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Insurance Insights October 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.

KPMG Updates

Why firms should consider people & risk in strategy

As regulators make their expectations for change in the financial services sector clear, boards look for insight and customers demand a new way of conducting business, it is more important than ever to proactively embed fair customer treatment into all aspects of a firm’s activities. We have seen over the years the major reputational and business impacts that a lack of customer focus has had on firms. KPMG, led by Gillian Kelly (Risk Consulting, Partner), reflects on the crucial need for firms to strategically align people and risk in their long term objective.

IAF and SEAR draft legislation

Details of the long-awaited draft legislation for an Individual Accountability Framework (“IAF”) and Senior Executive Accountability Regime (“SEAR”), as called for by the Central Bank of Ireland (“CBI”) in 2018, have been published. KPMG, led by Gillian Kelly, explains the possible impacts of this legislation.

Individual Accountability & Conduct Standards

In a recent webinar, KPMG highlighted the actions companies can take now to prepare to address the IAF requirements with particular reference to enhancements to the new suite of Conduct Standards, the uplifts required against the current Fitness & Probity Regime and the IAF.

KPMG has in depth experience in supporting firms with implementing accountability regimes in the UK and Australia. KPMG uses global insights and lessons learned to demonstrate the practical steps that companies can take now to address complexities that companies may need to consider:

  • The draft Heads of Bill and their implications;
  • Conduct Standards and their impact;
  • Certification Regime; and
  • IAF programme structure.

Design principles for remediation

Conduct Risk and associated remediation already command a significant amount of Board‑level attention. KPMG, led by Gillian Kelly, explain five design principles to foster successful remediation execution.

Development of a National Resolution Framework for re(insurers)

The Department of Finance, in collaboration with the CBI, has launched a public consultation to obtain submissions applicable to the development and scope of a possible domestic resolution framework for insurers. KPMG, led by John O’Donnell (Head of Insurance Risk and Regulatory) has summarised this here.

Central Bank of Ireland Updates

CBI: Insurance sector update / Consumer Protection

The CBI has published a speech by Director General, Financial Conduct, Derville Rowland, at the Deloitte 2022 Insurance Industry Trends event on the position of the insurance sector in Ireland, the effect of the COVID-19 pandemic, and the CBI’s expectations of the sector into the future. She also discussed the CBI’s current regulatory priorities, including an emphasis on conduct, culture and customer treatment, particularly around Business Interruption Insurance and Differential Pricing and indicated that the CBI now expect to launch their consultation on the proposed changes to the Consumer Protection Code in H1 2022.

CBI: Dividends and remuneration

In light of the improved macro-economic outlook and the reduced uncertainty about the impact of COVID-19 on the European financial sector, the ESRB has decided to allow its Recommendation of 15 December 2020 on dividend distributions during the COVID-19 pandemic (ESRB/2020/15) to expire after 30 September 2021. In this context, the CBI has also decided to modify its expectation of (re)insurance firms with respect to distributions and variable remuneration with effect from 1 October 2021.

CBI: Newsletter

The CBI has published an Insurance Newsletter, dated September 2021. The Newsletter covers topics such as recovery planning, insurance insights and sustainable insurance.

EIOPA Updates

EIOPA: Diversification in internal models

EIOPA has published a press release announcing that it has launched the second phase of its study on diversification in internal models under the Solvency II Directive. As part of the study, EIOPA has published a technical specification providing instructions to participants, a qualitative questionnaire and quantitative reporting and validation templates. Insurance undertakings must submit the results to their group national supervisory authority by 10 January 2022. National supervisory authorities must report back to EIOPA by 22 January 2022.

EIOPA: European Commission Solvency II proposals

EIOPA has published a press release commenting on the European Commission (“EC”) 's legislative proposal for amendments to Directive 2009/138/EC (“Solvency II Directive”). In its press release, EIOPA notes that they particularly welcome the proposal of the European Commission to develop an Insurance Recovery and Resolution Directive, to include the macroprudential perspective in Solvency II, to enhance the proportionality principle and to give mandates for further action on sustainable finance.

EIOPA: Revised Single Programming Document 2022-2024

EIOPA has published their Revised Single Programming Document 2022-2024. The Single Programming Document 2022-2024 sets out EIOPA’s strategy and work programme for the coming year. EIOPA’s agenda will continue to be influenced both by the COVID-19 pandemic, the macroeconomic environment, and the overall European agenda.

EIOPA: SupTech Strategy

EIOPA has published an interview with Ana Teresa Moutinho, Head of Supervisory Processes, with the Digital Finance magazine regarding SupTech strategy. Supervisors use technology (“SupTech”) to enhance internal administrative supervisory processes, to facilitate digital interaction with financial institutions and for improving supervisory practices.

EIOPA: Criteria for independence of supervisory authorities

EIOPA has published in a document its criteria for assessing the independence of supervisory authorities. EIOPA intends to assess supervisory authorities' independence to ensure the consistent application of legislation, preserve financial stability and protect consumers.

