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.
Ireland’s economy: Continued growth, comes with caveats
Ireland’s economy has remained strong throughout the winter across all key macroeconomic indicators and a budgetary surplus has facilitated a wide range of social transfers to mitigate cost-of-living challenges. However, a discourse is emerging that economic bottlenecks may hamper growth and competitiveness. KPMG, led by Dr. Daragh McGreal (Director, Head of Strategic Economics), look at what this will mean for the Irish economy in H1 2023.
The 6 major trends that will disrupt financial crime compliance
With evolving financial crime threats and heightened regulatory scrutiny, firms are reassessing their approach to financial crime risk management and compliance, and are paying a heavy financial cost, collectively spending billions trying to prevent financial crime. And so, maturing and embedding a robust FinCrime operating model to meet regulators expectation, without adding cost, is becoming critical to driving strong regulatory outcomes. KPMG, led by Ian Nelson (Partner, Head of Financial Services and Regulatory), discuss this further.
Episode 3: ESG reporting – are you ready?
Episode 3 of KPMG’s audit podcast series, where we explore the relevant issues, opportunities and new ways of working shaping the audit profession's future, focuses on the European Union Corporate Sustainability Reporting Directive (CSRD). CSRD will lead to a fundamental change in corporate reporting and represents the most significant transformation in corporate reporting in the last 25 years. Conor Holland, Principal, ESG Reporting & Assurance at KPMG, talks to Elaine Stafford about the CSRD and how this will impact Irish businesses.
Central Bank of Ireland updates
Digital Operational Resilience Framework
The Central Bank of Ireland published a speech by Gerry Cross, Director of Financial Regulation, Policy & Risk delivered on 28 March 2023 entitled “Implementing DORA – Achieving enhanced digital operational resilience in European Financial Services”. The speech covered the following topics with regard to the implementation of a Digital Operational Resilience Framework (DORA):
- Working Principles;
- Risk Management;
- ICT Incident Management & Reporting; and
- Oversight of Critical Third-Party Providers.
General Good Rules on Insurance Distribution
On 18 April the Central Bank published the “General Good Rules Arising from the Directive (EU) 2016/97 on Insurance Distribution 2023 (PDF, 590KB)”. The Rules are relevant to insurance undertakings and insurance intermediaries operating in Ireland on a cross-border basis and link consumer protection requirements under the European Insurance Distribution Directive to Irish regulatory requirements set out in the Consumer Protection Code, the Consumer Insurance Contracts Act and the Health Insurance Acts, among others others.
Private Motor Insurance Mid-Year Report 1
On 25 April the Central Bank published the first mid-year Private Motor Insurance Mid-Year Report of the National Claims Information Database (PDF, 1.1MB). This report provides key statistics on the private motor insurance industry in Ireland and captures data up to 30 June 2022. The aim of the report is to provide updated information on premium amounts, settled claim amounts and analysis on the impact of the Personal Injuries Guidelines on average claim costs.
Chief Risk Officer Forum
The Central Bank’s Director of Insurance Supervision, Domhnall Cullinan, during his address to the Insurance Ireland-Milliman CRO Forum held on 18 April, noted that in a period of heightened market volatility as we are currently experiencing, the Central Bank expects firms to closely monitor market and credit risks in their investment portfolios, ensuring that these risks are not unduly concentrated within a particular counterparty, sector or region.
He also reiterated the Central Bank’s priorities for 2023 from an Insurance Supervision perspective: the implementation of the Individual Accountability Framework (IAF); financial resilience; consumer Interests, specifically Payment Protection Insurance (PPI) and Value for Money (VfM) in unit linked products; climate change; digitalisation & technology; operational resilience including Digital Operational Resilience Act (DORA); and Financial Sanctions.
ESAs call for vigilance amidst mounting financial risks
On 25 April 2023, the three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) issued their Spring 2023 Joint Committee Report on risks and vulnerabilities in the EU financial system. The three Authorities are calling on national supervisors, financial institutions and market participants to remain vigilant in the face of mounting risks.
Extending and simplifying sustainability disclosures
On 12 April 2023, the ESAs published a Consultation Paper (PDF, 1.5MB) with amendments to the Delegated Regulation of the Sustainable Finance Disclosure Regulation (SFDR). The ESAs are proposing changes to the disclosure framework to address issues that have emerged since the introduction of SFDR.
