Insurance Insights September 2021 Insurance Insights September 2021 Insurance Insights September 2021

Brian Morrissey, Head of Insurance, and our insurance team have compiled a collection of KPMG's latest publications and articles which focus on developments in, and issues facing the insurance industry. Also included are recent publications from the CBI, EIOPA, and other European bodies.

Irish CEOs are optimistic about the domestic economy with confidence back to pre-COVID levels. Over seven in ten (72 percent) of Irish CEOs surveyed are optimistic about Irish growth prospects compared to 56 percent in 2020. They have highlighted that strategies such as joint ventures, M&A, and strategic alliances are the main post-pandemic levers for increased levels of growth.

The KPMG Irish CEO Outlook provides an in-depth 3-year outlook on enterprise and economic growth from thousands of executives around the world, including from Ireland. 

Investors and lenders are increasingly challenging the performance of their investee companies and borrowers regarding climate risks, as are employees, customers, and other parts of their supply chain. Businesses are making Net-Zero and Science-Based Target commitments and decarbonising their businesses, with renewable-energy procurement, energy efficiency, and the circular economy supporting this objective. Mike Hayes (Global Head of Renewables, KPMG Ireland) and Conor Holland (ESG Director, KPMG Ireland) of our Sustainable Futures practice explain.

The Department of Finance in collaboration with the CBI is launching a public consultation to obtain submissions applicable to the development and scope of a possible domestic resolution framework for insurers. The Department and the Central Bank believe that it is now timely to assess the policy considerations relevant to resolution, including the implications and benefits that will arise for policyholders, financial stability, industry and the Exchequer. The Department invites submissions on the potential domestic framework as detailed in this consultation document from interested stakeholders. This consultation will run for three months from 1 September to 30 November.

European Insurance and Occupational Pensions Authority (EIOPA) has published a letter to Economic and Financial Affairs Council (ECOFIN) regarding the implications of insurers’ failures to the protection of European policyholders and the need to address the lack of harmonisation around insurance guarantee schemes.

The Board of Supervisors of the EIOPA have published its decision on reporting key information documents (KIDs) required under the Regulation on a pan-European personal pension product (PEPP). Commission Implementing Regulation, which was published in the Official Journal of the European Union in June 2021, contains implementing technical standards (ITS) supplementing the PEPP Regulation on supervisory reporting and the co-operation and exchange of information between competent authorities and with EIOPA. The decision entered into force on 12 August 2021.

EIOPA has published a follow-up report to its 2018 peer review on supervisory practices for the application of the proportionality principle in governance requirements regarding key functions.

The Competition and Consumer Protection Commission (CCPC) has secured legally binding commitments from a number of parties that were under investigation in the private motor insurance sector. This is the third investigation the CCPC has undertaken in the sector. Upon closing the investigation, the CCPC has written to the Central Bank outlining its concerns about the culture of the industry and the repeated interventions that have been needed to address issues in the sector.

The following amendments to Solvency II and IDD rules came into force on 22 August 2021:

Commission Delegated Regulation (EU) 2021/1256, which supplements Solvency II through the amendment of Delegated Regulation (EU) 2015/35, by including sustainability risks in the governance of insurance and reinsurance undertakings.

Commission Delegated Regulation (EU) 2021/1257, which supplements the Insurance Distribution Directive through the amendment of Delegated Regulations (EU) 2017/2358 and (EU) 2017/2359, by inserting sustainability factors, risks and preferences into both the product oversight and governance requirements for insurance undertakings and distributors, and the rules on conduct of business and investment advice for insurance-based investment products.

The International Association of Insurance Supervisors (IAIS) has published a Newsletter dated July/August 2021. This includes among other things a summary of events, upcoming activities and news updates. The news updates include a summary of the Application Paper on Macroprudential Supervision, supervisory dialogue on climate related risks in the insurance sector and an update from the strategic roundtable for Asian Supervisors.

The IAIS has published the final version of its application paper on macroprudential supervision. The application paper, which was adopted by the IAIS Executive Committee on 27 August 2021, provides further guidance on the supervisory materials related to macroprudential supervision in Insurance Core Principle (ICP) 24 (macroprudential surveillance and insurance supervision). Alongside the application paper, the IAIS has published a summary (referred to as a "resolution") of comments received, together with its response to the comments. In the light of the feedback received, the IAIS has made some amendments to the application paper.

