Insurance Insights - November 2022

The vital role of internal audit in building stakeholder trust. KPMG Ireland (led by Patrick Farrell) summarise how Internal Audit (IA) function that can evolve as fast as, and is aligned to, the evolving nature of the organisation. Faced with new business models and increasing complexity, IA should adapt to provide the protection and value their organisation requires.

In July 2022, the European Central Bank’s (ECB) Governing Council increased interest rates for the first time in 11 years, followed by a subsequent increase in September 2022. This follows a series of interest rate increases by the US Federal Reserve and the Bank of England. KPMG Ireland (led by Úna Hegarty (Director in Accounting Advisory Services), summarise how management may need to pay far more attention, than perhaps they have in previous years, to movements in interest rates, given their potential to have material impacts on measurement, presentation and disclosure in the company’s financial statements. 

The Guernsey Financial Services Commission (GFSC) has announced three developments in their policy framework for sustainable finance which came into effect from 20^th September:

1. A Natural Capital Fund framework: a new offer in the Guernsey Sustainable Funds Regime marking the completion of a pledge made as part of COP26 to extend the GFSC’s regulatory regime to include sustainable funds;
2. An expansion of the green criteria in the Guernsey Green Fund regime to include the EU Taxonomy for Sustainable Activities’ technical screening criteria for activities contributing to climate change mitigation and adaptation; and
3. The publishing of anti-greenwashing guidance for the investment sector to ensure that adequate disclosures are made to investors in respect of any environmental sustainability claims made.

Further information in available here.

In October Guernsey Finance celebrated a century of captive insurance in Guernsey at a special event hosted by WE ARE GUERNSEY and the Guernsey International Insurance Association.

More than 100 insurance industry professionals were joined by guests Mark Helyar, of Counsel at Bedell Cristin, Julia Graham, CEO of Airmic and Malcolm Cutts Watson of Cutts Watson Consulting at the impressive Landing 42 of the City of London’s Leadenhall building.

A summary of the event can be found here.

As part of the proposed transition to a predominantly industry-funded model, the Isle of Man Financial Services Authority (IOMFSA) is inviting feedback on the legislation that will implement the Isle of Man Financial Services Authority’s proposed new fees structure.

KPMG advised of the proposed funding model in September 2022 release of Insurance Insights.

The public consultation on the draft Fees Orders and Regulations 2023 has been published online, with a closing date for comments of Tuesday 29 November 2022. The consultation is relevant to all the IOMFSA’s stakeholders and fee payers.

The consultation can be found here.

The Treasury Committee published responses from the Government, Prudential Regulatory Authority (PRA) and Financial Conduct Authority (FCA) to its report on the Future of Financial Services Regulation. In their response, the PRA agrees that the independence of the Bank of England is vital to maintaining the effectiveness of financial regulation. The FCA also supports the Committee’s position on regulatory independence but disagrees with the recommendation that the regulator should ‘have regard’ to financial inclusion, arguing it wouldn’t increase the FCA’s existing ability to act in line with the objectives set for it.

PRA published a discussion paper (DP) describing how it proposes to approach policymaking as it takes on wider rulemaking responsibilities following the UK’s departure from the European Union. The Financial Services and Markets Bill will implement the reforms identified by the government as part of its Future Regulatory Framework Review, which was established to consider how the UK financial services regulatory framework should adapt to be fit for the future outside of the European Union.  

PRA welcome views on the ideas set out in this DP from all interested parties. The period for comment runs until 8th December. 

FCA published a report in which it sets out a range of recommendations for measures that industry, Government and regulators can take to increase the availability and affordability of insurance cover for leaseholders of multi-occupancy building. 

FCA plans to provide an update on progress against the potential remedies in six months. It will also report on a review of the activities of brokers in 2023. 

FCA published the findings from its multi-firm review of general insurance (GI) brokers. The aim of the review was to understand which practices increased or weakened the credibility of firms’ wind-down arrangements. Most firms in the review had both wind-down planning arrangements and formal wind-down plans in place. FCA's findings show that firms need to further improve their wind-down planning and formal wind-down plans.

UK Parliament introduced the Retained EU Law (Revocation and Reform) Bill to Parliament. The Bill is intended to enable HM Government (HMG), via Parliament to amend more easily, repeal and replace retained EU Law. The Bill will sunset the majority of retained EU law so that it expires on 31 December 2023; the sunset may be extended for specified pieces of retained EU Law until 2026.

FCA published an update on Policy Statement 21/11 General insurance pricing practices. FCA notes that under PS21/11 firms were given a one-year transitional period from the date the enhanced PROD 4.2 rules came into effect to comply with the requirement for existing products. The transitional period ends on 30 September 2022. Manufacturers who design products which are sold through overseas intermediaries to cover non-UK risks for customers based outside the UK are also required to comply with the enhanced PROD 4.2 rules. However, distributors outside the UK are typically not subject to its rules. 

FCA has published their expectations of firms in the insurance sector around helping customers through the cost of living. 