EIOPA: Interview

EIOPA has published an interview with Petra Hielkema for Eurofi regarding climate change ‘A challenge for our time’. Topics discussed include Environmental, Social and Governance (“ESG”) risk mitigation & disclosures, risk management and internal decision-making processes and climate change challenges.

Other European and International Supervisory Authority Updates

Report on climate change impact on financial stability

The International Association of Insurance Supervisors (IAIS) has published a global insurance market report that provides the first quantitative global study on the impact of climate change on the insurance sector. The report focuses exclusively on insurers' assets.

EC: Insurance reforms resulting from Solvency II review

The EC has published a communication to the European Parliament and the Council of the EU on the review of the EU prudential framework for insurers and reinsurers in the context of the EU’s post-pandemic recovery. In the communication, the Commission sets out an overview of the policy decisions it has taken following the outcome of its review of the Solvency II Directive (the Solvency II review) and the EU prudential regime for insurers more broadly. The communication also sets out the Commission's current thinking on the following issues:

  • Revisions to the Solvency II Delegated Regulation.
  • The establishment of a harmonised framework for insurance guarantee schemes (IGSs).
  • Insurance-related initiatives arising from the COVID-19 pandemic and climate risks.

EC: Legislative proposal for amendments to Solvency II Directive

The EC has adopted a legislative proposal for a Directive containing targeted amendments to the Solvency II Directive arising from the Solvency II review. The proposed Directive contains measures relating to

  • Proportionality.
  • Quality of supervision.
  • Long-term guarantee measures.
  • Macro-prudential tools.
  • Sustainability risks.

The Council of the EU and the European Parliament will now consider the legislative proposal.

EC: Directive on recovery and resolution of insurers

The EC has adopted a legislative proposal for a Directive establishing a framework for the recovery and resolution of insurance and reinsurance undertakings. The proposed Directive will apply to all insurance and reinsurance undertakings established in the EU that are subject to the Solvency II framework. The proposed Directive contains measures relating to:

  • The preparation of recovery plans by insurance groups and insurers.
  • The preparation of resolution plans for key insurance groups and insurers by resolution authorities.
  • The conditions governing when a resolution authority can put an insurer into resolution.
  • The resolution tools available to resolution authorities, including tools relating to solvent run-off and the wind-down and conversion of capital and debt instruments.

The Council of the EU and the European Parliament will now consider the legislative proposal.

IE: PRIIPs

Insurance Europe (“IE”), alongside the European Association of Co-operative Banks ("EACB"), European Association of Public Banks ("EAPB"), the European Banking Federation ("EBF"), the European Fund and Asset Manager Association ("EFAMA"), the European Savings and Retail Banking Group ("ESBG") and the European Structured Investment Products Association ("EUSIPA") — raised serious concerns in response to a consultation conducted by the European Commission on planned changes to the Packaged Retail and Insurance-based Investment Products ("PRIIPs") framework. To ensure an orderly implementation, the financial sector associations called for a 12-month implementation period beginning after the adoption of the RTS by the College of Commissioners, as this is the minimum time needed for all products and all market participants.

IE: Regulation on AI

IE has published its response to a consultation by the EC on its proposals for a Regulation on artificial intelligence (“AI”). IE welcomed the overall objective of the Commission to create a proportionate and principles-based horizontal framework of requirements, without unduly constraining or hindering technological development and innovation.

IE: Pension tracking services

IE has published its response to a consultation by EIOPA on its draft advice to the EC on pension tracking services (PTS). Having a well-designed PTS in place is consistent with the insurance industry’s longstanding call for enhanced transparency of pension entitlements and effective in supporting people’s retirement planning processes and understanding of how pension systems work.

Impact of climate change on insurers’ investments

IAIS published the 2021 GIMAR edition on impact of climate change on financial stability of the insurance sector. More than 35% of insurers invested assets are exposed to risks from climate change, according to data covering 75% of the global insurance sector. Scenario analysis confirms significant benefits of an orderly transition towards internationally agreed climate targets from both a financial stability and solvency perspective.

UK Updates

PRA: Technical Information for UK Solvency II firms

The Prudential Regulation Authority published technical information for UK insurance firms subject to Solvency II to calculate technical provisions. The information includes risk-free rate term structures, fundamental spreads for the calculation of the matching adjustment and, for each relevant national insurance market, the volatility adjustments. PRA also publish the symmetric adjustment to the equity capital charge (“SAECC”) that informs insurance firms’ capital calculations.

Sub-delegated powers under the European Union (Withdrawal) Act 2018

The Bank of England (“BOE”) published a report on the BOE’s and PRA’s use of sub-delegated powers under the EU (Withdrawal) Act 2018. These cover 1) the use of the ‘deficiency fixing power' to make EU Exit Instruments to amend deficiencies in the PRA Rulebook and Binding Technical Standards ("BTS") following the UK’s withdrawal from the EU and 2) the use of the Temporary Transitional Power ("TTP") which, until 31 March 2022, allows firms to continue applying the rules as they were at 31 December 2020 while they prepare for UK onshored rules which apply from 1 April 2022.

