Insurance Insights May 2022

Charlotte Gerken gave a speech in which she set out the Prudential Regulation Authority’s (“PRA”) supervisory priorities for insurance firms in the coming year. These include:

• Climate Change and Environmental, Social, and Governance (ESG);
• Diversity and Inclusion;
• Operational Resilience; and
• Approach to Third Country Branches.

HM Treasury announced that Russian companies in the aviation or space industry will be prevented from making use of UK-based insurance or reinsurance services directly or indirectly. The UK Government will bring in legislation to prohibit UK based insurance and reinsurance providers from undertaking financial transactions connected with a Russian entity or for use in Russia. Further details of the legislation will be available in due course.

The PRA published the technical information for UK insurance firms subject to Solvency II to calculate technical provisions for the month of February on 8th March 2022. From 31 December 2020 (RFR data) and 31 March 2021 (SAECC and Volatility Adjustment data) UK firms must use the data which is published by the PRA rather than EIOPA.

The PRA has published a new modification. Following the UK’s departure from the EU, a significant number of EEA firms have entered the Temporary Permissions Regime. In some cases, the operations effected by the branches of insurance firms in the Temporary Permissions Regime include, in whole or in part, risks that are not located in the UK. PRA is now offering a modification by consent to all third-country insurance branches to exclude risks that are not located in the UK when calculating branch technical provisions and branch capital requirements. If a firm wishes to take advantage of this modification, it should contact the PRA with a suitable request, copying in their usual supervision contact. The email should include the firm name and reference number.

The PRA published Policy Statement PS2/22 which contains feedback to responses to Consultation Paper (CP) 21/21. The PRA states that it has amended certain aspects of its proposed policy, the main ones applicable to insurers being as follows:

• To provide greater clarity for firms, the PRA has decided to amend the definition of important group business services in Rule 1.2 of the Operational Resilience rules applicable to Solvency II firms. Rule 1.2 now states that an important group business service means a service provided by a member of ‘the’, rather than ‘a’, firm’s group.
• Paragraph 9.3 has been amended to clarify that a threat to the viability of the group is one example of how risks could arise to UK financial stability or a firm’s safety and soundness in the context of PRA-regulated insurers and policyholder protection.
• Paragraph 9.5 has been amended to clarify that firms are expected to work with other members of their group to act, should it be likely that a relevant important group business service could not be delivered within its impact tolerance.

The implementation dates for the changes set out PS2/22 are 31 March 2022 for the Operational Resilience Parts and the Group Supervision Part and 1 January 2023 for the Operational Continuity Part.

The Financial Conduct Authority (“FCA”) published a webpage “Operational resilience insights for insurance firms”, asking a sample of firms about rules for strengthening operational resilience. It contains examples of good practices and areas of improvement relating to operational resilience. The FCA directs firms to use its observations to review their approaches to operational resilience against the FCA's observations and consider what actions they still need to take.

The Isle of Man Financial Services Authority (“the Authority”) has issued a consultation CP22-03 Discretionary Civil Penalties for Entities Regulated under the Insurance Act 2008.

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Feedback is being invited on the proposed introduction of a new funding model and fees structure for firms regulated or supervised by the Isle of Man Financial Services Authority, with the intention to put in place a more sustainable approach that aligns with international best practice, while being mindful of the Island’s competitive position.

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The CBI has published a press release regarding the 2022 financial regulation priorities set out by the Director General, Financial Conduct Derville Rowland. The CBI notes that its objective is to create the regulatory context in which the potential benefits of innovation for consumers, businesses and society can be realised, while the risks are effectively managed, and that it would continue to operate a forward-looking approach to the authorisation of financial services firms, being clear about its expectations to prospective and applicant firms.

The CBI has published its Consumer Protection Outlook Report calling out five key cross sectoral risks facing consumers of financial services, as well as what the CBI expects regulated financial firms to do about those risks. 

The CBI has published a speech by Director General, Financial Conduct Derville Rowland, at the UCD Sutherland School of Law & Eversheds Sutherland book launch regarding “New Accountability in Financial Services: Changing Individual Behaviour and Culture”. Concluding her speech, Derville encourages firms to use this time to implement the Individual Accountability Framework (IAF) by understanding their obligations, assessing current governance structures to identify who is responsible for what and implement any necessary changes to their existing business model in order to ensure the requirements can be properly embedded.

The CBI has published comments from Derville Rowland, Director General, Financial Conduct regarding diversity at senior levels, Fitness & Probity, and consumer and investor protection. In her comments, Derville made it clear that “Regulated firms must prioritise diversity at senior levels to prevent groupthink, promote internal challenge, and protect consumers and investors”. According to the Central Bank of Ireland Demographic Analysis Report, gender diversity at senior levels in the regulated financial services sector is increasing but remains insufficient, with female representation in application for PCF roles at 31% in 2021 compared to 16% in 2012. 

The CBI has published a feedback statement on Pre-approval Controlled Functions (PCFs). Further to the Notice of Intention issued in September 2021, the CBI is amending the PCF list as follows:

• Expanding PCF-16 Branch Manager of branches in other EEA countries to include branch managers in non-EEA countries; and
• Introducing stand-alone PCFs in respect of a. Independent Non-Executive Directors; b. Head of Anti-Money Laundering and Counter Terrorist Financing Compliance; and 3. Removing PCF-31 Head of Investment.

The CBI published an opening statement by Governor Gabriel Makhlouf at Joint Oireachtas Committee on Finance, Public Expenditure and Reform, and Taoiseach, giving a brief overview of the economic outlook. The CBI has also published an opening statement by Gerry Cross, Director, Financial Regulation, giving overview on financial regulation.

The European Insurance and Occupational Pensions Authority (EIOPA) has announced the launch of a data collection exercise to assess the potential for a dedicated Pillar 1 treatment of climate-related adaptation measures in Solvency II's standard formula for non-life underwriting risk. The focus of the data collection is on the influence of climate-related adaptation measures on premium risk, and it is supplemented by qualitative questions on reserve risk and natural catastrophe risk. 

EIOPA has published its fourth report on the costs and past performance of insurance and pension products. The report points out that higher risk classes delivered higher net returns for unit-linked and hybrid products while longer holding periods continued driving higher performance of profit participation products. Certain lower-risk products posted particularly low and, at times, negative net returns. 

EIOPA has launched its first climate stress test to gain insights into the effects of environmental risks on the European occupational pension sector. Sustainability and the management of environmental risks have become key considerations for long-term investors and for European institutions for occupational retirement provision (IORPs).

The International Association of Insurance Supervision (IAIS) has published a Newsletter, Issue 111, dated February/March 2022, which focuses on, among other things, cybersecurity and Climate Risk.

The Financial Stability Board (FSB) has published its 2022 work programme. The FSB's work priorities reflect the fact that financial challenges are global in nature and affect the financial system. These challenges include digitalisation, climate change and potentially also shifts in the macroeconomic and interest rate environment. 

The European Commission has issued a press statement (dedicated webpage) by President von der Leyen on the fifth round of sanctions against Russia. The CBI has also a dedicated webpage regarding this topic which is updated regularly. 

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

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