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.
International Standard on Auditing (Ireland) 240
ISA 240 is the auditing standard on the auditor’s responsibilities relating to fraud and there have been several changes in both the UK and Ireland amending this standard. In May 2021 the Financial Reporting Council (“FRC”) issued their revised ISA (UK) 240 in response to the recommendations of the Brydon Review to clarify the responsibilities of auditors. The changes to ISA (Ireland) 240, revised in October 2021, reflect corresponding changes to the UK standard. KPMG, led by Claire Browne (Director, KPMG Audit), provides a perspective on what has changed for auditors and what the impacts are in this article.
KPMG Global Updates
A Strategic Partnership Role is the Future of Insurance
Welcome to the new reality - and with it a significant new role for the insurance finance function. Finance is poised for a shift from its traditional reporting, monitoring and planning duties to a significant new role as strategic partner to the business - driving informed, data-based decision making and helping to execute strategy, maximise growth and enhance profitability.
The Pressure is Rising
KPMG firms have updated their benchmarking of leading insurers’ readiness focusing on a selected group of 25 global insurers and national champions which have had IFRS 17 implementation programs running for several years. By sharing this intelligence on an anonymised basis, we hope to provide useful insights to companies large and small around the world as they work to make IFRS 17 a reality.
Can Capital Markets Save the Planet?
It’s now or never; no ifs, no buts. That is the ‘code red’ warning in the sixth report from the Intergovernmental Panel on Climate Change (IPCC), published in August 2021. Progress has been piecemeal, especially as governments have been preoccupied with rebooting their economies since the Covid-19 outbreak. It’s time to do a stock-take on the experiences to date of early adopters of climate investing and the changes they foresee over the next three years. The subject is timely and pertinent for two related reasons.
Central Bank of Ireland (CBI) Updates
CBI: The Insurance Quarterly – December 2021
The CBI has published the Quarterly Insurance Newsletter for the last quarter of 2021 on 15 December 2021. The Newsletter discuss topics such as Learnings from the 2021 thematic review of Own Risk and Solvency Assessments, EIOPA Internal Model Comparative Study, Private Motor NCID Report, Solvency II review and Update on Sustainable Finance initiatives relevant to the Insurance sector.
CBI: Cross-Industry Guidance on Outsourcing
The CBI has published a Feedback Statement regarding the Consultation Paper 138 on Cross-Industry Guidance on Outsourcing (the Guidance). In this Feedback Statement, the CBI has responded to the most material and/or consistently raised aspects of the 21 consultation responses. The CBI has also made some specific revisions to the Guidance, which is published together with this Feedback Statement.
CBI: Opening Statement by Gerry Cross, Director, Financial Regulation - Policy and Risk at Joint Oireachtas Committee on Finance, Public Expenditure and Reform, and Taoiseach
The CBI has published an opening statement by Gerry Cross, Director, Financial Regulation - Policy and Risk at Joint Oireachtas Committee on Finance, Public Expenditure and Reform, and Taoiseach discussing matters related to insurance. The speech discusses: Differential Pricing, the NCID and the cost of insurance and Business Interruption Insurance.
CBI: Cross-Industry Guidance on Operational Resilience
Following the publication last summer of Consultation Paper 140 which outlined the Central Bank’s proposed approach and perspectives in relation to how the financial sector should prepare for, respond and adapt to, and recover and learn from, an operational disruption that affects the delivery of critical or important business services, the Central Bank has published the Cross-Industry Guidance on Operational Resilience (December 2021). The Central Bank also published Feedback Statement – Consultation Paper 140: Cross-Industry Guidance on Operational Resilience. It is the Central Bank’s expectation that the boards and senior management of all regulated financial services providers, including (re)insurers, review the Guidance and adopt appropriate measures to strengthen and improve their operational resilience frameworks and their effective management of operational resilience in line with this Guidance. Regulated firms should be able to demonstrate that they have applied the Guidelines within an appropriate time frame.
EIOPA: 2nd Annual Report on Administrative Sanctions and Other measures under the Insurance Distribution Directive (IDD) (2020)
The European Insurance and Occupational Pensions Authority (EIOPA) has published its second annual report that provides an overview of the administrative sanctions or other measures imposed by national competent authorities (NCAs) that it is required to publish under the IDD. Overall, in 17 Member States, NCAs imposed a total of 1,942 sanctions in 2020 with administrative pecuniary sanctions of an aggregated value of EUR 793, 571.
EIOPA: Report on Limitations and Exemptions from Solvency II reporting during 2020 and Q1 2021
EIOPA has published an annual report focussing on the limitations and exemptions from regular supervisory reporting under Solvency II, as granted by the national competent authorities (NCAs) in the European Economic Area (EEA) to the 2020 year-end and in Q1 2021.
