Insurance Insights January 2022

At the annual year-end KPMG Insurance update, Andrew Candland, Head of Actuarial, Advisory and Major International Insurance Firms at Central Bank of Ireland (CBI) provided an update on progress on the 2021 regulatory priorities and gave his perspective on the key focus areas for the Central Bank in 2022.

To compliment the regulatory update, we considered the key issues impacting insurers and reinsurers including:

• Relevant changes to accounting standards impacting 2021 year ends across IFRS and Irish GAAP financial reporting frameworks and the most up to date developments on IFRS 17.
• Noting that the Global CEO survey puts tax risk as the number two risk on the minds of CEOs in financial services, a strategic review of current tax issues
• With increased regulatory focus on Climate and ESG matters, we updated on emerging developments and what this means for your organisation.
• A discussion of current hot topics impacting insurers and reinsurers.

Strengthening resilience throughout the financial system is one of the strategic commitments by the CBI. Resilience includes understanding existing vulnerabilities and mitigating those risks to ensure the financial system can withstand and limit the impact of future disruptions. A firm that is operationally resilient can recover its critical or important business services from a significant unplanned disruption, while minimising impact and protecting its customers and the integrity of the financial system. KPMG, led by Owen Lewis (Head of Management Consulting), Ian Nelson (Head of Regulatory, Head of Banking and Capital Markets), Patrick Farrell (Partner) and David Polley (Director) from our Operational Resilience team explain in the following article.

Read the full article here.

The CBI has published its final report into differential pricing in the home and motor insurance markets in Ireland. Using data gathered from almost 11 million policy records and consumer insights from a survey of c.5,500 consumers, the report identifies where some pricing practices can lead to unfair outcomes for car and home insurance consumers. Based on the evidence from the review, the CBI are proposing a series of measures to strengthen the consumer protection framework. KPMG, led by John O’Donell (Director, Risk Consulting), Jean Rea (Partner, Actuarial) and Yvonne Kelleher (Director, Risk Consulting), summarise what the CBI has found, the next steps and how KPMG can help.

In preparation for the introduction of the Individual Accountability Framework (“IAF”), the CBI has considered changes required to the existing list of PCF roles applicable to relevant Regulated Financial Service Providers “RFSPs”. As part of this review, on 22 September 2021, the CBI published its Notice of Intention to amend the list of current PCF roles. KPMG, led by, Gillian Kelly (Partner) discusses that firms must now consider the impact specific to their PCF structure against these key changes and where necessary ensure appropriate steps are taken, in order to address both the current F&P requirements and to prepare for the introduction of the IAF.

On 4 January 2022 the Isle of Man Financial Services Authority published an update to its policy for regulated activities.  The changes apply to existing licenceholders as well as new applicants. For further details on the specific changes, please click the link here.

The Authority also updated their training and competence framework to reflect the change of name to a qualification body.  For your information, the updated framework document has been linked here.

In December 2020 Guernsey's insurance regulator, the GFSC, launched a pilot scheme for a fast-track pre-authorisation scheme which allowed protected cells to be established within 48 hours.

The GFSC has now decided to extend the scheme indefinitely, so GCP's latest Short, Peter Child, of Strategic Risk Solutions, Mark Rogers, of Artex Risk Solutions, and Justin Upson, of Robus Group, assess how the scheme has been used to date, why its been a success and how it might be used going forward.

The CBI has published the December edition of the Insurance Newsletter which includes, among others:

• General observations following a thematic review of ORSAs carried out by the CBI in 2021 (high and medium-high impact insurers). The CBI expects insurers to design stresses and scenarios that could potentially threaten their capital needs; such stresses should be appropriately severe and not optimistic. Additionally, the CBI expects that appropriate consideration is given to the interlinkage of stresses and the combined effects on different parts of the balance sheet; to appropriately consider the feasibility of their stated management actions including group support; and to reflect on the reliability of past projections, including evidence of or commentary on an analysis of the actual vs expected SCR levels. The CBI reiterated that it expects insurers to do an assessment to identify material climate change risk exposures and to subject the material stresses to a risk assessment in their ORSA.
• An update on EIOPA’s EU-wide comparative studies on internal models. The CBI referred to the market and credit risk comparative study, the study on diversification, and the non-life underwriting risk comparative study. The CBI noted that the combined SCR of Irish (re)insurers using an internal model was €10.9 billion at the end of 2020 and accounted for some 38% of the industry’s total SCR.
• An update on the proposed amendments to Solvency II from the European Commission. The European Council is currently debating the draft legislation, and it is likely that there will be some changes made before it is eventually implemented, which will not be until 2024 at the very earliest.
• Reference to the supervisory expectations of insurers and other regulated financial services providers regarding climate and other ESG issues, as published in the CBI’s Dear CEO Letter on climate and other ESG issues of 3 November 2021. The CBI notes that those supervisory expectations were articulated on the basis that they can be applied in a proportionate manner aligned to the nature, scale and complexity of each firm. The CBI expects firms to understand the impact of climate change on their risk profile, business strategy and sustainability, and also to enhance their existing ERM frameworks to ensure robust climate risk identification, measurement, monitoring and mitigation.
• Reference to EIOPA’s consultation on a draft application guidance paper relating to climate scenarios in the ORSA, published on 10 December. The purpose of the application paper is help industry, particularly small and medium sized firms, to start running climate risk scenarios. The application guidance is optional, and is not a supervisory convergence tool.
• A summary of the oncoming changes to Solvency II regarding sustainability. These amendments require firms to incorporate sustainability in their investment and underwriting practices, ORSA, remuneration policy, prudent person principle, and in the activities of the actuarial function. These changes will come into force on 2 August 2022. The CBI expects firms to be considering if any changes are required to their processes in advance of this deadline.

