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
Internal Audit - Key thematic areas to consider in 2023
The risk landscape has shifted over the past year. To support Heads of Internal Audit, KPMG (led by Patrick Farrell, Risk Consulting Partner) have identified and compiled the key thematic areas and related risks that Internal Audit functions should consider in developing their Internal Audit plans for 2023. The thematic areas included in the KPMG report include both emerging and established risks that Internal Audit should consider when preparing its agile annual Internal Audit plan.
Will your Hybrid Working model result in Impairments?
In Ireland, we are seeing many businesses adopt a Hybrid working model. As more and more employees are in favour of working from home, this has given rise to under-utilised / vacant office spaces in many instances, with head office functions often the more significantly impacted. We are seeing an increasing number of clients grapple with vacant office spaces, potential impairments and onerous contracts. Companies that have been affected will need to consider the potential financial reporting implications. KPMG (led by David Drought (Director, Accounting Advisory and Aoife Madden (Associate Director, Accounting Advisory) delve into this further.
KPMG Recovery Planning Survey 2022
Recovery planning for insurers is in its infancy and hasn’t yet been fully embedded into insurers processes. Brendan McCarthy, Managing Director in our Actuarial practice, discusses how insurers adapted to the new requirements and how recovery plans might evolve over time in the following video. For more details, check out the results of our latest industry survey here.
KPMG Model Governance Framework
What are the key areas to consider for strong model governance? In this video, Clara Peters talks through three key areas for your company to consider.
Central Bank of Ireland (CBI) Updates
CBI: Deputy Governor remarks at Climate Finance Week 2022
The Central Bank of Ireland (Central Bank), Deputy Governor, Sharon Donnery, provided remarks at Climate Finance Week 2022. The remarks covered the science and scale of change currently required with regard to climate change, addressing the climate crisis, the prioritisation of climate risk at the Central Bank and how firms should identify and manage climate risks
CBI: Deputy Governor remarks at Financial System Conference
The Central Bank Deputy Governor, Derville Rowland, provided remarks ‘Delivering for the consumer in a changing world’ at the Financial System Conference 2022. The remarks covered the Central Bank’s current approach to consumer protection, the rapidly changing consumer environment and the Consumer Protection Code review. Ms Rowland noted that the CBI plans to engage with consumers, with industry and with wider stakeholders through multiple channels, both traditional and digital-based and that engagement formats will range from various roundtable discussions across the country to online surveys and more.
CBI: Intermediary Times
The Central Bank has published the second edition of the Intermediary Times for 2022. The purpose of this newsletter is to highlight specific areas of interest for retail intermediaries, including potential risks to business, and what they can do to develop business in a way that puts consumers first. This edition contains information on the changes to the Fitness & Probity application process; an update on the Consumer Protection Code review; the risk of under-insurance in the home insurance market; upcoming changes to the voluntary revocation process; and a reminder for insurance intermediaries to notify the Central Bank when they intend to cease operating, merge with - or transfer all or part of its regulated activities to - another regulated entity.
European Insurance and Occupational Pensions Authority (EIOPA) Updates
EIOPA: Newsletter
The European Insurance and Occupational Pensions Authority (EIOPA) has published an October 2022 Newsletter, which focusses on, among other things, the EIOPA Strategy from 2023 to 2026, the warning issued by EIOPA to insurers and banks to address consumer protection issues related to the sale of credit protection insurance products; and on the Joint European Supervisory Authorities Consumer Protection Conference.
EIOPA: Propriety of AMSB members and qualifying shareholders
EIOPA has published a report that follows up its peer review of the supervisory frameworks relating to the probity of the administrative, management or supervisory body members (i.e. the board of directors, or “AMSB”) and qualifying shareholders of EU insurance undertakings. In January 2019, EIOPA published a peer review that examined how national competent authorities (NCAs) assessed the probity of AMSB members and qualifying shareholders and set out best practices in this area. In the follow-up report, EIOPA considers the extent to which NCAs have implemented the actions recommended to them as a result of the peer review and taken into consideration the best practices.
In a press release accompanying the report, EIOPA states that it has found that the supervision of AMSB members' and qualifying shareholders' probity assessment has improved although the development of supervisory practices is still in progress in a number of countries. It invites NCAs that have not yet fully implemented the recommended actions to consider the identified examples as inspiration for the development of their national supervisory practices. EIOPA will continue to closely monitor the implementation of recommended actions and consider how best practices can be included in its supervisory handbook.
