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
Consultation on the UK Corporate Governance Code
The Financial Reporting Council (“FRC”) has released their long awaited consultation on the UK Corporate Governance Code. Unlike the wide-ranging review in 2018, this consultation is focused on the legislative and governance reforms the Government proposed within their response to the consultation ‘Restoring Trust in Audit and Corporate Governance’. Niall Savage and Maria Diver of the KPMG Audit Committee Institute explain the implications.
Audit committees and the external audit
The FRC has issued Audit Committees and the External Audit: Minimum Standard as a direct response to the Government's consultation on Restoring Trust in Audit and Corporate Governance, which expressed the intention to grant statutory powers to ARGA (the Audit, Reporting and Governance Authority) for mandating minimum standards for audit committees in relation to the Appointment of, and oversight over, external auditors. Niall Savage and Maria Diver explain the implications.
ESG in insurance: Strategy and transformation
Leading insurers see ESG as an opportunity to further reinforce their position and drive positive change. They increasingly recognize their role in advancing the ESG agenda, not only through products and investments, but also within their own organizations, across their customer base and throughout the broader ecosystem. Yet many are struggling to set ambition, prioritize activities and cascade their vision across every division and function.
In this latest report, we discuss how insurers can design and deliver a practical, value-driven ESG strategy that not only meets compliance requirements, but also delivers significant competitive advantage. We highlight key challenges for insurers, demonstrate examples of where leading insurers are getting it right, and offer key elements to help organizations compose an ESG strategy that aligns with overall business objectives.
IFRS 17: From transition to business as usual
As of 1 January 2023, IFRS 17 replaced the interim IFRS 4 standard, in force since 2004. In the Irish (re)insurance market work on opening balance sheet restatements is generally well progressed. Most (re)insurers were in a position to provide the required IAS 8 pre transition disclosures in their 2022 financial statements. There is however much to do over 2023, and beyond, to operationalise, embed and optimise reporting under IFRS 17 in the post-implementation phase. Read our article to find out more on the focus and challenge areas for Irish (re)insurers during 2023
Insurers’ first reporting under IFRS 17 and IFRS 9
As part of our ongoing analysis of insurers’ reporting on implementing the new accounting standards – IFRS 17 Insurance Contracts and IFRS 9 Financial Instruments – we now share our observations on selected insurers’ first interim reports and trading updates for the quarter ended 31 March 2023.
Our analysis focuses on:
- IFRS 17 disclosures and their comparatives in the interim reports; and
- the impacts of IFRS 17 on key performance indicators
We also include an update to our previous analysis of insurers’ IFRS 17 and IFRS 9 accounting policies and significant judgements. Read our article to find out more.
Central Bank of Ireland updates
Financial Stability Review
The Central Bank of Ireland (”Central Bank”) has published the first Financial Stability Review for 2023 on 7 June 2023. The report outlines the Central Bank’s assessment of key risks facing the financial system, the resilience of the economy and financial system to adverse shocks, and policy actions to safeguard stability.
The Central Bank Governor Gabriel Makhlouf, provided opening remarks at the launch of the Financial stability review where he noted a recurring theme of the Reviews in previous years has been the uncertainty caused by the pandemic, the war in Ukraine and the current inflationary episode in conjunction with the speed the events have unfolded across the world.
Governor’s Blog
On 2 June 2023, the Central Bank Governor published a Blog titled “Inflation and monetary policy: What to expect”. The Blog provided detail on inflation in the euro area and decisions the European Central Bank’s governing council have taken to address the high inflationary environment.
June 2023 Insurance Newsletter
The Central Bank of Ireland (”Central Bank”) has published the June 2023 edition of its Insurance Newsletter. The Newsletter sets out the good practices identified by the Central Bank during its thematic inspection on product oversight and governance it carried out in 2022; observations based on the regulatory supervision of reinsurance activities; and touches on unit linked products survey issued in 2022. The Newsletter also notes that the Central Bank will host an Industry Workshop on the revisions to the reporting and disclosure requirements on 17 October 2023 and that a financial sanctions questionnaire will be issued to some (re)insurers.
Insurance, regulation, and the transition to a net zero economy
Gerry Cross, Director of Financial Regulation, Policy & Risk gave a speech on 22 June 2023 at an Insurance Ireland event on the role of insurance in society and the risk of increasing protection gaps, greenwashing, risk management, and supervisory observations and on the Central Bank’s climate change guidance.
He referred to the Sustainable Finance Disclosures Regulation (SFDR), the Corporate Sustainability Reporting Directive (CSRD) and the Network for Greening the Financial System (NGFS), and noted that the Central Bank has established a Climate Change Unit in order to centrally oversee the integration of climate and sustainability considerations into all of our financial regulation and financial stability activities.
