Insurance Insights - August 2022 Insurance Insights - August 2022 Insurance Insights - August 2022

The business landscape is changing rapidly. Despite strong market performance, traditional commercial insurance business models are coming under pressure from swirling changes that now have the sector on the cusp of a radical transformation.

In the latest report, KPMG (led by Laura Hay (Global Head of Insurance)) spoke with over 400 decision-makers from commercial insurance organizations across the globe to better understand the evolving trends and their impacts on the future of the sector, alongside what we believe will be the three winning business models of the future.

Conduct and culture have become a key focus of insurance regulators and governing bodies in recent years. The International Association of Insurance Supervisors (IAIS) has highlighted these key areas as part of its 2020 – 2024 Strategic Plan. As part of its plan, the IAIS calls for a more comprehensive approach to conduct risk to be adopted by insurer supervisors; noting that conduct and culture issues within the insurance industry have the potential to lead to financial soundness and stability concerns.

Therefore, both conduct and culture should be of utmost importance to insurers.  KPMG (led by Gillian Kelly, Co-Head of Consulting) have summarised the key findings of the IAIS report, the new measures and the next steps that insurers should be considering.

On 27 July, the regulator issued a “Dear CEO letter” to the banking sector on the island in relation to AML account warnings and blocks.  The letter was issued following consultation with and input from the Financial Intelligence Unit on the island. The regulator commented that information contained within the letter may also be of relevance to other firms operating in the island that are also subject to the AML/CFT framework.  

There have been numerous updates to sanctions requirements throughout the month, and the UK National Economic Crime Centre also issued a red alert to promote awareness and encourage preventative action in respect of persons suspected of attempting to evade financial sanctions.  Whilst the alert is not directly applicable to the Isle of man, the typologies may be helpful, and insurers are advised to familiarise themselves with the content of the alert. 

On 1^st July the Cabinet Office amended their country risk lists following FATF’s June Plenary and the most recent publication of the 4^th round assessment ratings.  In particular, Gibraltar had been removed from the equivalent jurisdiction list and place on list B (jurisdictions that may pose a higher risk).  This was due to FATF determining that they had not made sufficient progress on their action plan.  The Authority requested information from licenceholders in respect of action taken by licenceholders where simplified measures for AML/CFT due diligence had been applied for Gibraltar customers. The Authority’s publication can be found here.

The Guernsey International Insurance Association (GIIA) introduced its world-leading ESG Framework with an accreditation kitemark in May 2021, created to help its members manage ESG opportunities and risk, and deliver positive ESG impact. A year on Guernsey’s Insurance sector has been reflecting on the success of Guernsey’s Insurance ESG Framework.  Industry participants have described the framework as a “handrail” they use to help clients navigate the ESG landscape.  

Read more here.

AM Best has downgraded the Financial Strength Rating to B (Fair) from B+ (Good) and the Long-Term Issuer Credit Rating to “bb+” (Fair) from “bbb-” (Good) of Universal Insurance Company (Guernsey) Limited (UIC) (Guernsey).

Read more here. 

The Central Bank of Ireland (CBI) has published its Newsletter, dated June 2022. This includes observations from the recent self-assessment questionnaire, key points from recent stakeholder engagement and EU and International updates. 

The Central Bank has published a speech by Gerry Cross: Individual accountability – a maturing of financial regulation - Speech by Gerry Cross, Director of Financial Regulation: Policy and Risk, at the Arthur Cox Client Seminar.

The speech outlines some key aspects of the new framework including the Central Bank’s approach to the regulations and guidelines that will implement the primary legislation.

The Central Bank has published a consultation paper to seek stakeholders’ views on proposed Guidance for (re)insurance undertakings on Intragroup Transactions and Exposures. The aim of the Guidance is to provide clarity on the Central Bank’s expectations with regard to intragroup transactions & exposures of (re)insurance undertaking supervised by the Central Bank and in doing so to promote a level playing field in this regard.

The proposed Guidance focuses on three key exposures namely: (i) intragroup assets; (ii) intragroup reinsurance; and (iii) cash pooling/treasury function arrangements as these are the most significant exposures observed by the Central Bank Interested stakeholders are invited to provide feedback on or before 23 September 2022.

The European Insurance and Occupational Pensions Authority (EIOPA) has published its Newsletter, dated June 2022. This includes a summary of the EIOPA Annual conference 2022, Insurance Innovators Summer Festival and AMICE Congress.