Economic and Monetary Affairs Committee of the European Parliament
EIOPA has published a statement by Petra Hielkema, Chairperson of EIOPA, from the annual hearing of the Economic and Monetary Affairs Committee of the European Parliament. In her statement, Ms Hielkema underlined the vital role that the insurance and pensions sectors play in the sustainability of Europe’s society and economy. She also highlighted some of EIOPA’s key achievements from the past year including in the areas of sustainability, digitalisation and consumer protection, as well as touching on challenges and upcoming priorities.
Other European and International Supervisory Authority Updates
IAIS: October Newsletter
The International Association of Insurance Supervisors (IAIS) has published its October 2022 Newsletter. The IAIS draws particular attention to the draft Issues Paper on Insurance Sector Operational Resilience which was recently published by the IAIS’ Operational Resilience Task Force.
IAIS: Operational resilience in the insurance sector
IAIS has published a draft issues paper to identify issues impacting operational resilience in the insurance sector and to provide examples of how supervisors are approaching these developments. It also considers lessons learned during the COVID-19 pandemic. The IAIS states in an accompanying press release that the consultation closes on 6 January 2023.
IAIS: Aggregation Method comparability assessment
In response to stakeholder comments on the draft criteria that will be used to assess whether the Aggregation Method (AM) provides comparable outcomes to the Insurance Capital Standard (ICS), the IAIS has decided to provide additional opportunity for stakeholder engagement on the development of scenarios that will be used to inform the assessment.
Further details on the timing and format of the workshops will be provided shortly. Accordingly, the IAIS has decided to extend the period for the design of the scenarios and move consideration of the final criteria from November 2022 to March 2023. However, this will not impact the timing of the AM comparability assessment, which remains scheduled to begin in the second half of 2023.
IE: Differential pricing practices
Insurance Europe (IE) has published their response to a consultation conducted by EIOPA on its draft statement on differential pricing practices. In their response IE note that although pricing and other commercial decisions are very sensitive areas, the potential concerns raised by EIOPA are significant and, if evidence of unfair treatment is found, then such behaviour would rightly need to be addressed.
IE: Distance Marketing of Consumer Financial Services
IE has published a set of key messages regarding the repeal of the EU’s Directive on Distance Marketing of Consumer Financial Services (DMD). Insurance Europe strongly welcomes the repeal of the DMD but recommends transferring its remaining provisions to more recent sector-specific EU legislation, such as the Insurance Distribution Directive.
Retail Investment Strategy
A new paper by Insurance Europe outlines how the European Commission can use its Retail Investment Strategy (RIS) for consumers to better understand retail investment products. The RIS aims to provide consumers with clear, concise and comparable information about retail investment and insurance-based products.
IE: Open finance: How to achieve the right framework
Following a recent publication of a report on Open Finance by the European Commission’s expert group on European Financial Data Space, an insight briefing was published which highlights the key considerations for any future open finance framework and the importance of getting the framework right to have a positive impact on both consumers and insurers.
UK Updates
FCA published review of business interruption insurance claims handling
Financial Conduct Authority (FCA) published a review of business interruption insurance claims handling which welcomed insurers quickly paying out interim payments, reallocating resources quickly and proactively communicating with policyholders to help them with claims following the test case judgment handed down by the Supreme Court last year. It has given out some examples of good practice in handling of business interruption (BI) claims as well as the key areas where firms did not meet FCA expectations regarding the fair treatment of customers.
Bank of England: Climate and Climate Conference
The Bank of England and Prudential Regulatory Authority (PRA) presented at a conference on climate change and capital. The conference brought together academics, practitioners, and policymakers to discuss views on:
- The appropriate time horizon over which the risks should be reflected in capital requirements.
- How to deal with uncertainty over that period, including the use of scenarios to measure and calibrate capital requirements more accurately.
- Where these risks are best reflected in the capital regime, i.e., the appropriateness of micro prudential firm-specific vs macroprudential system-wide capital requirements for climate risks.
The conference featured several research submissions on these issues and the challenges with using the prudential capital tools to ensure firms are resilient to climate-related financial risks
General insurance reserving and capital modelling
PRA published a letter by Nylesh Shah (Chief Actuary for General Insurance Co) to Chief Actuaries of general insurance firms and Lloyd’s Managing Agents regulated by the PRA on the insights from the recent thematic review across the general insurance sector. The PRA expects high claims inflation to affect every general insurance firm, although the nature of the impact will vary depending upon the firm’s business model and risk profile. The impact of a persistent spike in claims inflation may result in a material deterioration of solvency coverage for some firms unless mitigating actions are taken.
Bank of England: Climate change: possible macroeconomic implications
The Bank of England published an article stating that climate change influences key economic variables such as output and inflation, and therefore climate change matters for monetary policy makers such as the Monetary Policy Committee (MPC). The article explores the macroeconomic effects of physical impacts from climate change and the transition to a net-zero economy.