EIOPA has published on 29 March 2023 a staff paper (PDF, 476MB) where it explains that the failure to account for, mitigate and adapt to the consequences of biodiversity loss can have economic implications that potentially jeopardise financial stability. In the paper, EIOPA describes the transmission channels of nature-related risk into society and the economy, and the relationship between climate and nature-related risks.
EIOPA identifies how nature-related risks can translate into risks to insurers' assets and liabilities, how insurers can impact on these and the type of approaches for assessing risks and impacts. As part of its sustainable finance strategy, EIOPA aims to establish supervisory expectations for managing nature-related risks and impacts in a step-by-step approach.
EIOPA supervisory activities 2022
On 30 March 2023 EIOPA published its report on how it contributed during 2022 (PDF, 449KB) to enhance common European supervisory culture and promoted consistent supervisory practices both from a prudential and conduct of business supervision perspective.
Fostering risk-based supervision
On 22 March 2023 EIOPA hosted its ‘Eastern Cooperation Conference’ bringing together insurance supervisors from European Economic Area (EEA) and non-EEA jurisdictions. In hosting this conference, EIOPA underlined its continued support for jurisdictions in the process of adapting or implementing EU insurance legislation. The conference focused on exchanging views on supervisory experiences and practices, in particular related to the implementation of risk-based supervisory frameworks, such as Solvency II.
Modelling of market and credit risk
EIOPA has published the 3 April 2023 results of its comparative study on the modelling of market and credit risk in internal models based on year-end 2021 data (PDF, 1.5MB). The study focuses on EUR denominated instruments while also analysing selected GBP and USD denominated instruments as well as the corresponding foreign exchange rate indices. The 20 participants from 7 different Member States cover close to 100% of the EUR investments held by all undertakings with approved internal models covering market and credit risk in the EEA.
The overall results show moderate to significant dispersion in some asset model outputs. Although this dispersion may in part be attributable to certain model and business specificities that supervisors are conscious of, EIOPA notes that it also indicates the need for continued supervisory attention, including at the European level.
Other European and International Supervisory Authority Updates
International Association of Insurance Supervisors (IAIS) have published their Newsletter Issue 120 for February/March 2023. (PDF, 2.2MB)
Climate risk online training
IAIS published a press release announcing the joint launch with the Financial Stability Institute (FSI) of new online training materials on climate risk for insurance supervisors. The training materials focus on climate scenario analysis. The course, which is hosted on the Climate Training Alliance (CTA) platform, provides an end-to-end framework for supervisors to follow as they undertake a climate scenario analysis exercise.
Separately, the IAIS is consulting on climate risk supervisory guidance. Later this year, IAIS plans to consult on an application paper on climate scenario analysis to support greater convergence on these practices. Climate risk and broader sustainability issues are a key theme of the IAIS' Strategic Plan 2020-2024.
Holistic Framework insurance standards
IAIS published its report (PDF, 2.7MB) on the Targeted Jurisdictional Assessment (TJA) of the implementation of the Holistic Framework supervisory material. The report summarises the outcomes of the assessment of the implementation of standards that form part of the IAIS Holistic Framework for the assessment and mitigation of systemic risk in the insurance sector across ten major insurance markets.
Climate-related disclosures of UK financial institutions
The BOE published a Working Paper (PDF, 1.3MB) which talks about understanding climate-related disclosures of UK financial institutions. It says that climate-related disclosures reduce information asymmetries between firms and investors and help transition to a net zero economy. However, disclosure practices might differ across firms.
The Prudential Regulation Authority (PRA) explores the determinants of firm disclosures by creating a unique, firm-level panel data set on climate-related disclosures of UK financial institutions.
Climate-related risks and the regulatory capital frameworks
The BOE published a report of Bank’s latest thinking on climate-related risks and the regulatory capital frameworks. The report includes updates on: capability and regime gaps; capitalisation timelines; and areas for future research and analysis.
Learning from the 2021/22 Climate Biennial Exploratory Scenario
The Financial Conduct Authority (FCA) published a survey report (PDF, 1.1MB) which talks about how the UK Centre for Greening Finance and Investment (UKCGFI) and the Climate Financial Risk Forum (CFRF) worked together over 2022 to gather and synthesise the lessons from the process of the Bank of England’s Climate Biennial Exploratory Scenario (CBES). The central goal of this research was to capture and synthesise the learning from the CBES for UK Financial Institutions (FIs) and to share this internationally.
