Insurance Insights - January 2023

As more companies embrace digital transformations and big data, Internal Audit functions must keep pace. The starting point is data analytics. However, many Internal Audit functions are not realising the well-known benefits of data analytics. KPMG Ireland (led by Patrick Farrell (Partner, Risk Consulting) and Colm Laird (Director, Risk Consulting)) have summarised how capitalising on the wealth of data now available both from internal and external sources, Internal Audit functions can provide even greater assurance and added value insights not previously possible. Top performing Internal Audit functions have already adapted their processes and are now data - and technology - focused having invested significantly in their skillset and technological tools to help move into this adviser role. 

“Key issues impacting the insurance industry” was the main focus of KPMG Ireland’s Annual Insurance Briefing. Andrew Candland, Head of Actuarial, Advisory and Major International Insurance Firms at the Central Bank of Ireland (Central Bank) provided an update on progress on the on the 2022 regulatory priorities and gave his perspective on the key focus areas for the Central Bank in 2023. Ciara Wrafter (Partner, KPMG Tax) provided a tax update on the sector, while Una Hegarty (KPMG Accounting Advisory Services) gave an update on financial reporting. The briefing ended with a Regulatory & Risk Q&A with Jean Rea (Partner, KPMG Actuarial & Applied Intelligence) and John O’Donnell (Managing Director, Insurance Regulatory).

The Isle of Man Financial Services Authority (IOMFSA) has published an update to reflect feedback to a public consultation that took place in October and November 2022 on the proposed changes to the IOMFSA’s predominantly industry-funded model, to be effective from 1 April 2023.

Legislation to implement the Isle of Man Financial Services Authority’s proposed new fee structure will be laid before Tynwald in March 2023.

The updated feedback can be found here.

The Central Bank has published an Economic Letter, “Engagement, switching and digital usage in consumer and insurance markets: who does it and why it matters”. The Letter investigates the patterns of engaging and switching among the car and home insurance consumers in Ireland. Furthermore, the Letter examines the characteristics typically associated with consumers who are uncomfortable searching for and purchasing financial products, including insurance, online. 

The Central Bank held its first Financial Services Conference in November. The conference brought together diverse perspectives from industry leaders, consumer representatives, and international policymakers – from Ireland and across the EU – to discuss and debate the driving forces shaping the financial system.  A summary of the conference themes is available here.

The Central Bank has published the Intermediary Times newsletter for 2022. The purpose of this newsletter is to highlight specific areas of interest, including potential risks to business, and what one can do to develop business in a way that puts consumers first. This edition contains information on recent developments such as the Retail Intermediary Authorisations Webinar, changes to the Fitness & Probity application process and Central Bank Portal and issuing of the 2021 industry funding levy.

The Central Bank of Ireland has published its December 2022 Insurance Newsletter. The Newsletter includes Insurance Insights on inflation, the thematic review of (re)insurers’ Recovery Plans and key sectoral risks for (re)insurers in Ireland.  

The International Association of Insurance Supervisors (IAIS) has published its Newsletter, dated November 2022. The issue includes a recap of the Annual General Meeting and Annual Conference including articles covering the many activities achieved during the IAIS committee meetings. An update on key IAIS activities and summary of the role of the insurance sector is available here.

In response to stakeholder comments on the draft criteria that will be used to assess whether the Aggregation Method (AM) provides comparable outcomes to the Insurance Capital Standard (ICS), the IAIS has decided to provide additional opportunity for stakeholder engagement on the development of scenarios that will be used to inform the assessment. Further details on the timing and format of the workshops will be provided shortly. Accordingly, the IAIS has decided to extend the period for the design of the scenarios and move consideration of the final criteria from November 2022 to March 2023. However, this will not impact the timing of the AM comparability assessment, which remains scheduled to begin in the second half of 2023.

The International Association of Insurance Supervisors (IAIS) has published a stocktake report on diversity, equity and inclusion (DEI) in the insurance sector. In the report, the IAIS aims to take stock of the work on DEI that is being undertaken by insurance supervisors, relevant international organisations and the insurance industry, to identify areas where the IAIS could do further work in this area, in support of its mission and strategic plan.

