KPMG Updates
Insurance innovation: What trends are driving change in 2023 and beyond?
Insurtech and Environmental, Social Governance (ESG) are impacting on insurance, with trends including the global climate agenda and the emergence of new technologies such as Internet of Things and data analytics. KPMG Ireland (led byJean Rea, KPMG’s Actuarial and AI Partner) look at some of the key trends.
Professional Services in the AI age
Generative AI will transform almost every aspect of business operations in the coming years. From data analysis and marketing to optimising operational efficiency and enterprise value (EV), no area will be unaffected.
Sam Taylor, Director, Strategy & Performance Transformation for KPMG UK discusses the core competencies of generative AI, explore the reason firm’s engage consultants, and how generative AI might change the consulting profession.
Celebrating our anniversaries in the Crown Dependencies
2023 is a milestone year for our firm, as KPMG in the Crown Dependencies marks a number of key anniversaries across Guernsey, Jersey and the Isle of Man. From our earliest traces in Guernsey in the late 19th Century, to expanding to Jersey in 1973 and then forming the Isle of Man firm a decade later – the story of KPMG in the Crown Dependencies is rich with history.
Our history is fascinating, and we’re delighted to now mark more than 100 years physical presence in Guernsey, 50 years in Jersey and 40 years in the Isle of Man.
Learn more about our rich local heritage.
Let’s talk about regulatory culture
"Culture matters. Not only because it’s about doing the right thing, but a positive workplace culture impacts so many other areas within a firm. It can often be a difficult balance to get right, and yet it is so important."
Elaine McCormack, Associate Director in our Advisory team, explores what the term ‘culture’ really means.
Read the full article.
Guernsey Updates
Guernsey Financial Services Commission publishes 2022 annual report
On 1 June 2023 the Guernsey Financial Services Commission (Commission) published its 2022 annual report and financial statements.
In the annual report, the Commission discusses: the increased risks faced by the financial services sector as a result of high inflation and rising interest rates; its continued development of digital technology to enhance performance; its work with Guernsey Finance and others to develop the Bailiwick’s proposition in the fast growing sustainable finance sector and its support for the Bailiwick’s preparations for the impending MONEYVAL inspection.
Isle of Man Updates
Isle of Man launches dedicated Employee Benefits website
As part of Isle of Man’s focus on driving International Employee Beenfit opportunities in the Isle of Man, and following the launch in August 2022 of a new branch of the International Employee Benefits Association and the establhment of an Employee Benefits Cluster, a dedicated website has now been implemented.
The cluster and website showcase the businesses providing administration & technical expertise, governance and support services to international employee benefits programmes with an aim to:
- Deliver seamless solutions to global benefit programmes
- Provide a unified industry platform for ideas and opportunities
- Develop talent and professional standards in employee benefits
- Promote the Isle of Man globally as a centre of excellence for employee benefits
- Grow existing, and attract new, employee benefits businesses to the Isle of Man
- Our collaboration makes the sum of the parts greater than the whole.
UK Updates
PRA 2023/24 Business Plan
On 2 May, the PRA published its 2023/24 Business Plan, setting out the workplan for its four strategic priorities. This covers the Solvency II review, introduction of a resolution regime, the next insurance stress test, reinsurance risk and the impact of claims inflation all featuring.
FCA 2023/24 Business Plan
On 4 April, the FCA published its Annual Business Plan. The plan reiterates activity that has been previously published or scheduled and covers the plan for the creation of a new Interventions team within Enforcement specifically for Consumer Duty. This function will be operational from August 2023 to enable rapid action where immediate consumer harm is detected. Insurers should therefore be paying close attention to the suite of Dear CEO letters the FCA has issued on the key risks it views in the sector impacted by Consumer Duty.
FCA Consultation on Multi-occupancy building insurance
On 21 April, the FCA issued a consultation on new rights and protections for leaseholders to improve the transparency of the multi-occupancy leasehold buildings insurance market. Under the proposals, leaseholders would be defined as customers of buildings insurance, require insurance firms to act in leaseholders’ best interests and improve transparency.
Central Bank of Ireland Updates
Speech: the Individual Accountability Framework
The Central Bank of Ireland (“Central Bank”) has published a speech on 18 April 18, by Deputy Governor Derville Rowland, titled “Enhanced governance, performance and accountability in financial services: the Individual Accountability Framework”. The speech covers a wide breath of topics, including: the Report on the Behaviour and Culture of the Irish Retail Banks, Senior Executive Accountability Regime (SEAR), responsibilities of non-executive directors within the scope of SEAR, conduct standards and the interaction of the above with the Fitness and Probity Regime.
Fitness and Probity Enforcement
The Central Bank published an industry letter and new guidance on 21 April on Fitness and Probity Investigations, Suspensions and Prohibitions. The update follows commencement of Part 3 of the Individual Accountability Framework and aims to provide individuals, regulated financial service providers and holding companies with an overview of how fitness and probity investigations, suspensions and prohibitions operate.
Annual Report and Annual Performance Statement 2022
The Central Bank published its Annual Report and Performance Statement on 24 May. The report addresses a number of topics including the Central Bank strategy for 2022-2026. The Central Bank priorities for 2023 are detailed in Chapter 4 (pg.65), which will be of particular interest for the insurance sector.