EIOPA has published a consultation paper on a supervisory statement on the management of non-affirmative cyber underwriting exposures. EIOPA recommends that NCAs should dedicate more attention to insurance undertakings' assessment of the terms and conditions of their existing insurance products and sets out supervisory expectations covering the:

• Need for a top-down strategy and risk appetite definition for insurance and reinsurance undertakings to underwrite cyber risk.
• Need to identify and measure risks exposure with the purpose of implementing sound cyber underwriting practices, with regard to the management of non-affirmative cyber exposures.

Importance of cyber underwriting risk management and risk mitigation, including the reinsurance strategy. 

EIOPA has published a consultation paper on advice on the review of the securitisation prudential framework in Solvency II. The purpose of the consultation is to assist the Joint Committee of the European Supervisory Authorities (ESAs) in its response to a call for advice made in October 2021 by the European Commission relating to the Commission's review of the EU securitisation prudential framework. In the consultation, EIOPA seeks views on, among other things:

• Whether there are practical or legal difficulties in investing in securitisation with the simple, transparent and standardised (STS) label.
• Whether the current calculation for capital requirements for securitisation (senior STS, non-senior STS and non-STS) is not proportionate or commensurate with their risk. 
• Options for elaborating the existing Solvency II calibration method in a manner more consistent with the securitisation framework in the Capital Requirements Regulation (CRR).

The deadline for responses to the survey accompanying the consultation was 13 July 2022. The Commission has requested to receive the Joint Committee's advice by 1 September 2022.

EIOPA has published a feedback statement to its discussion paper on open insurance. In the discussion paper, EIOPA explored whether and to what extent insurance value chains should be opened by the sharing of insurance-related and specific policyholder data among insurance and non-insurance firms, with a view to protecting policyholder rights and allowing for innovation in products and services. Having considered the responses, EIOPA provides the following feedback:

• The approach to open insurance is a broad policy question. The responses indicate no strong agreement on potential next steps. 
• There are a wide range of opportunities and challenges arising from the use of open insurance. 
• EIOPA may carry out further work on more specific open insurance case studies (for example, necessary data sets, risks and benefits) to facilitate a better understanding of implications for consumers, industry and supervisors.

EIOPA will continue monitoring legislative developments relevant to open insurance to provide insurance and supervisory input where necessary. 

EIOPA has published its Annual Report 2021, setting out its activities and achievements of the past year. In 2021, sustainable financed, digitalisation, and consumer protection remained a priority.

EIOPA has published its annual report on supervisory activities in 2021. The report highlights the most important deliverables achieved during the year, including a review of the priorities in the field of supervisory convergence to take stock of emerging and future challenges both from a prudential and conduct of business supervision perspective.

The Insurance Association of Insurance Supervisors (IAIS) has released the dates and locations of its committee meeting and milestone events in 2023, as approved by the Executive Committee.

The IAIS has published a report on supervisors' use of key indicators to assess insurer conduct. The IAIS' 2020-24 strategic plan identifies culture and conduct as a key focus area in insurance supervision and notes that, increasingly, supervisors are seeking to adopt more forward-looking and outcomes-based approaches to conduct supervision. The survey covered 51 supervisory authorities across developed jurisdictions and emerging markets and developing economies. The report sets out the survey's findings, including:

• The number and type of indicators collected by supervisors.
• The purposes for which supervisors use conduct indicators.
• The challenges encountered by supervisors, including in the context of the impact of the COVID-19 pandemic on supervisors' collection of conduct data. 

As a next step, the IAIS is working on developing practical guidance for member supervisors on the use of key indicators to proactively monitor conduct risks to enable a more timely response to emerging conduct trends and risks. The IAIS expects to make this guidance available to members in Q1 2023.

The IAIS has published a consultation paper on draft criteria that will be used to assess whether the aggregation method (AM) developed by the United States provides comparable outcomes to the IAIS' insurance capital standard (ICS).

If the AM is found to provide comparable outcomes to the ICS, it will be considered an outcome-equivalent approach for implementation of ICS as a prescribed capital requirement (PCR). Stakeholders are therefore invited to provide feedback on whether each individual criterion is clear, adequate, sufficient, or too restrictive, considering the high-level principle to which it relates.