FCA: Proposed decisions on the use of LIBOR

The Financial Conduct Authority (“FCA”) published CP21/29 in which it sets out, and seeks views on, its proposed decision on which legacy use of the 1m, 3m and 6m sterling and 1m, 3m and 6m yen synthetic LIBOR settings it will permit to continue after end-2021. FCA is seeking responses to this consultation by 20th October 2021.

EIOPA Q&As

03 September: Intra-group commissions on direct business

With regards to commissions charged by an intermediary on direct business underwritten by a related insurance undertaking, EIOPA clarified in Q&A (#2019) that the SII framework does not outline the way in which an undertaking should organise itself or how a group should structure, nor does it set specific limits regarding a commission a company can earn from providing services.

09 September: Standard formula for life underwriting risk

EIOPA clarified in Q&A (#2290) that the event covered in Article 142(6)(b) of the Commission Delegated Regulation (EU) 2015/35 is the discontinuance of 40 % of all the insurance policies other than those falling within point (a) for which discontinuance would result in an increase of technical provisions without the risk margin.

10 September: Convertible bonds and Long Term Equity (“LTE”) treatment

EIOPA clarified in Q&A (#2262) that on the basis of guidelines on the treatment of market risk exposures in the standard formula:

  • If the asset can be considered as the composite of discrete components, and if equity risk is one of the risks that applies to the asset for the calculation of the SCR, then the part subject to this risk is eligible to the LTE treatment.
  • If the asset is not considered as the composite of separate components, the determination of which of the standard formula risk sub-modules apply depends on whether the debt or equity characteristics predominate in an economic sense. If the equity risk predominates economically, and the asset respects all other conditions listed in Article 171a of the delegated regulation 2015/35, it is then eligible. However, if the bond risk predominates, the asset cannot be eligible.

10 September: Inclusion of non-life lapse risk within risk margin

EIOPA clarified in Q&A (#2296) that the SCR of the reference undertaking should include all underwriting risk with respect to the transferred business. If the transferred business is exposed to non-life lapse risk, then this should be included within the calculation of the risk margin. The omission of non-life lapse risk from Technical Annex IV of the Guidelines on valuation of technical provisions is not an indication that it should not be included.

10 September: Validations

EIOPA clarified in Q&A (#2319) that they confirm the amendment to validation BV1136. It further explained that the reasoning behind this amendment is that the reporting of the issuer country is not required to be reported for all 'cash and deposits' in the list of assets (BV985). Therefore, EIOPA considers it appropriate to align both requirements (between the list of assets and the look through), even if this was not included in the ITS.

10 September: Tax receivables under counterparty default risk module

EIOPA clarified in Q&A (#2057) that:

  • Withholding taxes from tax authorities in EU member states might result in a tax receivable or a deferred tax asset in the Solvency II balance sheet. If it results in a tax receivable, then the counterparty default risk module is applicable. If it results in a deferred tax asset, then the counterparty default risk module is not applicable when determining the Basic Solvency Capital Requirement.
  • The counterparty default adjustment applies only to amounts recoverable from reinsurance contracts and special purpose vehicles.
  • If withholding taxes result in a deferred tax asset, then it should not be changed in value in any scenario-based calculations when determining the Basic Solvency Capital Requirement. If it results in a tax receivable, then it should be included in the calculation of the capital requirement for counterparty default risk on type 2 exposures. If withholding tax results in a tax receivable and its value is impacted by other market risks, it should be included in the respective market risk sub-modules. Provided the value of the tax receivable is impacted by underwriting risks the same approach applies for the relevant underwriting risk (sub-modules).

10 September: Activities under Freedom of Services (FoS)

EC clarified in Q&A (#2073) that any change, which an insurance undertaking intends to make to the information, referred to in Article 147 Solvency II and related to the nature of the risks and commitments undertaken on a freedom to provide services (FoS) basis shall be subject to prior notification.

17 September: Treatment of deferred taxes on DAC

EIOPA clarified in Q&A (#1785) that even though elimination of Deferred acquisition cost is treated in local GAAP and IFRS, under SII it is not recognised. Hence, for SII balance sheet both DAC and corresponding deferred taxes have to be eliminated.

20 September: Premium inputs in SCR calculation under IFRS 17

EIOPA clarified in Q&A (#2254) that the written and earned premiums are still mandatory disclosure under IFRS 17, and therefore available for the calculation of the underwriting risk modules.

23 September: Calculation of Mass Life Lapse scenario

EIOPA clarified in Q&A (#2173) that Under life Lapse scenario Article 142, for up and down stresses, all options listed under Article 142(4) should be considered in scenario calculations, and the calculation should be based on the type of discontinuance which most negatively affects the basic own funds of the undertaking on a per policy basis.

The calculation of the up, down and mass lapse stresses should be performed on a per policy basis, although Article 95a of Commission Delegated Regulation (EU) 2015/35 permits a simplification where Article 88 of Commission Delegated Regulation (EU) 2015/35 is complied with, so that the calculation can instead be performed on the basis of groups of policies.

Transition to IFRS 17

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.

Further information

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