Insurance Insights

The insurance industry, like most other business sectors, has seen a reshaping of attitudes towards Diversity, Equity and Inclusion (DEI) in recent years and alignment around the need to address it. We have seen major civil society driven movements such as Black Lives Matter (BLM and #MeToo that have brought DEI into the spotlight. Further to this, initiatives in the UK such as the Insurance Women’s Inclusivity network, the Insurance Cultural Awareness Network and the ABI Diversity, Equity and Inclusion Blueprint are having a tangible impact on the sector in this area.

Nevertheless, compared to other industries, the insurance and wider financial services sector are not leaders in DEI.

What more needs to be done to make the insurance industry a fair and inclusive place to work?

Mel Newton, Partner, FS People Consulting, KPMG in the UK discusses how things stand around DEI in Insurance and our new Reshaping DEI in Insurance report developed in collaboration with the Association of British Insurers.

A new era in audit is emerging as ESG and reporting regulations challenge business leaders like never before. Audit quality continues to be vital in underpinning trust in the capital markets. All the while, the audit profession is evolving in keeping up with these challenges. Emer McGrath, Head of Audit at KPMG Ireland, says that the key change is how we collaborate – in teams, with colleagues and with clients. 

Ensuring appropriate levels of corporate tax are paid by multi-national companies in a digital world has increasingly preoccupied governments over the last decade. We have all seen media stories of world-leading digital technology companies under fire over how much tax they pay relative to their revenue in countries like the UK. Since the financial crisis, pressure has also grown on low-tax jurisdictions that have attracted significant amounts of business by creating tax levels that larger countries cannot compete with.

In July 2021, leaders of 130 countries under the OECD’s Base Erosion and Profit Shifting project approved an outline framework for a global minimum tax regime created by the OECD and called “Pillar 2” for short. Implementation of this regime is now becoming urgent for many firms, including insurers.

Damon Lambert, Tax Partner, Insurance, KPMG in the UK has identified the key areas to focus on ahead of Pillar 2 commencing on 1 January 2024.

The Isle of Man Financial Services Authority is progressing plans to update the way it supervises regulated entities and designated businesses.  Internal restructuring is currently taking place at the financial regulator to support the implementation of an enhanced risk-based supervisory framework.

Bettina Roth, the Authority’s Chief Executive Officer, outlined the changes during Friday 3 February 2023 Manx State of the Nation conference at the Comis Hotel.  The intention is to focus the Authority’s resources on the risks that pose the biggest threat to its regulatory objectives of protecting consumers, reducing financial crime, and maintaining confidence in the Island’s financial services sector.

The revised supervisory methodology has been in development for some time, with the project highlighted as a priority in the Authority’s Strategic Plan and Annual Report.

The Central Bank of Ireland (CBI) has published a speech by Governor Gabriel Makhlouf at the Hertie School, Berlin, discussing ‘building resilience over the past decade’ in the European financial system.

The CBI views the management of outsourcing risk as key from both a Prudential and Consumer Protection perspective. KPMG Ireland (led by Leticia Cashin, Director, Actuarial) and John O’Donnell (Managing Director, Insurance Regulatory) discuss how regulated financial service providers in Ireland (“regulated firms”) are expected to have effective governance, risk management and business continuity processes in place in relation to outsourcing, to mitigate potential risks of financial instability and consumer detriment. 

The CBI introduced pre-emptive recovery planning requirements for (re)insurers in 2021 requiring (re)insurers to have a recovery plan in place since 31 March 2022. The Central Bank wrote to insurers in November 2022 setting out the observations from its thematic review of 71 Recovery Plans comprising of all High & Medium-High insurers' Recovery Plans and a sample of Recovery Plans prepared by Medium-Low & Low insurers. The CBI noted that undertakings have made good progress in understanding the recovery planning requirements and guidelines, however noted that there was some variance in the quality of the recovery plans shared with the Central Bank and that they expected that plans will develop further as they become more mature over future iterations. Further details of the review can be found here.

On 17 November 2022, the CBI issued a Dear CEO Letter to all regulated financial service providers (“Firms”). KPMG Ireland (led by Gillian Kelly, Aine MacDonnell, Director and Noel Moloney, Risk Consulting Director) discuss the purpose of the Dear CEO letter, which was to draw attention to the key risks previously identified in the CBI Consumer Protection Outlook Report of March 2022 and to emphasise the importance to Firms of meeting its expectations in light of the more challenging economic outlook.

The International Association of Insurance Supervisors has (IAIS) published its roadmap for 2023-24. The roadmap outlines the projects and activities that form the IAIS' work programme over the next two years, guided by its Strategic Plan 2020-24. The IAIS will prioritise efforts on key multi-year projects while also responding to the various global issues and trends facing the insurance sector. In 2023-24, the IAIS will provide significant work programme continuity with activities focused on, for example, finalising the development of global standards, in particular, the Insurance Capital Standard (ICS) for internationally active insurance groups (IAIGs) and assessing trends and risks in the global insurance sector through the global monitoring exercise (GME), which is an important pillar of the holistic framework for the assessment and mitigation of systemic risk.