Climate Disclosures Dashboard
The FCA published an article (PDF, 9.3MB) which informs about the updated Dashboard that incorporates both recent regulatory developments and progress made by industry in preparing climate related disclosures whilst retaining the user-friendly structure of the original dashboard. The Dashboard is split into five categories of climate disclosures – Transition risks, Physical risks, Financed emissions and portfolio alignment, Financing the transition (previously Mobilising transition finance) and Engagement.
It’s not the plane, it’s the pilot
The PRA published a speech by Shoib Khan in which he talks about the unique combination of risks currently facing the UK’s insurance sector.
Thematic findings from the 2022 cyber stress test
The PRA published a letter outlining the thematic findings from the 2022 Cyber Stress Test (PDF, 174KB). The objectives were to explore firms’ ability to quickly identify the nature of the disruption they faced; and the potential financial stability impacts of firms not meeting the impact tolerance in the case where data integrity had been compromised. As next steps, the Bank and PRA will monitor firms’ implementation of the operational resilience policy ensuring that firms are ready to remain within their impact tolerance as soon as possible and no later than March 2025.
Senior Managers and Certification Regime
Following the government announcement in December 2022 that the HM Treasury (MST), the FCA and PRA (the authorities) would commence separate reviews of the SM&CR, the PRA and FCA have published DP1/23 – Review of the Senior Managers and Certification Regime (SM&CR).
The FCA and PRA are reviewing the effectiveness, scope, and proportionality of the regulatory regime, which is the basis for this Discussion Paper (DP). HMT has, in parallel, launched a Call for Evidence to look at the legislative aspects of the regime. The reviews aim to understand stakeholders’ views on the functioning of the SM&CR and to identify ways to improve the regime to help it work better for firms and regulators, while preserving its underlying aims. The PRA and FCA invite answers on the specific questions set out in this DP by 1 June 2023.
Government’s updated Green Finance Strategy
The FCA published a joint statement, in which, the FCA, Financial Reporting Council (FRC), the BoE and The Pensions Regulator (TPR) have welcomed the Government's updated Green Finance Strategy.
Business interruption insurance test case
The FCA published latest data which was collected from all affected insurers on the progress of their non-damage business interruption (BI) insurance claims. A ’Dear CEO letter’ (PDF, 321KB) was sent to insurers affected by the business interruption insurance Test Case with the intention to gather information on all non-damage BI policies that are capable of responding to the coronavirus (Covid-19) pandemic.
The letter also sets out the FCA’s intention to gather information from all affected insurers regularly on the progress of their non-damage BI claims, and to publish some of this data.
Management Expenses Levy Limit 2023/24
The PRA has published PS3/23, which provides the PRA’s final policy following Consultation Paper (CP) 1/23. The PRA received no response to this consultation, therefore the policy proposals presented in CP1/23 will be implemented as consulted on. The Management Expenses Levy Limit (MELL) will apply from Saturday 1 April 2023, the start of the Financial Services Compensation Scheme’s (FSCS) financial year, to Sunday 31 March 2024.
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 February: SII Reporting -S.32.01
15 March: SCR – Counterparty Default Risk for receivables from intermediaries
EIOPA clarified in Q&A (#2523) that,
- Q&A 2367 covers only direct contractual relations as provided for under Article 28 of Commission Delegated Regulation (EU) 2015/35. however, careful assessment is needed to determine risk characteristics, e.g. as to determine collaterals.
- All receivables from intermediaries are subject to the counterparty default risk as provided for in Article 189 of the Commission Delegated Regulation (EU) 2015/35. However, in accordance with Article 202 of the same Regulation, receivables that have been overdue for more than 3 months get a higher risk charge than the others.
15 March: Pre-financing arrangements and contract boundary
EIOPA clarified in Q&A 2518 that the obligations related to the insurance contract referred to in Article 18 of the Commission Delegated Regulation (EU) 2015/35 are determined by the insurance policy and not influenced by the pre-financing arrangement. Therefore, the contract boundaries according to Article 18 Delegated Regulation should be determined without consideration of the pre-financing arrangement. The same applies to the dates of recognition and derecognition of the insurance obligations as determined in Article 17 of the Delegated Regulation.