The European Insurance and Occupational Pensions Authority (EIOPA) has published a speech, given by Petra Hielkema, EIOPA Chair, on pensions dashboards, disclosures and data. In her speech Ms Hielkema has discussed the current interest in sustainability and sustainable finance.

EIOPA has published a supervisory statement on the assessment of value for money of unit-linked insurance products under product oversight and governance (POG).

EIOPA has published a series of updates on Q&As. In accordance with Article 16b of the EIOPA Regulation, the European Commission has provided answers to a series of Q&As regarding the legal interpretation of provisions of the Insurance Distribution Directive and its implementing measures.

EIOPA has published a Newsletter, dated November 2021. The Newsletter covers topics such as sustainable finance, risk dashboard in insurance, climate risk management, latest publications, consultations and surveys, upcoming event and cyber–incident reporting and cyber underwriting.

EIOPA has published its annual report on the use by national competent authorities (NCAs) of capital add-ons (CAOs) under Article 52(3) of the Solvency II Directive. The aim of the report is to report the degree of supervisory convergence in the use of CAOs between supervisory authorities in different member states.

The Prudential Regulation Authority (PRA) has announced that it will invite a number of firms to participate in a voluntary cyber stress test. The stress test, which was announced in March 2021, will focus on a severe data integrity incident as the disruption scenario and will test firms’ ability to meet the impact tolerance for payments in a severe but plausible scenario.

This Consultation Paper (CP) sets out the PRA’s proposals to apply the group provisions in the Operational Resilience Part of the PRA Rulebook relevant to Capital Requirements Regulation firms to holding companies, and to make other minor formatting and clarification amendments to the Operational Resilience (Appendix 1) and Operational Continuity Parts of the PRA Rulebook (Appendix 3). This consultation closes on Friday 14 January 2022.

AML

Insurance Europe has published its position on the European Commission’s (EC) legislative package on anti-money laundering (AML). While confirming its support for the EC’s efforts to strengthen the existing AML framework, IE emphasised the importance of having a risk-based approach to ensure that the framework works in practice to reflect the low risk of money laundering/terrorism financing (ML/TF) in the life insurance sector.

EIOPA’s proposed changes to rules on technical provisions

Insurance Europe has published its response to a consultation conducted by EIOPA on its proposed revision of guidelines on the valuation of technical provisions, which are the amount of capital that an insurer requires to fulfil its insurance obligations and settle all expected commitments to policyholders and other beneficiaries.

Newsletter

The International Association of Insurance Supervisors (IAIS) has published a Newsletter, that discusses topics like; trends in the insurance sector, climate risk, Global Monitoring Exercise, pandemic risk, artificial intelligence and machine learning, Diversity, Equity and Inclusion, meetings, and publications by the IAIS, consultations and other in focus information.

Global Monitoring Exercise

The IAIS has published its 2021 Global Market Insurance Report (GIMAR). The report covers the latest findings from the IAIS’ targeted assessment of the impact of Covid-19 on the global insurance sector, the outcome of the first full Global Monitoring Exercise (GME) of potential systemic risks and key highlights of the global reinsurance market analysis.

Annual conference and 28th AGM

IAIS has published a press release following its 28th AGM and annual conference. At the meeting, the IAIS members and stakeholders reviewed progress on the IAIS' work programme and the key achievements in advancing its strategic plan for 2020-24. They also shared important findings about insurance supervision in the "new normal" and discussed key evolving trends affecting the sector.

Phase 2 of development of liquidity metrics

IAIS has published a consultation paper on phase 2 of the development of liquidity metrics. The IAIS explains that capturing liquidity risk in the insurance sector is a complex task due to the many dimensions to consider (including the variability of insurance products and their liquidity profiles, different liquidity needs of various insurance business models, the fungibility of assets, comparability across regions, choice of a time horizon and consideration of capital instruments).

Annual Report

Following the Annual General Meeting of Members, the IAIS has published its 2020 Annual Report. The Report has a special focus on how the IAIS has adapted its work programme during the Covid-19 pandemic.

Diversity, equity and inclusion

The IAIS has published a statement on the importance of diversity, equity and inclusion (DE&I) considerations in insurance supervision. The IAIS explained that there is growing acknowledgment for advancing DE&I within insurers' organisations and business models as it supports sound prudential and consumer outcomes and sustainability objectives.

Culture

The IAIS has published an issues paper on insurer culture. The issues paper aims to explore the concept of insurer culture as a point of intersection for prudential and conduct risks and includes selected examples to illustrate the broader role of culture in this regard.

Application paper on combating money laundering and terrorist financing

The IAIS has published an updated application paper on combating money laundering and terrorist financing. The application paper has been amended to include updates to align terminology and to ensure consistency with the Financial Action Task Force (FATF) recommendations, as well as new guidance on elements reflected in the latest version of ICP 22 (the insurance core principle on anti-money laundering and combating the financing of terrorism).

Application paper on supervisory colleges

The IAIS has published an updated application paper on supervisory colleges. The application paper describes the processes and practices related to the establishment and functioning of supervisory colleges for insurance groups with cross-border activities, as described in the insurance sore principles (ICPs) and ComFrame (CF).

Every month KPMG CD IFRS team produces an update on the progress of the industry to date on the implementation of the new insurance accounting standard.