The IAIS has published their Newsletter, dated December 2022 – January 2023. This includes endorsement of the IAIS Holistic Framework for the assessment and mitigation of systemic risk in the insurance sector, publication of the 2022 Global Insurance Market Report and the 2023-2024 Roadmap, reporting on diversity, equity and inclusion action in the insurance sector, publications on trends related to FinTech and SupTech. 

The IAIS has published a draft issues paper on roles and functioning of policyholder protection schemes (PPSs) for consultation. Issues papers often form part of the preparatory work for developing standards and can contain recommendations for future work by the IAIS. This paper provides an updated overview of global practices on PPSs and their roles in insurance resolution and related activities.

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 (#2480) that Article 189(7) of the Delegated Regulation (EU) 2015/35 refers to investment guarantees provided by a third-party to the policyholders. That provision is not applicable to a situation where an asset invested in by an insurance undertaking provides a guarantee to that undertaking, but not to its policyholders. Structured notes can have widely different features. For this reason, there is no general answer about their inclusion in the market concentration risk sub-module and counterparty default risk module; the treatment should be determined on a case-by-case basis taking into account the various underlying components of the structured note (e.g. the fixed income part and a series of derivative components) as well as the corresponding capital requirements as stated in Guideline 5 of the Guidelines on the treatment of market and counterparty risk exposures in the standard formula: “Where the asset can be considered as the composite of discrete components, undertakings should where appropriate apply the relevant stresses to each of these components separately."

EIOPA clarified in Q&A (#2330) that as per Article 84(2) of the Delegated Regulations (EU) 2015/35, indirect exposures to market and counterparty risk should be captured within the Solvency Capital Requirement. As per Guideline 2 of the Guidelines on look-through, firms should iterate the look-through approach so as to be satisfied that all direct and indirect risks have been captured. The formulaic calculation of each risk is given in each submodule. The firm should include the indirect exposure to the loan at SPV level in each submodule where there would be a change in own funds arising under the calculation.

EIOPA clarified in Q&A (#2353) that the economic penalties described in the question does not imply that the policyholder is legally enforced, or in other words legally obliged, to pay the premium, thus such penalties should not be considered as an ability to compel the payment of the premiums. The presence of any penalty related to the payment of future premiums does not overrule article 18(5) of the delegated regulation 2015/35. Thus, if the payment of the future premiums cannot be legally enforced, in the absence of a compensation for a specified uncertain event that adversely affects the insured person and of a financial guarantee of benefits, the future premiums will always fall outside the contract boundaries. The fact that these future premiums fall outside the contract boundaries does nonetheless not imply the discontinuance of the concerned insurance policies. The undertaking will, according to guideline 0, still have to take realistic discontinuity options into account.

EIOPA clarified in Q&A (#2200) that as per Article 15(3) of the Delegated Regulation (EU) 2015/35, a Deferred Tax Asset (DTA) needs to be valued taking into account any legal or regulatory restrictions on the ability to utilise that asset. This should include any restrictions which arise from the existence of ring-fenced funds. After all restrictions have been incorporated within the valuation, netting of the overall DTA and DTL amounts at entity level would be appropriate, and any net amount of DTA can be recognised as Tier 3 own funds. Please find further information related to the reporting in Q&A (#2354). As stated in Article 9 of the Delegated Regulation (EU) 2015/35, insurance and reinsurance undertakings shall value assets and liabilities in accordance with international accounting standards adopted by the Commission pursuant to Regulation (EC) No 1606/2002 provided that those standards include valuation methods that are consistent with the valuation approach set out in Article 75 of Directive 2009/138/EC.

EIOPA clarified in Q&A (#2483) that changes in ITS regarding definition of reinsurance recoverable and, respectively, definitions of reinsurance receivables and reinsurance payables, were intended to implement the approach presented by EIOPA in Q&A (#1853). At the same time, EIOPA wants to clarify that the answer in Q&A 1853 regarding the “uncertainty" of the payment was given in relation to claims and not premiums. In case of premiums in most of the cases the amounts are known and mentioned “uncertainty" feature cannot be used as determining whether or not the specific premium payment should be in the receivables/payables or in the best estimate/recoverable. 

Additionally, EIOPA wants to underline that according to Q&A 1853 everything related to the best estimate of the technical provisions should be represented in reinsurance recoverable and respectively according to explanation in ITS amendments to the item “Reinsurance payables" (C0010–C0020/ R0830) for “the “Solvency II value" column all expected payments (due and past-due) from the undertaking to reinsurers that are not included in reinsurance recoverable should be included in this item. 

Therefore, considering the example given by the insurance company in the inquiry according to which the policyholder does not pay the premium and expected payments from policyholder will be reported in receivables (i.e., “Insurance and intermediaries receivables") and not in the technical provisions – EIOPA confirms that in this case the appropriate reinsurer's share should be reported in the reinsurance payables and not in reinsurance recoverable.