IAIS has published a consultation paper on its review of the individual insurer monitoring (IIM) assessment methodology, which is used to calculate individual insurers' systemic risk scores. The IAIS is continuing to enhance its holistic framework for assessing and mitigating systemic risk in the insurance sector. A key element of the holistic framework is the global monitoring exercise (GME), which is designed to detect key risks and trends and the potential build-up of systemic risk in the sector.

The International Association of Insurance Supervisors (IAIS) has issued two publications showcasing work on digital innovation:

• An IAIS Report on FinTech developments in the insurance sector; and
• A Joint Note with the Access to Insurance Initiative (A2ii) and the Financial Stability Institute (FSI) of the Bank for International Settlements (BIS) on the role of supervisory technology (SupTech) in insurance supervision.

Please see below for EIOPA’s response to a selection of 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. Click here to search the full list of Q&A questions and responses. These may have relevance to Guernsey and Isle of Man markets now or in the future.

EIOPA clarified in Q&A (#2451) that for the purpose of the calculation of the expected profits in future premiums as set out in Article 260 of the Commission Delegated Regulation 2015/35, a split in the insurance obligations should be made into those attributable to already paid-in premiums and those attributable to premiums in respect of business in force which are receivable in the future. In the first example there is no premium receivable in the future, the EPIFP is therefore indeed equal to 0. In the second example, if the expected present value of the only premium which is receivable in the future is equal to 50, of which 5 is expected profit, then the EPIFP is indeed equal to 5.

EIOPA clarified in Q&A (#2368) that according to Article 189(3) of the Delegated Regulation (EU) 2015/35, type 2 exposures should consist of all credit exposures which are not covered in the spread risk sub-module and which are not type 1 exposures. “Commission rebate" cash flows from intermediaries should be included in the calculation of the capital requirement for counterparty default risk on type 2 exposures in the counterparty default risk submodule of the Standard Formula.

EIOPA clarified in Q&A (#2410) that when applying Article 184 DR to compute the amount mentioned in Article 336(d) DR for an undertaking referred to in Article 335(1)(f), the calculation base of the market risk concentration sub-module 'Assets' should be equal to the value of all the assets this undertaking holds excluding the assets listed in Article 184(2) (a) to (f). Assets held by other entities within the group should not be considered in the calculation base.

Please see also Q&A (#1417). Please note in particular that when determining the “SCR of other undertakings" (Article 335(1)(f) DR) in order to compute the SCR at group level, undertakings should not assume that “all the related undertakings cumulated according to Article 335(1)(f) fall under the same single name exposure".

EIOPA clarified in Q&A (#2393) that as noted in the question, future premiums that are within the contract boundary of the technical provisions would be expected to be included within the calculation of the lapse risk submodule. Article 189(3) of the Delegated Regulation (EU) 2015/35 gives examples of the credit exposures that should be included within the counterparty default risk submodule. In order to avoid double counting, element (b) 'policyholder debtors' should be taken to relate to premiums that are overdue, rather than those payable in the future.

EIOPA clarified in Q&A (#2375) that the definition of realised and unrealised gains and losses in the financial assessments may depend on whether IFRS or local GAAP are applied, for this reason EIOPA defined realised and unrealised gains and losses for the purposes of S.09.01 reporting. In any case, the total amount of gains and losses reported in S.09.01, i.e., the sum of C0070 to C0110 is not expected to reconcile with gains and losses from investments in the financial statements as valuation in Solvency II and the financial statements is not equivalent. The same holds true for net (realised) gains and losses and unrealised gains and losses. In S.09.01 net (realised) gains and losses should include gains and losses from assets sold or matured during the period excluding interest, dividends and rent; while unrealised gains and losses should include gains and losses from assets that have neither matured nor been sold during the period also excluding interest, dividends and rent". The cells for interest, dividends and rent include the amounts of interest, dividends and rent earned during the period regardless of whether the asset has matured or been sold during the period.

