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
Insurance innovation: Trends in 2023 and beyond
Insurtech and Environmental, Social Governance (ESG) are impacting on insurance, with trends including the global climate agenda and the emergence of new technologies such as Internet of Things and data analytics. KPMG (led by Jean Rea, KPMG’s Actuarial and AI Partner) look at some of the key trends.
Insurance and Artificial Intelligence: Benefits and ethics
KPMG (led by Jean Rea) discuss the growing role of AI in the Insurance industry, and what the ethical considerations insurers need to examine when exploring its use
Transparency Report 2022 and our Impact Plan
The 2022 KPMG Transparency Report covers our business and demonstrates our continued commitment to our regulators, investors, audit committees and other stakeholders.
Individual Accountability Framework: Commencement of key sections
On 19 April 2023, key sections of the Central Bank (Individual Accountability Framework) Act 2023 (IAF Act 2023) were commenced by the Minister for Finance. The KPMG Risk Consulting team (led by Gillian Kelly, Co-Head of Consulting) explains the implications to all regulated financial service providers.
Central Bank of Ireland updates
Individual Accountability Framework
The Central Bank has published a speech on 18 April 18, by Deputy Governor Derville Rowland, titled “Enhanced governance, performance and accountability in financial services: the Individual Accountability Framework”. The speech covers a wide breath of topics, including: the Report on the Behaviour and Culture of the Irish Retail Banks, Senior Executive Accountability Regime (SEAR), responsibilities of non-executive directors within the scope of SEAR, conduct standards and the interaction of the above with the Fitness and Probity Regime.
Fitness and Probity Enforcement
The Central Bank published an industry letter (PDF, 331KB) and new guidance (PDF, 1.2MB) on 21 April on Fitness and Probity Investigations, Suspensions and Prohibitions. The update follows commencement of Part 3 of the Individual Accountability Framework and aims to provide individuals, regulated financial service providers and holding companies with an overview of how fitness and probity investigations, suspensions and prohibitions operate.
Annual Report and Annual Performance Statement 2022
The Central Bank published its Annual Report and Performance Statement on 24 May. The report addresses a number of topics including the Central Bank strategy for 2022-2026. The Central Bank priorities for 2023 are detailed in Chapter 4 (pg.65), which will be of particular interest for the insurance sector.
EIOPA updates
Discussion paper on climate catastrophe insurance
In April, EIOPA and the European Central Bank (ECB) published a joint discussion paper (PDF, 781KB) on policy options to reduce the climate insurance protection gap. The climate insurance protection gap refers to the uninsured portion of economic losses caused by climate-related natural disasters. Only around a quarter of climate-related catastrophe losses are insured in the EU. The discussion paper closes to comments on 15 June 2023.
Relevant Risk-Free Interest Rate Term Structures
On 4 May EIOPA published technical information on the relevant risk-free interest rate term structures with reference to the end of April 2023.
Symmetric adjustment of the equity capital change for Solvency II
On 4 May EIOPA has published technical information on the symmetric adjustment of the equity capital charge for Solvency II with reference to the end of April 2023.
Opening the world of catastrophe models
EIOPA has published a speech on 16 May by Pietra Hielkma, EIOPA Chair, on opening the world of catastrophe models. Ms Hielkma noted EIOPA’s concerns around data and model availability related to climate change risks.
Ms Hielkma unveiled a new tool: the Climata App, the result of a collaboration between EIOPA and the Eidgenössische Technische Hochschule (ETH) Zürich. Climada App is a state-of-the-art catastrophe open-source model developed by the Swiss university; it provides a global coverage of major climate-related extreme weather hazards from cyclones and river flood to drought, including rich historical and probabilistic event data sets at distinct time horizons.
Risk Dashboard Q4 2022
EIOPA has published its Risk dashboard on 15 May based on Q4 2022 Solvency II data. The analysis shows that insurers’ exposures to macro and market risks are currently the main concern for the insurance sector while all other risk categories are at medium levels. The Risk Dashboard summarises through a set of risk indicators the main risks and vulnerabilities facing the insurance sector in the EU.
How rises in inflation and interest rates might affect consumers
On 15 May, the three European Supervisory Authorities (EBA, EIOPA and ESMA – ESA) published an interactive factsheet (PDF, 3.5MB) to help consumers understand how the recent increases in inflation and interest rates can affect their money. The factsheet includes information on financial products and services that consumers hold or plan to buy (Loans, savings, financial investments, insurance and pensions).
ESAs publish joint annual report for 2022
On 23 May, the ESAs published its 2022 Annual Report which provides an account of its joint work over the past year. EIOPA chaired the joint committee in 2022 by facilitating discussions and the exchange of information across the three ESAs, the European Commission and the European Systemic Risk Board.