Climate-related financial risk
PRA published a letter by Sam Woods (Deputy Governor and CEO, PRA) to CEOs of PRA-regulated firms, which provides a summary of the capabilities which the PRA would expect firms to be able to demonstrate by now. The letter also sets out thematic observations on firms’ levels of embeddedness and provides examples of effective practices identified. It draws on the BOE’s supervision of firms of all sizes, as well as engagement with specific firms, the PRA’s thematic climate work and the findings from the Bank’s Climate Biennial Exploratory Scenario exercise, the results of which were published in May 2022.
Bank of England: Network analysis of the UK reinsurance market
The Bank of England published an empirical analysis of the network structure of the UK reinsurance sector based on 2016 Solvency II regulatory data. It examines counterparty credit risk originating from reinsurance contracts as a source of financial contagion in the insurance industry. The findings suggest that the UK reinsurance sector exhibits the ‘small-world’ property with a scale-free, core-periphery structure and topological characteristics common to other financial networks. These characteristics of risk dispersion from the periphery to the core make the network ‘robust-yet-fragile’ to financial shocks.
EIOPA Q&As
Please see below for EIOPA’s response to 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.
07 October: S2 Reporting - QRT S.01.02
EIOPA clarified in Q&A (#2501) that if the column C0010/R0300 of S.01.02 template is 0 (Not reported as no PEPP), the reporting entity is not required to complete column C0298 of template s.06.02.
07 October: S2 Reporting - QRT S.22.01.04
EIOPA clarified in Q&A (#2464) that there is a mistake and the MCR ratio (R0130) shall not be reported in S.22.01.04. The mistake will be corrected in the future ITS amendments.
14 October: S2 Reporting – CIC Code XT79
EIOPA clarified in Q&A (#2215) that the conclusion from Q&A (#1904) also applies to bonds and the selling of own shares. Given that the instrument has been sold, but the payment is still pending on the reference date, the value should be reported as XT79, “Any other assets, not elsewhere shown” (R0420).
14 October: S2 Reporting for cash and receivables
EIOPA clarified in Q&A (#2182) that pending payable or receivable amount needs to be reported in S.06.02 if it reflects a positive value. Please see Q&A (#1904) on the CIC categorisation. Given the information provided, the classification with the CIC Code XT79 seems correct. In this case it needs to be reported in the balance sheet as “Any other assets, not elsewhere shown” (R0420).
Cash shall be reported in one row per currency, for each combination of items C0060, C0070, C0080, and C0090; g) Transferable deposits (cash equivalents) and other deposits with maturity of less than one year shall be reported in one row per pair of bank and currency, for each combination of items C0060, C0070, C0080, C0090 and C0290.
20 October: Solvency Capital Requirement (SCR) – Concentration risk
EIOPA clarified in Q&A (#2431) that all the assets held in respect of life insurance contracts where the investment risk is partially borne by the policy holders and partially by the undertaking should be included in the determination of the capital requirement for market risk concentration. Indeed, the Article 184 (2)(a) of Commission Delegated Regulation (EU) 2015/35 excludes only the assets where the investment risk is fully borne by policyholders, not partially.
21 October: S2 Reporting – Threshold for QRT S.30.01
EIOPA clarified in Q&A (#2504) that the question has been answered in Q&A (#2475). In any case, option b) is correct, i.e., threshold relates to all reinsurance recoverable rather than just those relating to facultative contracts.
21 October: S2 Reporting – QRT S.05.01
EIOPA clarified in Q&A (#2481) that the item "Expenses incurred" reported in S.05.01 -Premiums, claims and expenses by line of business should be equal to the sum of "Administrative expenses", "Investment management expenses", "Claims management expenses", "Acquisition expenses" and "Overhead expenses" and as such R1900 is reported net .
21 October: Financial Stability Reporting – QRT S.14
EIOPA provided some detailed clarifications in Q&A (#2476) relating to Financial Stability reporting QRT S.14.
21 October: S2 Reporting – QRT S.30x
EIOPA provided some detailed clarifications in Q&A (#2475) relating to Reinsurance Reporting Templates QRT S.30x.
21 October: SCR treatment of lease asset and liability
EIOPA clarified in Q&A (#1996) that as per the answer to question (#1922), and expanded upon in the answer to question (#2172), both the asset and the liability will need to be taken into consideration in the calculation of the SCR. The relevant risks will depend on the inputs used in the valuation of the asset and liability.
21 October: S2 Reporting – QRT S.13
EIOPA clarified in Q&A (#2414) that that it is not acceptable to report transfer value related cash flow as part of Future Premiums instead of Future Benefits. In addition, S.13 is not required to be reported from an accounting perspective and there is no need to bring consistency between IFRS 9/17 and SII reporting.