EIOPA clarified in Q&A (#2324) that pursuant to Article 20(5) IDD, pre-contractual information referred to in paragraph 4 of the same Article must be provided by way of a standardised insurance product information document. Therefore, IPID is intended as a stand-alone standardised pre-contractual document to enable comparability for a target market across non-life products offered by different distributors. The substance of the IPID is connected to the insurance product designed for the target market, not to the particular bespoke insurance contract between the parties.

Therefore, where the changes made to the insurance contract are not the consequence of changes to the insurance product, the insurance distributor does not have to update the IPID (as a stand-alone document provided for the target market).

EIOPA clarified in Q&A (#2250) that Articles 172-175 of Directive 2009/138/EC (Solvency II) provide for rules applicable to third-country reinsurers operating in the Union.

Those Articles lay down, together with the corresponding delegated acts, the conditions under which a third country regime for reinsurance is to be considered equivalent or not (including on a temporary basis). Reinsurers established in third countries that are subject to an equivalence decision have a right to provide services in all EU Member States. In the absence of an equivalence decision, EU Member States retain the right to determine the conditions under which third country reinsurers may provide services in their respective territories.

Article 211 of Commission Delegated Regulation (EU) 2015/35 sets out the conditions under which reinsurance contracts can be recognised as risk mitigation techniques. This regulation is directly applicable in all Member States and supersedes national legislation. Its provisions apply to contracts concluded by third country providers either under an equivalence decision or under national regimes. 

EIOPA clarified in Q&A (#2239) that the answer to this question is provided by the European Commission: 

Motor third party liability (MTPL) insurance is compulsory insurance against civil liability in respect of the use of motor vehicles based on Directive 2009/103/EC (Motor Insurance Directive). It is often combined with so-called motor casco or vehicle own-damage insurance. In principle, ancillary insurance distributors, such as car dealers, can distribute both insurance products. However, there are certain conditions to be observed, as follows:

‘Ancillary insurance intermediaries’ are defined in Article 2(1) point 4 IDD. It follows that, as a form of liability insurance, MTPL insurance can only be distributed on an ancillary basis if it covers a motor vehicle sold by the ancillary insurance intermediary as its principal professional activity. This means that practically only car dealers and other professional providers of motor vehicles can act as ancillary insurance distributors for MTPL insurance products.

‘Ancillary insurance intermediaries’ who offer their customer an insurance coverage on a sale of a car fall within the scope of the Directive provided the insurance coverage includes MTPL insurance, since the exemption clause in Article 1(3) IDD does not include insurance against liability risks. Such intermediaries have to register as ancillary insurance intermediaries under IDD and must comply with the IDD rules applicable to them. Car dealers may be exempted if they limit their offer to motor casco insurance products covering the risk of breakdown, loss of or damage to the car sold, provided that all the conditions set out in Article 2(1) and Article 1(3) IDD are complied with.

 Article 1(3) IDD applies, Article 1(4) IDD also has to be complied with. This provision puts additional obligations on insurers and insurance intermediaries that carry out a distribution activity through an exempted ancillary insurance intermediary, are responsible for compliance with Articles 17 and 24 IDD, and for considering the demands and needs of the customer before the proposal of the contract.

EIOPA clarified in Q&A (#2218) that the answer to this question is provided by the European Commission: 

‘Ancillary insurance intermediaries’ are defined in Article 2(1) point 4 IDD. Article 1(3) IDD provides some exemption to ancillary insurance intermediaries from the scope of the Directive. In all these cases, the only decisive factor is that the respective distributors and the insurance products proposed fulfil cumulatively each of the conditions set out in Article 2(1) point 4 and Article 1(3) IDD. Finally, if the exemption of Article 1(3) IDD applies, Article 1(4) IDD also has to be complied with. This provision imposes additional obligations on insurers and insurance intermediaries that carry out a distribution activity through an exempted ancillary insurance intermediary, are responsible for compliance with Articles 17 and 24 IDD, and for considering the demands and needs of the customer before the proposal of the contract.