The PRA has issued Consultation Paper (CP) 17/21 Solvency II: Definition of insurance holding company. In this CP, the PRA is proposing to make changes to the definition of an insurance holding company (IHC) and in particular to distinguish this from a mixed-activity insurance holding company (MAIHC). The key implication of this distinction is that an IHC would trigger more onerous Solvency II group supervision (group capital requirements, reporting etc) compared to an MAIHC.

The PRA published a ‘Dear CEO’ letter, reminding insurers to carry out the next concurrent Insurance Stress Test (IST) in 2022. The launch date for the IST will be Mid-May 2022 and the feedback to the industry will be given by end of December 2022. For life insurers, the focus will be on economic stresses while for GI the focus will be on natural catastrophe perils and cyber underwriting risk.

The PRA published a Dear CFO letter regarding the launch of its Qualitative Questionnaire. This is a further data collection exercise along with the Quantitative Impact Study (QIS) published in July. The aim of this qualitative questionnaire is to inform further Solvency II policy development as part of the Solvency II review.

The FCA has published the latest Business interruption (BI) Insurance test case data as of 5th August 2021. The aggregate value of the interim/initial payments made for the 5,040 (5 July: 4,975) unsettled claims where such payments have been made is £331,285,812 (5 July: £308,885,284). This means that (at the point of the information submission) 26,238 (5 July: 23,933) BI policyholders out of the 41,666 (5 July: 40,531) who had had claims accepted, had received at least an interim payment.

The FCA published policy statement (PS21/11) in which it has made minor amendments to the final GI pricing practice rules that were earlier reported in PS21/5. Since publishing PS21/5, the FCA have engaged with stakeholders to understand the challenges involved in implementing these new rules.

FCA has published a letter setting out its supervisory strategy for Personal and Commercial line (P&C) insurers. In the letter, the FCA provides an updated view of the key risks of harm P&C insurers pose and outlines the FCA's expectations of P&C insurers. The letter also sets out an overview of the supervisory strategy and programme of work to ensure that firms are meeting expectations, and harms are being appropriately remedied.

The FCA has published the findings from its multi-firm review assessing how firms have responded to its general insurance (GI) distribution chain guidance and COVID-19 value guidance. The FCA reports that some firms have made good progress in meeting the existing rules and guidance on product governance and value, issued in 2018 and 2019, as well as against temporary guidance on product value, issued in response to Covid-19 in 2020.

However, the FCA is concerned that a number of firms are not fully meeting expected standards and that some firms may struggle to meet new enhanced rules on product governance, which come into force on 1 October 2021. The FCA has also separately published a review in that regard.

EIOPA revised its response to Q&A (#2013) to say that:

• A look through approach shall apply to Special purpose vehicles (SPVs) which are collective investment undertakings and other investments packaged as funds.
• If SPV notes meet the conditions in Article 84(4) of the Delegated Regulations and if the SPV is not a related undertaking but represents indirect exposure then look through approach shall apply to market risk, underwriting risk and counterparty risk.

Otherwise,

• If the notes exhibit only debt (equity) instrument characteristics, they should be included in the calculation of the capital requirement for interest rate, spread and market risk concentration risk (equity risk and market risk concentration risk).

If the notes exhibit both debt and equity instrument characteristics the approach outlined in Guideline 5 of the EIOPA Guidelines on Market and Counterparty Default Risk should be followed.

EIOPA clarified in Q&A (#1956) that the market consistent valuation must be ensured for leased assets and liabilities, which may be achieved by using the lessee’s incremental borrowing rate, depending on the circumstances.

EIOPA clarified in Q&A (#1862) that the absence of any direction to calculate the risk-mitigating effect at a lower level than "underwriting risk", means that an undertaking would be most compliant if they were to calculate the risk-mitigating effect at the level of every UW risk sub-module, then aggregated those sub-modules to give UW risk modules, and then aggregating those UW risk modules to give an overall capital amount for "underwriting risk".

EIOPA clarified in Q&A (#1680) that the individual risk assessment might involve medical underwritings, but it is not a requirement.

EIOPA clarified in Q&A (#1679) that the undertakings should do a projection and allocation of expenses that considers realistic assumptions on future businesses, i.e. even if full expenses are considered, they should be apportioned between existing and future business and where it is consistent with expense assumptions for contracts in paid-up state, paid-up expenses can be set up.