It recognises that the resolution of comments received may well lead to changes to the current drafting of the criteria. The consultation closes to responses on 15 August 2022. Following consideration of comments on the draft criteria, the IAIS will finalise the criteria. It expects to begin this assessment in Q3 2023.

The European Parliament's Economic and Monetary Affairs Committee (ECON) has published a draft report on the European Commission's legislative proposal for a Directive amending the Solvency II Directive. In the explanatory statement to the report, Mr Ferber sets out details of the amendments he has proposed on issues including:

• Proportionality. 
• Supporting the recovery and other EU policy objectives. in accordance with actual data experience and to clarify aspects of the matching adjustment.
• The use of level 1 and level 2 legislation. 
• Co-operation between supervisors. 

The European Parliament's Economic and Monetary Affairs Committee (ECON) has published a draft report on the European Commission's legislative proposal for the Insurance Recovery and Resolution Directive (IRRD). In an accompanying explanatory statement, Mr Ferber states that, in his view, the proposed framework raises several questions that have not been answered yet. These include questions about how useful recovery and resolution tools can be in the absence of harmonised rules for insurance guarantee schemes and whether the suggested rules are really a good fit for the insurance sector, which is materially different from the banking sector where many of the IRRD provisions seem to originate from. Among other specific points he highlights, Mr Ferber:

• Questions whether the proposal for member states to designate specific resolution authorities to play an important role in recovery planning and the resolution procedure is helpful, especially given that national supervisory authorities already exist and are familiar with the economic conditions of the insurance market.
• Raises concerns about the suggested scope of the proposal, which would make at least 80% of a member state's life and non-life and reinsurance market subject to pre-emptive recovery planning and at least 70% of its life and non-life and reinsurance market subject to resolution planning.

ECON published a working document on the proposal in March 2022.

Association of British Insurers (ABI) published an article which talks about how the general insurance and long-term savings industry is making significant progress in setting transparent Net Zero targets. It also lists five urgent requests for Government that would enable the insurance and long-term savings sector to maximize the vital role it must play.

Prudential Regulatory Authority (PRA) has launched a data collection exercise (DCE) as part of the Solvency II review. The DCE will explore the potential impact and feasibility of the potential formulation for the credit risk premium and the matching adjustment fundamental spread calibration (MA-FS).

The exercise will assist with the PRA's analysis of, amongst other things, potential reform options relating to MA-FS methodology. A DCE template and instruction document have also been published.  A roundtable event for invited industry participants and their advisors was held on Tuesday 21 June.

The Treasury Committee published a report which outlines that that new forms for scrutiny will be required, given the number of regulatory initiatives is likely to grow as regulators assume additional responsibilities following the UK’s exit from the EU. The Sub-Committee on Financial Services Regulations will take the lead on scrutiny of financial regulatory proposals and will have powers to “send for persons, papers and records” and agree reports.

A new Financial Services Scrutiny Unit is being formed, which will include financial specialists, staff members of the Treasury Committee, and a legal adviser from the Office of Speaker’s Counsel. Specialist advisers will also be appointed to provide the Sub-Committee with detailed and expert knowledge. 

PRA has published its annual report which includes information on its activities for the year ended 28 February 2022. 

Bank of England (BoE) published its climate-related financial disclosure which sets out the Bank’s approach to managing the risks from climate change across its policy functions and operations. BoE will continue to advance its understanding of the macroeconomic implications of climate change and net-zero transition, both domestically and internationally through groups like the G7 and the Network for Greening the Financial System.

The Bank has committed to publish annual climate disclosures. As with the Bank’s previous climate disclosures, this year’s disclosure follows the structure recommended by the Financial Stability Board’s (FSB’s) Task Force on Climate-related Financial Disclosures (TCFD), covering four key elements: governance; strategy; risk management; and metrics and targets.

Financial Conduct Authority (FCA) updated its webpage on the Climate Financial Risk Forum (CFRF). The update concerns the online climate scenario analysis narrative tool, developed by the CFRF Scenario Analysis Working Group, to support smaller firms.

The Working Group will continue to collect feedback from users on this beta version of the tool up to Q3 2022 and will update the tool to enhance content and reflect the latest Network of Central Banks and Supervisors for Greening the Financial System (NGFS) scenarios in Q1 2023.