PRA published a staff working paper on the effects of subsidized flood insurance on real estate markets. It sets out research in progress by its staff, with the aim of encouraging comments and debate. Subsidized insurance against extreme weather events improves its affordability among households in high-risk areas but it can weaken the risk signal via property prices. 

Ireland has enjoyed several years of back-to-back economic growth, but with recent global geopolitical events putting strain on the global economy, and a cost-of-living crisis eroding disposable incomes, how will Ireland fair as the world faces a potential downturn? KPMG, led by Dr. Daragh McGreal (Director – Head of Strategic Economic) examines Ireland’s economic outlook.

The CBI has launched a Discussion Paper on the review of the Consumer Protection Code. The Discussion Paper is part of an extensive engagement programme with a wide range of people and organisations to hear their views and experiences. The feedback received will inform the CBI’s decision-making on proposed revisions to the Code. Those proposed revisions will in turn be the subject of a formal public consultation on proposed changes to the Code. You can also read the CBI Governor remarks on the Discussion Paper here. 

Consultation Paper (CP) 151 is amongst a number of recent publications relating to climate change, including the Central Bank of Ireland (CBI)’s letter setting out its supervisory expectations in relation to climate and other Environment, Social and Governance (ESG) issues from November 2021, and EIOPA’s recent application guidance on climate change materiality assessments and climate change scenarios in the ORSA. KPMG Ireland’s Insurance sector experts and Sustainable Futures team (led by Jean Rea (Partner in Actuarial and Applied Intelligence), Patrick Farrell (Partner in Risk Consulting and Russell Smyth (Head of Sustainable Futures) ) have prepared a short summary of the guidance and what insurers should do next. 

The CBI Director of Insurance Supervision, Domhnall Cullinan, provided remarks at Financial Services Ireland. The remarks covered the current uncertain economic environment, gatekeeping, and highlighted the issues under the consideration by the CBI for the insurance industry in 2023. 

EIOPA has published a supervisory statement on exclusions in insurance products related to risks arising from systemic events. EIOPA has developed the supervisory statement under Chapter V of the Directive on insurance distribution (IDD) and Delegated Regulation (POG Delegated Regulation). The aim of the supervisory statement is to promote supervisory convergence regarding how national competent authorities (NCAs) assess the treatment of exclusions as part of the product design and terms and conditions drafting process.

EIOPA has published a supervisory statement on the management of non-affirmative cyber underwriting exposures. EIOPA has developed the supervisory statement under Articles 44(1), 45(1) and (2) and 183 to 186 of the Solvency II Directive. It explains that the supervisory statement delivers on EIOPA's strategic priorities for the European cyber insurance market with specific reference to non-affirmative cyber risk and sound management of policy wording and presentation of information. The aim of the supervisory statement is to promote supervisory convergence in how national competent authorities (NCAs) address the market in relation to cyber risks.

EIOPA has published its strategy for the period 2023-26. It states its mission is to protect the public interest by contributing to the short-, medium- and long-term stability, effectiveness, and sustainability of the financial system for the EU's economy, citizens and businesses. Its strategic objectives are to strengthen the resilience and sustainability of the financial sector, thereby safeguarding its effectiveness, level playing field and financial inclusion, and to ensure strong and consistent protection of consumer interests across the EU.

EIOPA has published a report and factsheet setting out the findings from its thematic review on the functioning of the EU market for credit protection insurance (CPI) products sold via banks, acting as insurance intermediaries. The thematic review focused on identifying potential sources of conduct risk and consumer detriment to allow EIOPA and national competent authorities (NCAs) to take relevant policy and supervisory measures if needed. It also assessed whether consumers are treated fairly within "bancassurance" business models.

EIOPA has also issued a warning to insurers and banks (acting as insurance distributors) to ensure CPI products offer fair value to consumers. 

EIOPA published the European Insurance Overview 2022 which is an extension of EIOPA's statistical services to provide an easy-to-use and accessible overview of the European (re)insurance sector. The report is based on annually reported Solvency II information. 

European Parliament's Committee on Economic and Monetary Affairs (ECON) has published a study on the prudential treatment of equity exposures. The study assesses the impact of amendments to Solvency II as well as the expected impact of the two European Commission (EC) proposals on equity investments by insurance companies. 

The three European Supervisory Authorities (ESAs) have delivered to the EC their Final Report with draft Regulatory Technical Standards (RTS) regarding the disclosure of financial products’ exposure to investments in fossil gas and nuclear energy activities under the Sustainable Finance Disclosure Regulation (SFDR). In the draft RTS, the ESAs propose to add specific disclosures to provide transparency about investments in taxonomy-aligned gas and nuclear economic activities. The EC will scrutinise the draft RTS and endorse them within three months of their publication. 

The International Association of Insurance Supervisors (IAIS) has published a joint note, developed with the Access to Insurance Initiative (A2ii), on the role of insurance supervisors in multi-stakeholder approaches to address pandemic protection gaps. The note, which has been written by IAIA and A2ii staff members, examines the role insurance supervisors could play in the design, development and implementation of insurance-based programmes for pandemic risk. It considers key characteristics of proposals in this area, including public-private partnerships (PPPs) and risk pools, and outlines the role(s) supervisors can play as future initiatives are developed. The note focuses on gaps in coverage for types of risk where diversification is more difficult to achieve, particularly coverage for non-damage business interruption (BI) losses in the context of pandemics.