EIOPA clarified in Q&A (#1428) that, in most cases, paid-in premiums and the related obligations reflect a right and an obligation for the undertaking, i.e. the right to keep the premium and the obligation to cover the risk. Therefore, the premium and the related obligations belong to the contract.

However, under very specific circumstances, this may not be the case. For example, in case of a contract with a paid-in premium where either party can cancel the contract during a limited period of time, e.g. a few days after entering into it. In such a case, the undertaking does not have the right to keep the premium nor the obligation to cover the risk and, therefore, the premium and the related obligations do not belong to the contract.

EIOPA stated in Q&A (#2138) that the implication of Article 213(2) of Commission Delegated Regulation (EU) 2015/35 is that the stress scenario should treat the counterparty as having defaulted, with only the collateral available to the cedant.

EIOPA stated in Q&A (#2306) that for EEA exposures, the Commission Delegated Regulation (EU) 2015/35 of October 2014 of the European Parliament and council specify the number of events for each peril/submodule. For example, the earthquake scenario is always a single event regardless of how many countries an undertaking writes business in. The earthquake scenario is calibrated (in theory) to provide a 1-in-200 OEP (Occurrence Exceedance Probability) estimate on a pan-EEA basis.

EIOPA clarified in Q&A (#2276) that for investments in related undertakings which are "Collective investment undertakings and other investments packaged as funds" a look-through approach shall apply when calculating the Solvency Capital Requirement.

Investments in related undertakings which are not “collective investment undertakings and other investments packaged as funds", a look-through approach shall apply to market risk, underwriting risk, and counterparty risk where the conditions listed in Article 84(4) of the Commission Delegated Regulation (EU) 2015/354 are met.

Where any of the conditions are not met, a look-through approach shall not be applied.

EIOPA states in Q&A (#2256) that a look-through approach shall always apply to SPVs which are collective investment undertakings and other investments packaged as funds. If Special Purpose Vehicles notes held by an insurance undertaking meet the conditions in Article 84(4) of the Delegated Regulation, then the look through approach shall apply to market risk, underwriting risk, and counterparty risk.

EIOPA states in Q&A (#2210) that LEI codes must be reported correctly according to the GLEIF (Global Legal Entity Identifier Foundation) database. The names should be reported correctly but minor differences as indicated to the entries in the GLEIF database can be accepted.

EIOPA clarified in Q&A (#2143) what should be used for identification of an instrument based on “code” and “type of code” predefined pattern (one of the following).

EIOPA clarified in Q&A (#1906) that PPI insurance cover should offer professional indemnity against liabilities arising from professional negligence to include any kind of costs/ detriment of customers caused by the insurance intermediary. This includes costs for claims, legal fees and subsequent legal remedies if borne by the customer or any party injured as a result of intermediary negligence. Costs on the side of the insurance intermediary is not covered as they would reduce the amount available for protection of customers.

EIOPA clarified in Q&A (#1778) that the notion of “contract of insurance” is generally left to be determined by national law, but would include investments packaged with insurance where the wrapper is a contract of insurance.

EIOPA clarified in Q&A (#2058) that according to Guideline 9 on valuation of assets and liabilities other than Technical Provision, deferred tax assets should not be discounted, i.e. face value should be used for SII purposes.

EIOPA clarified in Q&A (#1671) that the POG (Product oversight and governance) requirements apply to the manufacturing of insurance products that are offered for sale to customers (i.e. more than one customer). In case of manufacturing insurance tailor-made policies stipulated as a result of the participation of the insurance undertaking in a public procurement procedure, a manufacturer cannot apply POG provisions, if this tailor-made insurance product is personalised, adapted or designed for individual customers.

EIOPA stated in Q&A (#1607) that the IDD includes a range of different regulatory requirements applicable for insurance intermediaries, that have to be fulfilled by travel agents selling travel insurance contracts as well as under specific conditions. Besides from regulatory requirements applicable to Insurance intermediaries, there are other provisions of other areas of law which insurance intermediaries have to adhere to.

EIOPA stated in Q&A(#2053) that Insurance intermediaries shall be registered in their home Member States and the IDD home member state is where the insurance intermediary has his/her residence or where the insurance intermediary has its registered office or where the head office is situated.

EIOPA stated in Q&A (#1924) that the IDD defines activities which shall not be considered to constitute insurance distribution activities, including the management of claims of an insurance undertaking on a professional basis and expert appraisal of claims.

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.

For more on any of the items above, or any Insurance-related queries, contact Brian Morrissey, Head of Insurance.

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