Her Majesty’s Treasury (HMT) published a news story stating that The Chancellor, Rishi Sunak, and Economic Secretary, John Glen, met with executives from the insurance industry on 27th June as part of its ongoing consultation on post-Brexit reforms to Solvency II insurance regulations. 

The Chancellor valued the perspective of industry, and their input. He also made clear that although the aim is to deliver these ambitious reforms at pace, these reforms are complex in nature and it is important to get them right.

PRA published PS5/22 which provides feedback to responses to Consultation Paper (CP) 4/22 ‘Regulated fees and levies: Rates proposals 2022/23’. It also contains the PRA’s final policy which includes:

• the fee rates to meet the PRA’s 2022/23 Annual Funding Requirement (AFR) for the financial period Tuesday, 1 March 2022 to Tuesday, 28 February 2023 (fee year).
• amendments to the Fees Part of the PRA Rulebook (Appendix 1).

No changes were made to the proposals outlined in the CP. This PS is relevant to all firms that currently pay PRA fees or are expecting to do so within the 2022/23 fee year. The implementation date for the PRA Fees Amendment (No 1) Instrument 2022 was Friday, 1 July 2022. 

Please see below for EIOPA’s response to recent questions, as summarised by our colleagues in KPMG UK. EIOPA has responded to queries where uncertainties exist in the Solvency II requirements. The Solvency II requirements may change or become more prescriptive over time.

07 June: Risk-Free Interest Rate - VA calculations

EIOPA clarified in Q&A (#2400) that the published EUR-duration is being calculated at a lower level in its process to update the representative portfolios.

10 June: IFRS 17 and S2 reporting of premiums and claims

EIOPA clarified in Q&A (#2206) that Insurance group will still continue to report S.05.01 regardless of IFRS 17.

24 June: Cost model not permitted for Solvency II valuation

EIOPA clarified in Q&A (#2357) that as per Article 16(3) of the Delegated Regulations, using a cost model based on deprecation and impairment is not permitted in Solvency II for the valuation of property assets. Even if a cost model is being used in the financial statements of the undertaking, Article 9(3) of the Delegated Regulation requires the undertaking to use an alternative method for the valuation for Solvency II purposes.

29 June: Applicability of concentration risk to intra-group exposures

EIOPA clarified in Q&A (#2384) that point (ii) of Article 184(2)(b) of the DR requires that the counterparty is fully consolidated in accordance with Article 335(1)(a) of the DR. Article 335 of the DR concerns the determination of consolidated data for group solvency according to method 1. Method 1 applies under Solvency II regime at group level. Therefore, the two entities should be consolidated at group level under the Solvency II regime.

29 June: 0% capital charge only applicable for government exposures in currency of that country

EIOPA clarified in Q&A (#2409) that sovereign bond issued by the Republic of Poland denominated in EUR (or USD for example) cannot have the value g_i= 0.

29 June: Look through approach –exemption under article 171a(2)

EIOPA clarified in Q&A (#2422) that the provision in Article 171a(2) can only be applied to certain types of exchange-traded funds (ETFs).

29 June: Determining single name exposure

EIOPA clarified in Q&A (#2428) that when determining the risk factor and the exposure at default for a single name exposure, exposures in the form of bank deposits, which meet the requirements of Article 187(5), Commission Delegated Regulation (EU) 2015/35, should not be taken into account in the calculations.

The Council of the EU has published a press release announcing it has agreed its general approach on the proposed Directive amending the Solvency II Directive. The Council published a compromise text on 16 June 2022, with a note from the Presidency inviting the Council to agree on a general approach on this basis. The general approach reached completes the negotiating mandate agreed by the Council. In the press release, the Council notes (among other things), that its mandate:

• Should ensure a balanced review of the Solvency II prudential framework in terms of capital requirements.
• Improves the protection of insurance policyholders through enhanced co-operation between supervisory authorities and continues to prevent insurer failure.
• Aims to improve proportionality, long-term guarantee measures, cross-border supervision issues and the creation of macroprudential tools.
• Assigns new tasks to EIOPA. These include preparing a report on the assessment of risks related to biodiversity loss by insurers (along with natural disasters and climate related risks) and defining consistent guidelines when assessing macroprudential risks.

The general approach provides the Council Presidency with a mandate for further discussions with the European Parliament, once the Parliament adopts its position on the proposed Directive. The European Commission adopted the proposed Directive in September 2021.

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.