21 October: Technical Provisions – Counterparty Default adjustment
EIOPA clarified in Q&A (#2387) that there is no PD mapping table available for the calculation of the counterparty default adjustment. Undertakings must therefore make their own estimate of the probability of default that should be used in the calculation.
As noted in Q&A (#2081), undertakings should use either a market consistent methodology or a best estimate methodology in order to assess an appropriate value to use, having regard to Guideline 81 of the Guidelines on the Valuation of Technical Provisions as to whether a 1-year PD is appropriate to use for the term of the exposure.
21 October: Technical Provisions – cash flows from intermediaries
EIOPA clarified in Q&A (#2380) that the cash flows described seem to fall within the descriptions in Article 28(c) and (e) of the Commission Delegated Regulation (EU) 2015/35.
These cashflows should therefore be included within the technical provisions. Note that in the cases described, the payments from the intermediary must be considered both in the best estimate calculation, as indicated in Article 28 of Commission Delegated Regulation (EU) 2015/35, and when calculating the counterparty default risk module, as indicated in Article 189 of that Regulation.
21 October: S2 Reporting – QRT S.08.01
EIOPA clarified in Q&A (#2356) that the case described in the question fits the following indication in the ITS ((EU) 2015/2450): "In the case of more than one trigger over time, report the next trigger occurring". Therefore, what should be reported is the trigger value of the contract which has the next triggering event (i.e., earliest expiration date).
21 October: S2 Reporting of net deferred tax assets/liabilities
EIOPA clarified in Q&A (#2354) that a netting of deferred tax assets and liabilities for determining the amounts to be presented in the solvency balance sheet (S.02.01, R0040 and R0780/C0010) has to be performed according to Guideline 9 on the valuation of assets and liabilities other than technical provisions, in line with IAS 12.71. Reporting netted deferred taxes implies that either R0040 or R0780 should be 0 except for the case where some deferred tax assets and deferred tax liabilities cannot be offset.
The “amount equal to the value of net deferred tax assets" (S.23.01, R0160, C0050) therefore corresponds to the value of deferred tax assets in the solvency balance sheet (S.02.01, R0040, C0010). This is the amount requiring a demonstration that it is probable that future taxable profits will be available against which the deferred tax assets can be utilized (see Art. 15 (3) DR)) and thus reflects an own funds item of Tier 3 quality.
26 October: Treatment of reinsurer from non-equivalent country
EIOPA clarified in Q&A (#2484) that if a reinsurance agreement with a reinsurer from a non-equivalent third country complies with all relevant requirements in Articles 209-211 except for 211.2.c), a letter of credit issued by a counterparty with a CQS 3 or better and that fully covers the reinsurer’s obligations should be considered to meet the criteria set in Article 213.1.b). Therefore, in such a case, reinsurance cover provided by a non-equivalent third-country reinsurer with a CQS 4 or worse could be considered when calculating the Basic Solvency Capital Requirement.
If a reinsurance agreement with a reinsurer from a non-equivalent third country complies with all relevant requirements in Articles 209-211 except for 211.2.c), full collateralisation of the reinsurer’s obligations should be considered to meet the criteria set in Article 213.1.a) provided the collaterals meet the requirements in Article 214. Therefore, in such a case, reinsurance cover provided by a non-equivalent third-country reinsurer with a CQS 4 or worse could be considered when calculating the Basic Solvency Capital Requirement.
28 October: S2 Reporting –QRT S.05.01 and IFRS 17
EIOPA clarified in Q&A (#2232) that instructions of the S.05.01 have been amended considering the IFRS 17. The changes are part of the ITS amendments 2022 to be applicable from 31 December 2023. Please also consider Q&A (#2465).
28 October: Risk-Free Interest Rate – Extrapolation
EIOPA clarified in Q&A (#2453) that all background information on the methodology to derive the risk-free-rates can be found in the Technical Documentation, valid until the end of 2022. The updated version applicable from January 2023 is available on EIOPA’s website. The Technical Documentation also provides the information on the input data to be used to derive the risk-free-rate term structures.
For replicating any of the published term structures as of 31 December 2021, and/or analysing sensitivities regarding different values for the UFR, you also need the Credit Risk Adjustments (CRA) and the Volatility Adjustments (VA) (if applicable) as of that date and can be taken directly from the monthly publication for December 2021. The level of the UFR does not affect the CRA and/or VA. Please note that to be able to get data from Refinitiv you need to have a subscription to their services (fee-liable). For the main currencies like EUR, GBP and USD market data from Bloomberg will work but might lead to small deviations.
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.