The International Association of Insurance Supervisors (IAIS) has published their September Newsletter.

The Court of Justice of the EU (ECJ) has given a preliminary ruling in a reference concerning the definitions of "insurance intermediary", "insurance mediation" and "insurance distribution" under the Insurance Mediation Directive (IMD) and the Insurance Distribution Directive (IDD), in the context of arranging membership of a group insurance policy. 

The Reinsurance Advisory Board (RAB) has published its comments on the CBI’s consultation paper on its guidance for (re)insurance undertakings on intragroup transactions and exposures. In the RAB’s view, the CBI should explicitly recognise the potentially most important benefit of membership of a (re)insurance group: the diversification of risk. Intragroup transactions (IGTs) are an essential tool for facilitating the diversification of group-wide risks, which enhance the financial strength of a (re)insurance group and its subsidiaries.

IE is seeking feedback on the Sustainable draft report on minimum safeguards (MS). The report advises on the application of MS in relation to the Taxonomy Regulation Articles 3 & 18. It does so by a) embedding MS in existing EU regulation, b) identifying substantive topics relating to the standards and norms referenced in Article 18 of the Taxonomy regulation and c) presenting advice on compliance with MS.

IE has issued a Risk based underwriting FAQ on the right to be forgotten. The FAQ covers a number of questions in respect of the ‘right to be forgotten’ for cancer survivors as part of the European Commission’s “Beating Cancer Plan”.

IE has issued their concerns with regard to the review of the Consumer Credit Directive. The European Parliament has called for the introduction of an EU-wide right to be forgotten (RTBF) for persons with a prior diagnosis of certain communicable and non-communicable diseases, including cancer. Insurance Europe is concerned that such an approach is not compatible with private insurance and would be to the detriment of consumers, including those whom an RTBF is intended to benefit.

IE has published information on how to make the EU Data Act work from the perspective of insurers. The information addresses “What to keep in the act” and “How can the Data Act enable the development of innovative digital services” and “What can be improved”.

IE has issued the key messages on the review of the Motor Vehicle Block Exemption Regulation (MVBER). Insurance Europe welcomed the draft regulation extending the MVBER for five years and the draft communication introduced targeted updates to the additional automotive guidelines. 

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.

EIOPA clarified in Q&A (#2474) that “alternative investments” means collective investment undertakings, including investment compartments thereof, which: 

• raise capital from several investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors and 
• do not require authorisation pursuant to Article 5 of Directive 2009/65/EC. 

These funds would be identified with CIC code ‘4’.

EIOPA clarified in Q&A (#2403) that premiums that are not yet due should be included in the Technical Provisions (if they are within the contract boundary) and should not be included in the Counterparty Default Risk sub-module of the SCR. However, if monthly payments are arranged to facilitate a payment schedule for an annual premium that has already fallen due, then those monthly payments should be classified as a policyholder debtor and included within the Counterparty Default Risk sub-module of the SCR.

EIOPA clarified in Q&A (#2465) that “written/earned premiums” is in alignment with the definition used in the Directive 91/674/EEC. While the current Implementing Regulation (EU) 2015/2450 (ITS on Reporting) refers to the Directive 91/674/EEC in its draft amendments this reference is deleted and a reference to Article 1(11) and (12) of Delegated Regulation (EU) 2015/35 is included. Acknowledging, that the application date of IFRS 17 (January 2023) precedes the implementation date of the ITS amendments on reporting for the first 3 quarters in 2023 the insurance and reinsurance undertakings shall report written/earned premiums as defined in Article 1(11) and (12) of Delegated Regulation (EU) 2015/35 regardless of whether they use IFRS 17 or local GAAP. The requirement is in line with the current ITS and with its amendments.

EIOPA clarified in Q&A (#2272) that IFRS 9 allows both 'trade date' and 'settlement date' accounting for 'regular way purchase or sale', which means that either the transaction is already recognised at reporting day under 'trade day accounting' or will only be recognised after the reporting day following 'settlement accounting'. In the trade day account case, the outstanding amount is a receivable/ payable, whereas in the 'settlement accounting' case nothing is booked before settlement day.

EIOPA clarified in Q&A (#2211) that undertakings usually retain the risks and benefits of collaterals pledged and, for this reason they remain in the Balance Sheet of the undertaking. If that is not the case and the cash posted as collateral has been derecognised, therefore it should not appear in S.02.01 and S.06.02. In that case, there is also no SCR stress for the cash. However, collaterals posted usually remain in the Balance Sheet. In that case, cash posted as collateral should appear in S.02.01 together with the rest of the cash (R0410). In S.06.02 the cash should also appear, but it should be identified as pledged as collateral in C0100. Therefore at least two separate lines for cash would be needed in S.06.02: one for the cash posted as collateral and one for the rest. Regarding the treatment for SCR purposes, the fact that the cash is pledged as collateral does not affect the stress (except in case the cash was derecognised, where no stress is needed since it would be off-balance).