During 2022, the joint committee focused on various issues of cross sectoral relevance, joint risk assessment of sustainable finance, digitalisation, consumer protection, securitisation, financial conglomerates and central clearing. The Committee’s main deliverables concerned the Sustainable Finance Disclosure Regulation (SFDR) and the Digital Operational Resilience Act (DORA).
Other European and International Supervisory Authority Updates
Addressing natural catastrophe protection gaps
The International Association of Insurance Supervisors (IAIS) published a statement dated 28 April on the role of insurance supervisors in addressing natural catastrophe protection gaps (PDF, 105KB). The IAIS notes that enhancing resilience against intensifying natural disasters is a pressing challenge for jurisdictions across the globe, and the damage and economic losses caused by natural catastrophes are increasing.
Global Insurance Market Report
On 21 April, IAIS published a special topic edition of its global insurance market report (GIMAR) (PDF, 879KB), which provides an assessment of cyber risks in the insurance sector and financial stability implications. In the report, the IAIS sets out an analysis of the risks and trends associated with cyber insurance coverage, cyber resilience in the insurance sector and the impact these risks may have on financial stability.
Insurance Distribution Directive
On May 2nd, Insurance Europe (‘IE’) published its feedback to EIOPA on the application of the Insurance Distribution Directive (‘IDD’) (PDF, 131KB). IE provides feedback on a number of issues such as Digitalisation & Sustainability while drawing EIOPA’s attention to additional issues the industry is experiencing that are not addressed directly during the discussions.
Supervisory reporting and disclosure under Solvency II
The following Implementing Regulations, which contain implementing technical standards that supplement the Solvency II Directive, were published in the Official Journal of the European Union (OJEU):
- Commission Implementing Regulation (EU) 2023/894 (PDF, 12.1MB) on ITS concerning the templates for the submission by insurance and reinsurance undertakings to their supervisory authorities of information necessary for their supervision. This Regulation, which reflects a mandate in Articles 35(10), 244(6) and 245(6) of the Solvency II Directive, repeals Implementing Regulation (EU) 2015/2450; ; it introduces new quantitative reporting templates (QRTs) and makes changes to existing QRTs. It applies from 31 December 2023.
- Commission Implementing Regulation (EU) 2023/895 (PDF, 2MB) on ITS concerning the procedures, formats and templates for the disclosure by insurance and reinsurance undertakings of their report on their solvency and financial condition (SFDR). This Regulation, which reflects a mandate in Articles 56 and 256(5) of the Solvency II Directive, repeals Implementing Regulation (EU) 2015/2452; it introduces changes to the QRTs that are required to be disclosed on the SFCR and applies from 31 December 2023.
UK updates
PRA 2023/24 Business Plan
On 2 May, the PRA published its 2023/24 Business Plan, setting out the workplan for its four strategic priorities. This covers the Solvency II review, introduction of a resolution regime, the next insurance stress test, reinsurance risk and the impact of claims inflation all featuring.
FCA 2023/24 Business Plan
On 4 April, the FCA published its Annual Business Plan. The plan reiterates activity that has been previously published or scheduled and covers the plan for the creation of a new Interventions team within Enforcement specifically for Consumer Duty. This function will be operational from August 2023 to enable rapid action where immediate consumer harm is detected. Insurers should therefore be paying close attention to the suite of Dear CEO letters the FCA has issued on the key risks it views in the sector impacted by Consumer Duty.
FCA Consultation on Multi-occupancy building insurance
On 21 April, the FCA issued a consultation on new rights and protections for leaseholders (PDF, 1MB) to improve the transparency of the multi-occupancy leasehold buildings insurance market. Under the proposals, leaseholders would be defined as customers of buildings insurance, require insurance firms to act in leaseholders’ best interests and improve transparency.
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.
4 May: Risk concentration
EIOPA clarified in Q&A (#2408) the sequence of the calculation in the market risk concentration sub-module, namely that “[individual] exposures should […] first be mapped to credit quality steps and relative excess exposure thresholds, and risk factors should subsequently be applied at the level of single name exposures.” (See recital 31 of that Regulation).
Where insurance and reinsurance undertakings have exposures of the types referred to in Article 187(4), (4a) or (4b) as well as other exposures not in the scope of the same paragraph to the same counterparty, they should derive an implied credit quality step in order to be able to follow the sequence for the calculation explained above.
The implied credit quality step for a specific exposure in the scope of Article 187(4), (4a) or (4b) should be the credit quality step which would produce the same risk factor g i for a single name exposure pursuant to Article 186(1) as the risk factor g i for the specific exposure determined in accordance with Article 187(4), (4a) or, as applicable, (4b).