EIOPA updates
Management Board
On 2 June 2023, the Board of Supervisors of EIOPA appointed Mr Ante Žigman, President of the Board of the Croatian Financial Services Supervisory Agency (Hanfa), to EIOPA’s Management Board. Mr Žigman’s term began on June 3, 2023. He will replace Ms Zuzana Silberova, Executive Director of the Financial Market Supervision Department at the Czech National Bank, who has completed her second term on the Management Board.
The Board of Supervisors has also decided to re-elect Mr Alberto Corinti, member of the Board of Directors at the Italian Institute for the Supervision of Insurance (Ivass), for a second two-and-a-half-year term.
ICT third-party service providers and oversight fees
The European Supervisory Authorities (European Banking Authority (“EBA”), European Insurance and Occupational Pensions Authority (“EIOPA”) and European Securities and Markets Authority (“ESMA”)) published a joint discussion paper (PDF, 777KB) on May 26 2023, seeking stakeholders input on aspects of the Digital Operational Resilience ACT (‘DORA’). The discussion paper follows the European Commission’s request for advice on the criteria for critical ICT third-party service providers and the oversight fees levied on them. Stakeholders are invited to provide their input by 23 June 2023.
Greenwashing and risks
On 1 June 2023, ESAs published their progress reports (PDF, 1MB) on Greenwashing in the financial sector. The ESAs put forward a common high-level understanding of greenwashing applicable to market applicants across their respective limits. EIOPA’s Progress Report provides initial views on greenwashing from an insurance and pension perspective including on how it occurs, its impact, challenges related to its supervision as well as its implications for the regulatory framework.
EIOPA finds that greenwashing can occur – to varying extents – as part of the broader set of conduct risks at all stages of the insurance (e.g. entity level, product manufacturing, delivery and management) and pensions (e.g. scheme design, delivery and management) lifecycles. The report presents concrete examples to show how greenwashing manifests itself in practice.
Solvency II Relevant Risk-Free Interest Rate Term Structures
On 5 June 2023, EIOPA published technical information on the relevant risk-free interest rate term structures with reference to the end of May 2023.
Equity capital change for Solvency II
On 5 June 2023, EIOPA has published technical information on the symmetric adjustment of the equity capital charge for Solvency II with reference to the end of May 2023.
Mystery shopping exercise
The Board of Supervisors of the European Insurance and Occupational Pensions Authority (EIOPA) agreed on 28 June that EIOPA will coordinate the first joint mystery shopping exercise on sales of insurance. The exercise will be conducted in 8 Member States and will follow a common methodology and criteria developed by EIOPA and its Members. The results of the exercise will be available in the first half of 2024.
DORA policy products
The European Supervisory Authorities (EBA, EIOPA and ESMA – the ESAs) launched today a public consultation on the first batch of policy products under the Digital Operational Resilience Act (DORA). This includes four draft regulatory technical standards (RTS) and one set of draft implementing technical standards (ITS). These technical standards aim to ensure a consistent and harmonised legal framework in the areas of ICT risk management, major ICT-related incident reporting and ICT third-party risk management. The consultation runs until 11 September 2023.
Other European and International Supervisory Authority Updates
Insurance Sector Operational Resilience
On 23 May 2023, the International Association of Insurance Supervisors (“IAIS”) published its issues paper on Insurance Sector Operational Resilience (PDF, 1.5MB). The paper identifies issues impacting operational resilience in the insurance sector and provides examples of how supervisors are approaching developments with consideration of lessons learnt during the pandemic.
IAIS: Newsletter May 2023
On 31 May 2023 the IAIS published its newsletter for May 2023 (PDF, 1.8MB). The newsletter provides a summary of a number of work/interests the IAIS is focused on currently.
IE: Annual Report 2023
Insurance Europe (“IE”) published their annual report dated 30 May 2023. The report sets out the European Insurance industry’s positions on the main insurance issues. The report covers topics such as ways to advance sustainability and inclusivity, improve financial regulation, serve consumers better, support digitalisation and ensure greater protection for societies and economies.
EC retail investment proposal
Insurance Europe and a number of associations representing the financial services industry have issued a statement (PDF, 210KB) dated 6 June 2023 raising concerns over the EU Commission’s proposed Retail Investment Strategy. The associations note a likely disruption to the EU financial sector and consumers’ access to investment products and insurance protection if the Strategy is implemented as proposed.
UK updates
PRA: Results of the firm feedback survey 2022
Each year, the Prudential Regulation Authority (“PRA”) seek input from firms on the effectiveness and quality of the PRA supervisory framework and approach through an annual firm feedback survey. This process is overseen by a team independent of frontline supervision. The survey was conducted from August to October 2022 and the feedback has been published.
Thematic review of general insurance reserving and capital modelling
The PRA has published a Letter to Chief Actuaries of general insurance firms and Lloyd’s Managing Agents regulated by the PRA setting out observations of a review on how firms responded to the October 2022 letter. Firms are advised to take into account the observations as they prepare for their next and subsequent reserving and capital assessment exercises.
PRA Regulatory Digest - May 2023
The PRA Regulatory Digest has been published for the month of May.
