Tracker, Financial Services Regulation & Compliance - Insurance
Central Bank speech on Solvency II and related matters
Recently, the Central Bank published a speech delivered by its Director of Policy and Risk at the most recent annual general meeting of the Dublin International Insurance & Management Association (DIMA). Solvency II was the core focus of the speech, with a particular emphasis on protection of policyholders, harmonised cross-border provision of insurance, risk based supervision and equivalence assessments. Other topics addressed included: (a) the Central Bank's continued work with the European Insurance and Occupational Pensions Authority (EIOPA) to promote supervisory convergence; (b) initial discussions around a possible harmonised EU Recovery and Resolution regime; and (c) treatment of infrastructure investments and the role insurers play in this regard.
Solvency II newsletter
The Central Bank recently published the latest editions of its Solvency II Matters newsletter (on 30 June and 29 July 2015, respectively). In particular, this highlights two ongoing Central Bank reviews, namely a review of its existing guidelines and requirements to assess applicability/suitability under Solvency II, and a review of all existing conditions of authorisation for (re)insurers with a view to assessing whether/how these need to be transitioned under Solvency II). The Central Bank also intends to publish 'lessons learned' from the most recent preparatory phase reporting carried out by High and Medium High impact (re)insurers in due course. Finally, the Central Bank expects to issue an industry wide Solvency II implementation preparedness survey in early September 2015. Helpfully, the Central Bank has also provided a Solvency II timetable for the period leading up to 1 January 2016, together with a checklist for firms to track their preparation and progress.
Data Protection Commissioner - focus on use of private investigators
The 2014 annual report of the Data Protection Commissioner of Ireland (DPC) was recently published. From an insurance perspective, a key point to note is that the DPC intends to focus on insurers' engagements with private investigators (and data protection compliance issues in that context). The report also provides details regarding recent prosecutions undertaken by it in relation to private investigators.
EU & INTERNATIONAL
IDD (IMD2) progress
The text of a final compromise proposal for the revised insurance mediation Directive (the Insurance Distribution Directive (IDD)) was published on 17 July 2015. On 22 July 2015, the Council of the EU published a press release confirming its approval of the text through its Permanent Representatives Committee (COREPER). The IDD will now be submitted to the European Parliament for a vote at first reading, before final consideration by the Council. The text has not been significantly amended since the publication of a revised 6th presidency compromise text dated 7 November 2014. Key latest amendments include, inter alia: (a) that 'reinsurance distribution' does not include professional loss adjusting, expert appraisal of claims and the management of claims of a reinsurer; (b) ability of Member States to require intermediaries to assess a sufficiently large/diverse range of insurance products when purporting to provide independent advice; and (c) power for the European Commission to specify criteria for assessing whether inducements have a detrimental impact on customer service and interests. Additionally, the automatic exemption from providing certain information to professional customers no longer applies. Instead, Member States may choose to dis-apply those information requirements in the case of insurance-based investment products for such customers.
Solvency II – latest developments on equivalence
On 14 July 2015, the European Economic and Financial Affairs Council (ECOFIN) of the Council of the EU confirmed its non-objection to provisional equivalence decisions taken by the European Commission in June regarding certain third countries (Australia, Bermuda, Brazil, Canada, Mexico and the USA). The European Parliament must now review the decisions concerned and, in a letter dated 16 July 2015, has extended the deadline for raising objections to the decisions by three months (to expire 7 December 2015).
EIOPA publishes second set of Solvency II guidelines and draft ITS
On 5 July 2015, EIOPA published a second set of draft implementing technical standards (ITS) (comprising nine ITS papers) and guidelines required under Solvency II (comprising 8 guideline papers). Simultaneously, final reports and feedback on the corresponding prior consultations were published. The new ITS have been submitted to the European Commission for endorsement (and two further ITS - on mapping of external credit assessment institutions and the equity transitional - are expected to be finalised shortly by EIOPA). The new guidelines will apply from 1 January 2016.
EIOPA progresses Solvency II risk free interest rate coding
On 15 July 2015, EIOPA launched a process for obtaining feedback on the test-stage version of the software for risk free interest rate (RFIR) coding (used in the preparatory phase of Solvency II). While national supervisors have already reviewed the coding, EIOPA now wishes to receive input from stakeholders (particularly users of technical computing language) to improve the coding and identify errors. Comments are invited until 31 August 2015. EIOPA intends to publish final revised coding and methodology prior to 1 January 2016. To assist stakeholders, on 24 July 2015, EIOPA also published a user manual regarding carrying out calculations through the published RFR coding.