EIOPA: Results of the 2021 Insurance Stress Test published
EIOPA published the results of its 2021 Insurance Stress Test in which it assessed the industry’s resilience to a prolonged COVID-19 scenario in a “lower for longer” interest rate environment. EIOPA conducted a capital and solvency assessment and also examined participants’ pre- and post-stress liquidity positions.
EIOPA: December 2021 Financial Stability Report
EIOPA has published its December 2021 Financial Stability Report. The report examined key macroeconomic developments including the effects of the COVID-19 pandemic, and the prevalence of risks that are key for the insurance and pension sectors.
EIOPA: Consultation on the application guidance on climate change risk scenarios in the ORSA
EIOPA has launched a public consultation on the application guidance on running climate change materiality assessment and using climate change scenarios in the Own Risk and Solvency Assessment (ORSA). The consultation gives general insights in the ORSA where undertakings have the possibility to address climate change risks and provides examples using both dummy non-life and life companies, which will help to design the steps for the materiality assessment and to run climate change scenarios.
Stakeholders are invited to contribute to this consultation by responding to the questions in the survey by Thursday, 10 February 2022.
EIOPA: Sets out forward looking digital transformation strategy
EIOPA published its Digital Transformation Strategy, to ensure a systematic, balanced and holistic approach to the technological transformation of the European insurance and pensions markets and their supervision that is currently underway. In its strategy, EIOPA addresses the challenges posed by the digitalisation of the insurance and pensions sector, while enabling stakeholders to harness the benefits that arise from new technologies and business models.
EIOPA: Sustainable Finance Roundtable
On the occasion of its 5th Sustainable Finance Roundtable, EIOPA announced its three year plan (2022-2024) to address sustainability risk. Through its work on sustainable finance, EIOPA aims to ensure that (re)insurers and occupational pension funds integrate sustainability risks in their risk management, to protect consumers and secure financial stability.
EIOPA: Pilot Exercise on Climate Change Adaptation in Non-Life Underwriting and Pricing
EIOPA has launched the voluntary Pilot Exercise to better understand how insurers integrate climate-related adaptation measures in non-life insurance products and to assess the appropriateness of the corresponding prudential treatment of these insurance products.
EIOPA: Retail Risk Indicators Methodology Update
In line with the objectives set out in Article 35(1) and 35(2) of EIOPA’s founding Regulations, an initial retail risk indicators methodology was first developed by EIOPA in 2015 that provided a basic set of indicators based on data to be reported by Members to EIOPA and to be used for periodic discussions with Members with the aim of identifying quantitative ways to monitor the insurance market and identify risks for consumers. EIOPA has proposed revised methodology to reflect the changes made over the years and to include considerations on how to further develop these indicators on the basis of the proposed revised reporting framework and also to take into account new and emerging risks.
Other European and International Supervisory Authority Updates
EC: Sustainability disclosures under Article 8 of EU Taxonomy Regulation
The European Commission (EC) and EU Platform on Sustainable Finance has published further information to support disclosures under Article 8 of the EU Taxonomy Regulations, which requires large public interest entities to include additional information in their non-financial statement on how and to what extent their activities are associated with environmentally sustainable economic activities that are aligned with the EU Taxonomy Regulations.
PRA: Technical information for Solvency II firms
The PRA (Prudential Regulatory Authority) published the technical information for UK insurance firms subject to Solvency II to calculate technical provisions for the month of November on 09th December 2021. From 31 December 2020 (RFR data) and 31 March 2021 (SAECC and Volatility Adjustment data) UK firms must use the data which is published by the PRA rather than EIOPA.
PRA: PS29/21 | CP11/21 – Review of Solvency II: Reporting (Phase 1)
PRA published PS29/21 that provides feedback to responses to Consultation Paper CP11/21 (“Review of Solvency II: Reporting (Phase 1)”). It also contains the PRA’s final rule instrument, UK Technical Standards amendment instrument, and updated Statement of Policy (SoP) and Supervisory Statements (SS).
The PRA has considered the responses to CP11/21, as a result, the PRA has:
- Changed the implementation date so that firms will not be required to report the quarterly or annual quantitative reporting templates proposed for deletion in CP11/21 from 31 December 2021; and the modification by consent to limit the quarterly reporting requirements as set out in SS11/15 will apply from 31 December 2021;
- Reduced the reporting frequency of templates S.28.01 and S.28.02 from semi-annually to annually for all firms; and
- Eliminated all quarterly reporting requirements for pure reinsurance branches, and further removed the reporting requirements at Q1, Q3, and Q4 for firms eligible for a quarterly reporting waiver.