International Association of Insurance Supervisors Updates
Addressing natural catastrophe protection gaps
The International Association of Insurance Supervisors (IAIS) published a statement dated 28 April on the role of insurance supervisors in addressing natural catastrophe protection gaps. The IAIS notes that enhancing resilience against intensifying natural disasters is a pressing challenge for jurisdictions across the globe, and the damage and economic losses caused by natural catastrophes are increasing.
Global Insurance Market Report
On 21 April, IAIS published a special topic edition of its global insurance market report (GIMAR), which provides an assessment of cyber risks in the insurance sector and financial stability implications. In the report, the IAIS sets out an analysis of the risks and trends associated with cyber insurance coverage, cyber resilience in the insurance sector and the impact these risks may have on financial stability.
Insurance Europe Updates
Feedback to EIOPA on the application of the Insurance Distribution Directive
On May 2nd, Insurance Europe (‘IE’) published its feedback to EIOPA on the application of the Insurance Distribution Directive (‘IDD’). IE provides feedback on a number of issues such as Digitalisation & Sustainability while drawing EIOPA’s attention to additional issues the industry is experiencing that are not addressed directly during the discussions.
EIOPA Q&As
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.
4 May: Risk concentration
EIOPA clarified in Q&A (#2408) the sequence of the calculation in the market risk concentration sub-module, namely that “[individual] exposures should […] first be mapped to credit quality steps and relative excess exposure thresholds, and risk factors should subsequently be applied at the level of single name exposures.” (See recital 31 of that Regulation). Where insurance and reinsurance undertakings have exposures of the types referred to in Article 187(4), (4a) or (4b) as well as other exposures not in the scope of the same paragraph to the same counterparty, they should derive an implied credit quality step in order to be able to follow the sequence for the calculation explained above. The implied credit quality step for a specific exposure in the scope of Article 187(4), (4a) or (4b) should be the credit quality step which would produce the same risk factor g i for a single name exposure pursuant to Article 186(1) as the risk factor g i for the specific exposure determined in accordance with Article 187(4), (4a) or, as applicable, (4b).
4 May: SCR
EIOPA clarified in Q&A (#2539) that according to Annexes VI of the Commission Implementing Regulation (EU) 2015/2450 of 2 December 2015, the definition of the code CIC are the following:
The code CIC 32 refers to 'Equity of real estate related corporation' which is defined as 'Equity representing capital from real estate related corporations'.
The code CIC 45 refers to 'Real estate funds' which is defined as 'Collective investment undertakings mainly invested in real estate'.
According to Article 84 of the Delegated Regulation (EU) 2015/35, the Solvency Capital Requirement shall be calculated on the basis of each of the underlying assets of collective investment undertakings and other investments packaged as funds (look-through approach). According to EIOPA's guideline 3 on look-through approach, undertakings should apply the look-through approach where they invest in real estate through collective investment undertakings or other investments packaged as funds. Therefore, in the case where the undertaking invests in an asset with the code CIC 45, it should apply the look-through approach.
Investments with the code CIC 32 can have different features depending on the activities of the related corporation. For this reason, there is no general answer to the question. The appropriate answer needs to be found on a case-by-case basis taking into account the specific features of the investment. For example, in accordance with Article 84(2)(a) of the Delegated Regulation, the look-through approach should be applied to an equity investment in a company that mainly invests in property. As stated in EIOPA's guideline 3 on look-through approach, an equity investment in a company that exclusively provides real estate services falls under the equity risk sub-module.
4 May: Article 300 of the Solvency II Directive
EIOPA clarified in Q&A (#2385) that the Notice regarding the adaptation in line with inflation of the amounts laid down in the Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) (2021/C 423/12), published on 19 October 2021, states: “The revised amounts shall be implemented by Member States by 19 October 2022.” This means the revised amounts will come into force as of 19 October 2022. Replying to the question of whether the first calculation using revised amounts should take place in the fourth quarter of 2022 or in the first quarter of 2023, the first calculation of the MCR taking into account the revised amounts should take place in 2022. Therefore, the updated floors indicated in the Notice should be the reference for calculations of the MCR for Q4 2022 and YE 2022 and, if pertinent, for any other calculation of the MCR between 19 October and YE of 2022.
4 May: Article 179 of Delegated Regulation (EU) 2015/35: Credit derivative
EIOPA clarified in Q&A (#2317) that according to Article 179(3) of Commission Delegated Regulation (EU) 2015/35, credit derivatives which are part of the undertaking's risk mitigation policy shall not be subject to a capital requirement for spread risk, as long as the undertaking holds either the instruments underlying the credit derivative or another exposure with respect to which the basis risk between that exposure and the instruments underlying the credit derivative is not material in any circumstances. Therefore, if any of the examples of derivatives mentioned in the question are part of the undertaking's risk mitigation policy pursuant to that paragraph, the derivative should be treated in the counterparty default risk module and not in the spread risk module.
The term credit derivative is not further specified in Commission Delegated Regulation (EU) 2015/35. However, as the explanatory memorandum to the act adopted by the Commission explains, the “Delegated Regulation [was] based on […] technical advice provided by EIOPA in 2009 and 2010“. EIOPA’s advice on the market risk module proposed that credit derivatives, “such as credit default swaps, total return swaps and credit linked notes”, should be dealt with in the spread risk module (see paragraph 4.116).
Accordingly, credit default swaps and total return swaps that are not part of the undertaking's risk mitigation policy pursuant to Article 179(3) should be treated in the spread risk module.
