of the volatility adjustments to the relevant risk-free interest rate term structures for Solvency II.
The same day, EIOPA published technical information on the relevant risk free interest rate term structures (RFR) with reference to the end of December 2021. This technical information is used for the calculation of the technical provisions for (re)insurance obligations.
EIOPA also published the second parallel technical information on the RFR with reference to the end of November 2021 for the implementation of Interbank Offered Rates (IBOR) transitions.
Finally, EIOPA published the technical information on the symmetric adjustment of the equity capital charge for Solvency II with reference to the end of December 2021.
EIOPA publishes report on the application of the Insurance Distribution Directive
On 6 January 2022, EIOPA published its first report on the application of the Insurance Distribution Directive (the IDD, the Report). The Report examines, among other things, changes to market structure and cross-border activity patterns as a result of the IDD, its impact on insurance intermediaries that are SMEs, and the ability of national competent authorities (NCAs) to carry out their functions and duties under the IDD.
EIOPA identified several key findings in the Report, including:
- insurance intermediaries continue to have difficulty applying the demands-and-needs test;
- there has been a decline in the number of registered intermediates from 2016 – 2020 (in contrast, the number of passporting intermediaries increased in the same period);
- the lack of guidance on digital disclosures, means insurance intermediaries have struggled to apply the relevant rules, and, accordingly, NCAs are experiencing difficulty in their supervisory practices; and
- some NCAs lack appropriate tools/powers to supervise intermediaries, including in some cases, lack of “intermediate powers” which would enable NCAs to take adequate remedial measures and banning products.
EIOPA notes that although the IDD has been in application since 2018, some countries only transposed the IDD in the past year. Overall, the Report found that the IDD has had a positive impact on insurance distribution to consumers, but the limits in terms of evidence and experience means the Report only provides a preliminary picture of the IDD's impact. EIOPA plans to prepare another report on the application of IDD in two years' time to enable the Commission to review the IDD.
Call for experts to join EIOPA’s Technical Expert Network on Catastrophe Risks
On 7 January 2022, EIOPA sought applications from experts to join its Technical Expert Network on Catastrophe Risks (the Network) for a five-year term. The Network, established in 2019, provides EIOPA with expertise in modelling / underwriting of natural catastrophe and climate change risks, complementing EIOPA's work on sustainable finance. The Network also supports the collection and analysis of data for the calibration of these risks. Applications close on 31 March 2022.
EIOPA publishes Consumer Trends Report
On 24 January 2022, EIOPA published its Consumer Trends Report (the Report). EIOPA noted that increasing rates of digitalisation was a key trend brought about by the COVID-19 pandemic, which presents opportunities as well as challenges for consumers. Ultimately the Report finds that against the backdrop of COVID-19, insurers and intermediaries served consumers well, and demonstrated robust operational resilience. Among the key issues identified in the Report are:
- product complexity in unit linked products continues to cause confusion for consumers;
- marketing of sustainable products runs the risk of "greenwashing", but also demonstrates the insurance sector's move towards ESG preferences;
- digitisation has improved claims handling efficiency and user-friendliness, but issues persist in some markets; and
- greater price optimisation through use of artificial intelligence and consumer data may result in mistreatment of and may indirectly discriminate against some consumers.
EIOPA publishes third paper on methodological principles of insurance stress testing climate risks
On 27 January 2022, EIOPA published its third paper on methodological principles of insurance stress testing (the Paper), which is focused on climate change-based risk scenarios. The Paper can be used to assist in the creation of bottom-up stress tests when assessing exposure to climate risk. EIOPA notes it is conscious of the learning curve facing insurers in relation to climate risk. However, such stress testing is an important tool to raise awareness of climate risk and evaluate knock-on effects of climate risk into the wider financial sector and the real economy.
EIOPA consults on its proposals on Retail Investor Protection
On 28 January 2022, EIOPA launched its public consultation paper on retail investor protection in relation to the sale of Insurance-Based Investment Products. The consultation paper was published in response to a call for advice sent to EIOPA by the European Commission in July 2021. The proposals detailed in the consultation paper cover five different areas, which are:
- Enhancing consumer engagement with disclosures, including digital disclosures;
- Assessing the risks and opportunities presented by new digital tools and channels;
- Tackling damaging conflicts of interest in the sales process;
- Promotion of an affordable and efficient sales process; and
- Assessing the impact of complexity in the retail investment product market.
The consultation period is open to feedback from stakeholders until 25 February 2022.
EIOPA publishes Risk Dashboard based on Solvency II for Q3 2021
On 31 January 2022, EIOPA published its Risk Dashboard for Q3 2021 based on Solvency II data. The Risk Dashboard is based on Solvency II data and summarises the main risks and vulnerabilities in the EU's insurance sector through a set of risk indicators. The Risk Dashboard noted that insurers' macro risk exposure remains high, while other risks (including ESG and solvency risk) remain at medium levels. Inflation and high unemployment rates were key drivers of macro risk, with financial markets staying broadly stable. EIOPA also noted in the Risk Dashboard that solvency positions for groups decreased in Q3 2021 but remains above 2020 year end level.
For more information on these topics please contact any member of A&L Goodbody's Insurance & Reinsurance team.
Date published: 11 February 2022