4 May: SCR
EIOPA clarified in Q&A (#2539) that according to Annexes VI of the Commission Implementing Regulation (EU) 2015/2450 of 2 December 2015, the definition of the code CIC are the following:
The code CIC 32 refers to 'Equity of real estate related corporation' which is defined as 'Equity representing capital from real estate related corporations'.
The code CIC 45 refers to 'Real estate funds' which is defined as 'Collective investment undertakings mainly invested in real estate'.
According to Article 84 of the Delegated Regulation (EU) 2015/35, the Solvency Capital Requirement shall be calculated on the basis of each of the underlying assets of collective investment undertakings and other investments packaged as funds (look-through approach). According to EIOPA's guideline 3 on look-through approach, undertakings should apply the look-through approach where they invest in real estate through collective investment undertakings or other investments packaged as funds. Therefore, in the case where the undertaking invests in an asset with the code CIC 45, it should apply the look-through approach.
Investments with the code CIC 32 can have different features depending on the activities of the related corporation. For this reason, there is no general answer to the question. The appropriate answer needs to be found on a case-by-case basis taking into account the specific features of the investment. For example, in accordance with Article 84(2)(a) of the Delegated Regulation, the look-through approach should be applied to an equity investment in a company that mainly invests in property. As stated in EIOPA's guideline 3 on look-through approach, an equity investment in a company that exclusively provides real estate services falls under the equity risk sub-module.
4 May: SCR
EIOPA clarified in Q&A (#2530) that when calculating the term Vinter of the variance of the loss distribution of type 1 exposures in accordance with Article 201 of the Delegated Regulation (EU) 2015/35, the terms (PDk * (1-PDk) * PDj * (1-PDj) )/ (1,25 * (PDk + PDj) – PDk * PDj ) where both PDk and PDj are zero should be considered to be equal to zero.
4 May: SCR
EIOPA clarified in Q&A (#2521) that according to Article 1(12) of the Delegated Regulation (EU) 2015/35, 'earned premiums' means the premiums relating to the risk covered by the insurance or reinsurance undertaking during a specified time period.
The operational risk module shall be calculated in accordance with Article 204 of that Delegated Regulation. For that purpose paragraph 3 of that Article specifies different amounts of earned premiums that enter the calculation. For example, in Article 204(3)(a) DR, Earnlife denotes the premiums earned during the last 12 months for life insurance and reinsurance obligations, without deducting premiums for reinsurance contracts. In that case, the premiums used should be the premiums that relate to the life insurance and reinsurance risks covered during the last 12 months.
4 May: SCR
EIOPA clarified in Q&A (#2461) that as stated in Article 84 of the Delegated Regulation (EU) 2015/35 and detailed in Q&A 1212, a look-through has to be applied to the AIF and the investments have to be included in the calculation of the capital requirement for type 2 equities, and potentially currency risk. It is needed to look-through to identify any unhedged currency component that would fall under the currency sub-module.
According to the guideline 2 on look-through approach, undertakings should perform a sufficient number of iterations of the look-through approach, where appropriate (e.g. where a fund is invested in other funds) to capture all material risk.
In case a look-through approach cannot be applied, please refer to the Article 84(3) of the Delegated Regulation (EU) 2015/35.
4 May: Article 300 of the Solvency II Directive
EIOPA clarified in Q&A (#2385) that the Notice regarding the adaptation in line with inflation of the amounts laid down in the Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) (2021/C 423/12), published on 19 October 2021, states: “The revised amounts shall be implemented by Member States by 19 October 2022.” This means the revised amounts will come into force as of 19 October 2022.
Replying to the question of whether the first calculation using revised amounts should take place in the fourth quarter of 2022 or in the first quarter of 2023, the first calculation of the MCR taking into account the revised amounts should take place in 2022. Therefore, the updated floors indicated in the Notice should be the reference for calculations of the MCR for Q4 2022 and YE 2022 and, if pertinent, for any other calculation of the MCR between 19 October and YE of 2022.
4 May: SCR
EIOPA clarified in Q&A (#2373) that the term "class of items" does not refer to the classification as rated/unrated exposures by selected ECAIs. Where an external credit assessment is not available from the selected ECAIs (Article 4(2) of Delegated Regulation (EU) 2015/35), an insurer would not be allowed to seek for another available credit assessment from another ECAI in relation to “unrated exposures”, as this would not be in line with the principle laid down in Article 4(3) of Delegated Regulation (EU) 2015/35, under which the use of credit assessments needs not to be used selectively.
4 May: Article 300 of the Solvency II Directive
EIOPA clarified in Q&A (#2385) that the Notice regarding the adaptation in line with inflation of the amounts laid down in the Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) (2021/C 423/12), published on 19 October 2021, states: “The revised amounts shall be implemented by Member States by 19 October 2022.”