FCA: PS21/24: Enhancing climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers
The Financial Conduct Authority (FCA) published PS21/24 which introduced a new Environmental, Social and Governance (ESG) sourcebook containing rules and guidance. These rules will directly impact asset managers, life insurers and FCA-regulated pension providers. They relate to a firm’s role as a fiduciary – that is, how it takes climate-related matters into account in its management or administration of assets on behalf of clients and consumers, both at entity level and for specific portfolios or financial products and services. New climate-related disclosure rules will apply from 1 January 2022 for the largest in-scope firms and 1 year later for smaller firms.
03 December: Exposure to non-life guarantee fund
EIOPA clarified in Q&A (#2325) that the exposure to a non-life guarantee fund should be covered in the calculation of the capital requirement for counterparty default risk on type 2 exposures.
10 December: Spread risk on credit derivatives
EIOPA clarified in Q&A (#2323) that the starting point are the debt instruments which the CDS (Counterparty Default Swap) references (i.e. the “instruments underlying the credit derivative"). To determine the spread risk capital charge, the effect of the instantaneous increase/decrease of the credit spread for the underlying instruments on the value of the CDS determined in accordance with Article 75 Solvency II must be calculated. If it can be shown to give the same result as applying the spread widening/tightening to the underlying instruments the described approach to apply the spread widening/tightening to the Spread of the CDS is in line with the requirement of Article 179(1).
17 December: Guidelines on basis risk
EIOPA clarified in Q&A (#2114) that if the reinsurance contract is denominated in a different currency than the risk exposure, basis risk exists due to the currency mismatch. However, if the contract already states a fixed rate, there is no basis risk due to the currency mismatch as the exchange rate is known beforehand. In this case, the reinsurance contract would be equivalent to a contract denominated in the same currency as the exposure and any relevant amounts as the retention or the limit can be easily expressed in any of the two currencies by just applying the fixed rate.
17 December: Nat Cat Risks
EIOPA clarified in Q&A (#2349) that since all Nat Cat risks are simultaneous, in cases as the one described in the question it is not possible to determine the right order to apply the reinsurance cover. It should be noted that there should be no double-counting of the reinstatements (Guideline 15 on the application of outward reinsurance arrangements) and their consideration in the calculation should always be in line with the terms of the contract. Therefore, in the example, overall, only 2 events should be covered, so Example 1 is not correct since it requires to cover 4 events (2 windstorm and 2 hail).
17 December: Projection of the future SCR for the Risk Margin
EIOPA clarified in Q&A (#2343) that the projection of the future Solvency Capital Requirement (SCR) for the Risk Margin should be consistent with the assumptions underlying the rest of the Technical Provisions, in particular the amount of future premiums within the contract boundary. If the best estimate of the earned premium during 2021 is within the contract boundary as at FY2020, then the calculation of SCR (1) for FY2021 should include the claims reserve for Accident year 2021 (generated by the earned premium during 2021 for the transferred business as a closed portfolio).
17 December: Guidelines on application of outwards reinsurance
EIOPA clarified in Q&A (#2307) the assumption that a CAT treaty with one reinstatement which is exhausted in the calculation of the Nat Cat submodule cannot be available for the Man Made CAT. However, it should be noted that the capacity of the reinsurance treaty should not be allocated to the different submodules arbitrarily. If the capacity of the treatment is not enough to cover a full submodule (Nat Cat or man-made) and there are no reinstatements, the allocation to one of these two submodules is up to the undertaking. However, in case there is one or more reinstatements, both submodules (Nat Cat and man-made) should benefit from reinsurance cover, of course never exceeding the total capacity of the reinsurance treaty.
Regarding the allocation of a reinsurance treaty with one or more reinstatements within Nat Cat submodule, if an event combining two perils is possible and would be covered as a single event, then the allocation should be split between both perils for each event. If a combined event is not possible, therefore each reinstatement should be assigned independently trying to avoid concentrating all the risk-mitigating effect of the contract in one single peril.
17 December: Volume measure for premium risk should always be non-negative
EIOPA clarified in Q&A (#2275) that this question has been rejected because the matter it refers to has been answered in Q&A 2132. As the volume measure for premium risk is net of reinsurance, it corresponds to the part of the gross risk that has not been covered by the reinsurance contract. Reinsurance contract cannot cover larger risk than the gross risk which indicates that the volume measure for premium risk should always be non-negative. When it comes to the value of the factor for geographical diversification of a given segment, it shall be either 1 or a value calculated in accordance with Annex III of the Regulation. The structure of the formula in article 116 paragraph 2, as well as formula in Annex III paragraph 1 indicate that the maximal value of the factor for geographical diversification should equal to 1.
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.
For more on any of the items above, or any Insurance-related queries, contact Brian Morrissey, Head of Insurance.