EIOPA consults on infrastructure investment risk
On 2 July 2015, EIOPA issued a consultation (CP-15/004) on its proposed advice to the European Commission concerning identification and calibration of infrastructure investment risk categories. EIOPA highlights the importance of analysing whether the investments and system of governance requirements in Solvency II are sufficient to manage infrastructure risk. EIOPA seeks views on issues including whether any barriers to such investments reflected in Commission Delegated Regulation (EU 2015/35) are not prudentially justified, and its proposed criteria/definitions used to identify debt and equity investments in infrastructure projects. Comments are invited by 9 August 2015. EIOPA has also announced that it will also host a stakeholder meeting on infrastructure investments on 4 September 2015 in Frankfurt, prior to EIOPA's submission of advice to the European Commission.
EIOPA advice to Commission on PRIIPS
On 3 July 2015, EIOPA published a final report and technical advice to the European Commission (dated 29 June 2015) regarding product intervention powers under the Regulation on key information documents for packaged retail and insurance-based investment products. The report analyses feedback received by EIOPA following consultation on powers to monitor and temporarily restrict/prohibit the marketing/sale of insurance-based investment products. The technical advice specifies criteria/factors to be taken into account in determining whether the powers are triggered (i.e. if there is a significant investor protection concern or a threat to the functioning of financial markets within, or stability of the financial systems of, the EU).
Guidance on effective deposit insurance systems
On 13 July 2015, the International Association of Deposit Insurers (IADI) published two guidance papers on effective deposit insurance systems. One of the papers relates to 'before the event' funding of such systems, with a view to ensuring that providers of such insurance have the financial capacity to respond when necessary. Nine guiding principles are identified to assist in the creation of an efficient funding system (including recommendations for periodic review and validation of funding methods). The second paper relates to possible use of multiple deposit insurance organisations (i.e. more than one deposit insurance provider). In that regard, information on multiple organisation arrangements in various jurisdictions is provided, as well as practical guidance for such structures.
ESRB analysis paper of the EU insurance sector
On 13 July 2015, the European Systemic Risk Board (ESRB) published a paper (Occasional Paper No. 7) assessing the exposures that insurers may have due to holding debt, equity and other financial instruments (to other financial institutions, including other insurers). The ESRB's study shows that insurers' exposures to banks are not significant (with approximately 10% of insurers' total assets exposed, based on the insurance groups reviewed by the ESRB). According to the ESRB, given that insurers' solvency positions are high (and concentration of their exposures is low), insurers are not likely to find themselves in default solely as a result of default by a financial counterparty.
Insurance Europe reiterates IFRS implementation concerns
On 2 July 2015, Insurance Europe published a letter (dated 30 June 2015) sent jointly by it and the European Insurance CFO Forum to the European Financial Reporting Advisory Group (EFRAG). The letter responds to EFRAG's draft advice to the European Commission on adoption of the International Financial Reporting Standards (IFRS) 9 for financial instruments. While the letter welcomes endorsement of IFRS 9, it reiterates (in line with its prior letters to EFRAG) that adopting IFRS 9 ahead of IFRS 4 Phase II (i.e. the future standard for insurance contracts) will impact the insurance industry negatively. Insurance Europe suggests that IFRS 9 implementation for insurers be deferred or, failing this, requests the European Commission to arrange a deferral for European insurers.
EIOPA note on public disclosure under Solvency II
On 10 July 2015, EIOPA published a note on its website calling for high quality public disclosure of financial information through publication of the Solvency and Financial Condition Report (SFCR) under Solvency II. Amongst other matters, EIOPA emphasises that the public disclosure requirement is an opportunity for (re)insurers to challenge stakeholder perception of opaqueness and inadequacy of publically released information. EIOPA notes that external audit services can be a powerful tool in ensuring that information is of such a high quality.