15 March: Reporting Template S.05.01
EIOPA clarified in Q&A (#2320) that S.05.01 should not create any obligation to recalculate statutory technical provisions. Therefore, in case technical provisions are calculated only annually according to local Generally Accepted Accounting Principles (GAAP), the amount of “Changes in other technical provisions" reported quarterly in S.05.01 should not be reported, i.e., equal to 0. However, in case undertakings recalculate statutory technical provisions quarterly, even if it is only for internal purposes, the “change in other technical provisions" should be reported quarterly.
16 March: Financial Stability Reporting
EIOPA clarified in Q&A (#2557) that, for the S.14.05.11 template, information should be provided on portfolio level with the internal portfolio ID to be reported in c0240 column.
16 March: Reporting Template S.06.04
EIOPA clarified in Q&A (#2553) that:
- For the calculation of the key performance indicator (KPI) on physical risk (Solvency II value of property exposed to physical risk, in relation to total of property in the Implementing Technical Standards (ITS) amendments on reporting and disclosure 2022 to be applicable as of 31.12.2023) property, plant and equipment (PPE) should be included.
- The KPI on transition risk for investments includes assets held within funds, such as collective investment undertakings, which are part of investments.
- UL and index linked investments are not in the scope of the KPI on transition risk
16 February: Treatment of credit derivatives in SCR
EIOPA clarified in Q&A (#2317) that the answer to this question is provided by the European Commission.
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.
16 March: Reporting Templates S.30.04 and S.31.01
EIOPA clarified in Q&A (#891) , assuming that the state guarantee applies to CCR (reinsurance undertaking accepting the reinsurance) and not to Generali (reporting entity) this fact is not to be reflected neither in S.30.04 or in S.31.01.
This fact should be considered in the attribution of the probability of default to CCR for the purposes of Solvency Capital Requirement (SCR) calculation (counterparty default risk, if applicable).
This guarantee would be relevant for the reporting of S.30.04 of CCR as reporting entity.
24 March: CIC for Exchange Traded Commodities (ETCs)
EIOPA clarified in Q&A (#2299) that It is expected that ETCs need to be reported with CIC Category 5 "Structured notes" and the sub-category that fits the risk exposure (like "commodity risk - 56") or "other"."
24 March: New currency field
EIOPA clarified in Q&A (#2571) that,
In the new "Currency" field introduced by taxonomy 2.8.0, the rule states that “the breakdown by currency is only required to cover 90% of reinsurance recoverables. For the remaining 10% it is possible to group it under "other currencies".
The 90%/10% threshold should apply to the overall total. This means that for some reinsurers 100% of the recoverables may be broken down by currency, while for other the percentage may be lower than 90%. However, the approach should be consistent for all reinsurers, this means that the currencies reported individually (i.e., not grouped within “other currencies") should be the same for all reinsurers. For example, if USD is reported individually for reinsurer A, it cannot be grouped within “other currencies" for reinsurer B.
24 March: Validations
EIOPA in Q&A (#2594) clarified some discrepancies noted in the Solvency II list of validations published in the PWD3 of the Taxonomy 2.8.0.
24 March: Reporting Template S.04.04
EIOPA clarified in Q&A (#2552) that C0020 includes all the business underwritten through FPS in a country different from the country of establishment while C0030 includes information by underwriting entity and by EEA country and includes business underwritten in the considered country through FPS. Non-EEA business is not to be reported in this template
24 March: Reporting Template S.14.04
EIOPA clarified in Q&A (#2526) that the draft ITSs has been submitted to European Commission in March reflecting EIOPA's final outcome and considering all comments received by then. As such, changes in the instructions at this stage of the process are not possible.
Template S.14.04.11 reuses column code C0240 for two different key columns, which may be confusing for some filers. Therefore, EIOPA considers potential column code amendment in the future.
For the S.14.04.11.01 template, information should be provided on portfolio level with the internal portfolio ID to be reported in c0240 column. Furthermore, the relation between .01 and .02 tables can be described as one-to-many, therefore it is expected that C0240 from the (first) Portfolio table will be aligned with C0240 values reported in (second) Portfolio detail table. Therefore, EIOPA expects actual code to be reported.
Finally, regarding the suggestion for the new columns, informed that currently no such changes are planned. However, depending on the overall feedback EIOPA may consider introducing some clarification in the release package and modelling amendment for the future taxonomy release.
27 March: Reporting Templates S.37
EIOPA clarified in Q&A (#2589) that S.37.02 and S.37.03 should always be reported to show all (external to the group) exposures, split by the various properties - regardless of whether the exposure is a significant risk concentration.
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.