This means the revised amounts will come into force as of 19 October 2022. Replying to the question of whether the first calculation using revised amounts should take place in the fourth quarter of 2022 or in the first quarter of 2023, the first calculation of the MCR taking into account the revised amounts should take place in 2022. Therefore, the updated floors indicated in the Notice should be the reference for calculations of the MCR for Q4 2022 and YE 2022 and, if pertinent, for any other calculation of the MCR between 19 October and YE of 2022.
4 May: Article 300 of the Solvency II Directive
EIOPA clarified in Q&A (#2385) that the Notice regarding the adaptation in line with inflation of the amounts laid down in the Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) (2021/C 423/12), published on 19 October 2021, states: “The revised amounts shall be implemented by Member States by 19 October 2022.”
This means the revised amounts will come into force as of 19 October 2022. Replying to the question of whether the first calculation using revised amounts should take place in the fourth quarter of 2022 or in the first quarter of 2023, the first calculation of the MCR taking into account the revised amounts should take place in 2022. Therefore, the updated floors indicated in the Notice should be the reference for calculations of the MCR for Q4 2022 and YE 2022 and, if pertinent, for any other calculation of the MCR between 19 October and YE of 2022.
4 May: SCR
EIOPA clarified in Q&A (#2373) that the term "class of items" does not refer to the classification as rated/unrated exposures by selected ECAIs. Where an external credit assessment is not available from the selected ECAIs (Article 4(2) of Delegated Regulation (EU) 2015/35), an insurer would not be allowed to seek for another available credit assessment from another ECAI in relation to “unrated exposures”, as this would not be in line with the principle laid down in Article 4(3) of Delegated Regulation (EU) 2015/35, under which the use of credit assessments needs not to be used selectively.
4 May: Article 179 of Delegated Regulation (EU) 2015/35: Credit derivative
EIOPA clarified in Q&A (#2317) that 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.
28 April: Article 169 and Article 184 of Delegated Regulation (EU) No 2015/35
EIOPA clarified in Q&A (#2394) that pursuant to Article 169 of Commission Delegated Regulation (EU) 2015/35, the standard formula capital requirement for equity risk shall be equal to the loss in the basic own funds that would result from an instantaneous decrease equal to a certain percentage in the value of an equity investment.
For that purpose, the value of the equity investment should never be assumed to be negative, i.e. where the value is negative, the value to be used for the purpose of calculating the equity risk should be null.
Article 184 of the Delegated Regulation specifies the formula calculation of the market risk concentration sub-module. For that purpose as well, assets should never be assumed to have a negative value.
28 April: SCR
EIOPA clarified in Q&A(#2362), Article 191 of Commission Delegated Regulation (EU) 2015/35 provides for a specific treatment for certain types of retail loans secured by mortgages on residential property. Among other criteria, paragraph 4 of that Article sets out a size threshold to ensure the retail characteristics of the exposure.
This criterion excludes that loans issued by an insurance undertaking can benefit from the treatment reserved for retail loans secured by mortgages on residential property where the amount owed to the insurance undertaking is larger than EUR 1 million.
In the context of the look through approach pursuant to Article 84 of Commission Delegated Regulation (EU) 2015/35, loans issued by a collective investment undertaking and where the amount owed to collective investment undertaking is larger than EUR 1 million cannot be assumed to have retail characteristics in the sense of Article 191 of that Regulation and they cannot benefit from the treatment reserved for retail loans secured by mortgages on residential property.
28 April: SCR
EIOPA clarified in Q&A(#2362), Article 191 of Commission Delegated Regulation (EU) 2015/35 provides for a specific treatment for certain types of retail loans secured by mortgages on residential property.
Among other criteria, paragraph 4 of that Article sets out a size threshold to ensure the retail characteristics of the exposure. This criterion excludes that loans issued by an insurance undertaking can benefit from the treatment reserved for retail loans secured by mortgages on residential property where the amount owed to the insurance undertaking is larger than EUR 1 million.
In the context of the look through approach pursuant to Article 84 of Commission Delegated Regulation (EU) 2015/35, loans issued by a collective investment undertaking and where the amount owed to collective investment undertaking is larger than EUR 1 million cannot be assumed to have retail characteristics in the sense of Article 191 of that Regulation and they cannot benefit from the treatment reserved for retail loans secured by mortgages on residential property.
21 April: SCR
EIOPA clarified in Q&A (#2560) that in all scenarios where the number of policies changes, including the increase or decrease in lapse rates and the increase or decrease of mortality rates, the general principle set out in Q&A 1678 is valid. Whether and by how much future expenses can change due to a lower or higher number of policies depends on undertaking specifics like the proportion of fixed and variable expenses. Whether the assumption of constant per policy expense for determining the capital requirement is realistic depends on the particular situation of the undertakings.
Further information
For more on any of the items above, or any Insurance-related queries, contact Brian Morrissey, Head of Insurance.