IAIS publishes July 2015 newsletter
The International Association of Insurance Supervisors (IAIS) recently published its July 2015 newsletter. Key points highlighted include that the IAIS has begun to analyse data collected as part of the 2015 G-SII assessment exercise which will form the basis of their recommendation for the 2015 designation, and a summary of the IAIS' 8th Annual Global Seminar Stakeholder Dialogues held on 24 June 2015 (which facilitated stakeholder discussions on globally significant insurance matters). Two further IAIS/stakeholder dialogue events are planned (one in relation to capital, and the other in relation to Insurance Core Principle (ICP) revisions and other supervisory material); both to be held on 5 October 2015.
EIOPA monthly Solvency II updates
On 7 July 2015, EIOPA published its monthly technical information on relevant risk free interest rate term structures to be applied by (re)insurance undertakings in the calculation of their technical provisions and on symmetric adjustment of the equity capital charge. This information is published by EIOPA to assist (re)insurers during the preparatory phase of Solvency II.
IAIS draft paper – regulation/supervision of captives
On 1 July 2015, the IAIS launched a consultation on a draft paper (dated May 2015) regarding regulation and supervision of captive (re)insurers. The draft paper is designed to assist national supervisors with ensuring an appropriate regulatory regime for such undertakings. The IAIS confirms that, in producing the draft paper, it has specifically considered the application of many of its ICPs (3 - 9, 13 - 17 and 19 - 24, inclusive) for captives. Feedback is invited by 3 August 2015.
IAIS consults on conduct of business risk
On 1 July 2015, the IAIS published a draft issues paper (dated 17 June 2015) for consultation regarding conduct of business (CoB) risk, focusing on retail customers, and its management. Key issues addressed in the draft paper include sources and impacts of CoB risk and the way in which this should be catered for within risk management frameworks and mitigation of CoB risk by both insurance sector entities and supervisors. The paper also explains issues that IAIS members may wish to consider when implementing ICPs 9 (Supervisory Review and Reporting), 18 (Intermediaries) and 19 (Conduct of Business). Comments are invited until 14 August 2015.
UK changes to policyholder compensation
On 3 July 2015, the Prudential Regulatory Authority in the UK (PRA) announced changes to the insurance limits under the Financial Services Compensation Scheme. In the event of insurer failure, recovery limits have now been increased to 100% of cover for (a) long-term policies, (b) professional indemnity insurance and (c) claims resulting from death or incapacity.
Lloyd's updates code in respect of complaints handling
On 1 July 2015, the Society of Lloyd's in the UK (Lloyd's) announced updates (to take effect on 9 July 2015) to its code for underwriting agents in respect of personal lines claims & complaints handling. The updates are aimed at ensuring compliance with the Alternative Dispute Resolution Directive. Amongst other matters, the updates require that managing agents ensure that information about the UK Financial Ombudsman Service (FOS) is contained in both policy documentation and on their website and require that, when notified of their right to refer a complaint to the FOS, complainants must indicate whether they agree to waive the time limits for such referral.
Insurance Europe announces details of conference
On 29 July 2015, Insurance Europe announced that its 8th International Insurance Conference will be held in Dublin on 25 May 2016. The press release notes that the conference is already attracting interest amongst stakeholders given its forward-looking focus on topics such as technological advances and serving customers in the future.
Bank of England speech - adapting to Solvency II
On 9 July 2015, the Bank of England (BoE) published a speech delivered by its Executive Director of Insurance Supervision on adapting to Solvency II. The speech provided an overview of the BoE's approach to capital under Solvency II. In particular, the speech confirmed that the BoE does not intend to use Solvency II to increase required capital across the UK insurance sector, or maintain the current Individual Capital Adequacy Standards (ICAS) regime following 1 January 2016. Other points emphasised in the speech included that Solvency II will be embraced in a proportionate manner and that the BoE intends to make final decisions on internal model approvals in early December 2015.
PRA publications and updates regarding Solvency II
On 14 July 2015, the PRA issued a letter sent by it to directors of insurers, providing an update relating to Solvency II implementation. The updates include information relating to: (a) the internal model application process; (b) the publication by EIOPA of the second set of implementing technical standards; (c) the recognition of outwards reinsurance by firms; and (d) the PRA's upcoming Solvency II activity timetable up to the end of Q3 of 2015. On 23 July 2015, the PRA issued a supervisory statement (SS30/15) setting out its expectations of firms on the treatment of sovereign debt in internal models under Solvency II and an updated supervisory statement (from its April 2015 version of SS22/15) on the application of EIOPA's first set of Solvency II guidelines. On 24 July 2015, the PRA updated its Solvency II webpage to announce that it considers it vital that the approval process for matching adjustment applications under Solvency II is consistent across firms. For formal applications received before 1 July 2015, the PRA will make its final decisions in late October 2015.
PRA launches general insurance stress test 2015
On 1 July 2015, the PRA updated the stress testing section of its webpage to report that it has requested the UK's largest general insurers to participate in a stress test exercise. The stress tests are developed to inform the PRA's work in assessing the resilience of UK insurers and in monitoring how insurers are developing their own risk and solvency assessment. The PRA has also published a spreadsheet for the stress scenarios and accompanying notes. Participants have until 1 October 2015 to respond.
EIOPA speech on group supervision
On 7 July 2015, EIOPA published a speech (given on 24 June 2015) by its Chairman on the challenges of group supervision. In particular, the speech focused on equivalence under Solvency II. Key points highlighted included that such equivalence promotes open international insurance markets whilst at the same time protecting the interests of policyholders. The speech also notes other international risk-based regulation initiatives, including the work of the IAIS in relation to international capital standards.
Lloyd's guidance on senior insurance managers' regime
On 1 July 2015, the Lloyd's Market Association published a guidance paper for managing agents on the UK senior insurance managers' regime which enters into force on 1 January 2016 (once finalised by the PRA/FCA). The paper provides a summary of the possible impact on governance structures and required regulatory approvals. It states that managing agents should consider taking a number of actions including review of existing governance arrangements, assigning prescribed responsibilities to senior insurance management functions, and identifying current approved persons who can be 'grandfathered' (i.e. transitioned) into the new regime.
UK regulations updated to reflect Solvency II requirements
On 16 July 2015, HM Revenue & Customs in the UK published draft regulations regarding the treatment of regulatory capital securities for tax purposes. Amongst other matters, the Taxation of Regulatory Capital Securities (Amendment) Regulations 2015 propose amendments to existing UK legislation to cater for Tier 1 compliant instruments for the purpose of Solvency II. Comments are invited until 9 September 2015. The Regulations are drafted to take effect from 1 January 2016.
Lloyd's updates technical provisions guidance for Solvency II
On 6 July 2015, Lloyd's published its updated guidance on technical provisions for Solvency II. Key amendments relate to guidance on contract boundaries for outwards reinsurance, the introduction of matching and volatility adjustments to risk free rates, and a recommendation that a proportionate run off simplification for the calculation of the risk margin is not appropriate without justification. Lloyd's notes that, while the guidance offers practical solutions, alternative approaches (based on appropriate justification) may be equally valid.
LMA 'consumer wordings' guidance
On 27 July 2015, the Lloyd's Market Association published updated guidance on consumer wordings. The guidance is designed to aid Lloyd's managing agents when drafting/amending product literature to meet regulatory expectations. The guidance sets out sample clauses and emphasises that the core theme is for policy wording to be clear, fair and not misleading.
Lloyd's bulletin - use and function of sanctions clauses in policies
On 27 July 2015, Lloyd's issued a bulletin on the use and function of sanctions clauses in (re)insurance contracts. These types of clauses typically provide that no cover is deemed to be in place (and no claims will be payable) if it would mean that the (re)insurer would be exposed to trade or economic sanctions. The bulletin replaces Lloyd's October 2014 guidance (and effectively updates the October 2014 version to include specific guidance on the use of such clauses in German market policies by non-German (re)insurers). This includes that the German Federal Ministry for Economic Affairs and Energy has recently confirmed that, in its view, the London market standard sanctions clause (LMA 3100) does not comply with German anti-foreign boycott legislation when used by German 'resident' (re)insurers (as defined under German law), and use of the LMA 3100 by (re)insurers who are not German residents does not contravene the relevant legislation.
Joint position paper on OECD BEPS action plan
On 30 July 2015, Insurance Europe and the Pan European Insurance Forum jointly published a position paper. The paper summarises the views of the European insurance industry regarding the proposals of the Organisation for Economic Co-operation and Development (OECD) in its draft versions of its Action Plan on Base Erosion and Profit Shifting (BEPS). The draft Action Plan aims to address weakness in the international tax environment. The paper notes that, while the industry supports the aims of the Action Plan, concerns remain that the unique nature of insurers' business models are not fully taken into account.
For further information please contact a member of the Financial Regulation team.
Date published: 04 August 2015