System-wide exploratory scenario exercise
The Bank of England (“BoE”) has launched its first system-wide exploratory scenario exercise. The exercise aims to improve understanding of the behaviours of banks and non-bank financial institutions in stressed financial market conditions. It will explore how those behaviours might interact to amplify shocks in UK financial markets that are core to UK financial stability.
The market for inflation risk
The BoE have published a market research paper based on transaction-level data on the universe of traded UK inflation swaps to characterise who buys and sells inflation risk, when, and with what price elasticity. This provides measures of expected inflation cleaned from liquidity frictions. The paper shows that this market is segmented: pension funds trade at long horizons while hedge funds trade at short horizons, with dealer banks as their counterparties in both markets.
Transforming data collection
The BoE’s Data Standards Committee serves as a forum for relevant stakeholders including reporting firms, trade bodies and relevant standard setting bodies to propose solutions in the area of data standards. The minutes for the meeting held on 16 February have been published.
PRA: Solvency II Consultation
The Prudential Regulation Authority (“PRA”) has released its Solvency II consultation setting out the bulk of the reforms not covered by the Government’s secondary legislation. This includes proposals on internal models, TMTP changes, reporting and market access. The proposed changes to the matching adjustment will be in a separate paper in September.
PRA ramps up scrutiny of funded reinsurance
Following on from Charlotte Gerken’s Moderation in All Things speech in April 2023, where she noted that the BPA market is growing very rapidly and there is a risk that insurers may ‘over-indulge’ and go outside of their risk appetite, the PRA has delivered a ‘Dear CRO’ (PDF, 221KB) letter. The letter provides feedback on the PRA’s preliminary thematic review and sets out concerns around quality of collateral, recapture risk and effectiveness of management action. Firms are asked to take remedial action, with further supervisory and policy action likely.
ESG in insurance: Strategy and transformation
Leading insurers see ESG as an opportunity to further reinforce their position and drive positive change. They increasingly recognize their role in advancing the ESG agenda, not only through products and investments, but also within their own organizations, across their customer base and throughout the broader ecosystem. Yet many are struggling to set ambition, prioritise activities and cascade their vision across every division and function.
In this latest report, we discuss how insurers can design and deliver a practical, value-driven ESG strategy that not only meets compliance requirements, but also delivers significant competitive advantage. We highlight key challenges for insurers, demonstrate examples of where leading insurers are getting it right, and offer key elements to help organizations compose an ESG strategy that aligns with overall business objectives.
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.
EIOPA Q&A #2342: Valuation of Assets and Liabilities other than TPs
Article 13 seems to assume that related undertakings appear as one line on the balance sheet, but in case of a subsidiary IAS foresees consolidation, and according to Article 9.1 it seems that the Solvency II balance sheet then also requires consolidation.
In #2342 EIOPA have clarified that on the basis of Article 9 (1) of the Commission Delegated Regulation (EU) 2015/35 (DR), assets and liabilities other than technical provisions can only be recognised in the Solvency II balance sheet if they meet the international accounting standards recognition criteria at initial recognition. After initial recognition, related undertaking shall, in the Solvency II balance sheet, appear as one line and be valued in accordance with Article 13 of the DR. For determination of the consolidated data please refer to the Final Report on Public Consultation No. 14/036 on Guidelines on group solvency including the illustration table in Guideline 19.
EIOPA Q&A #2580: Solvency Capital Requirement (SCR)
In response to #2580, a request for clarification on Annex XVII of Commission Delegated Regulation (EU) 2015/35 (DR) in relation to method-specific data requirements and method specifications for undertaking-specific parameters of the standard formula, EIOPA have noted that:
1) The aggregated losses referred to in Annex XVII B.(1)(a) DR for a given year t should be equal to the claims paid during year t plus the best estimate of the claims outstanding at the year end of the first development year of the accident year t.
2) The statement refers to all the expenses listed in Article 31(1), points (a) to (d) of DR.
The aggregated losses referred to in Annex XVII B.(2)(f) DR are defined in Annex XVII B.(1)(a) DR as the payments made and the best estimates of the provision for claims outstanding in segment s after the first development year of the accident year of those claims. Article 31(1) DR lists the expenses that should be taken into account in cash-flow projections used to calculate best estimates.
EIOPA Q&A #2472: Risk-Free Interest Rate - VA representative portfolio
In response to #2472 - a request for confirmation that for VA calculation CIC #12 is included in the Corporate Portfolio and the potential inconsistency with the definition within Annex IV: Complementary Identification Code (CIC) Table (where CIC #12 is a Government Bond). Similarly, CIC #13 and #14 which are defined as Government while for VA can be allocated as Government or Corporate depending on the Issuer, EIOPA have clarified that:
For the construction of the representative portfolios government and corporate bonds are classified according to their reported credit rating or in case lacking: their assumed credit rating.
CIC12-classified bonds are supranational bonds issued by supranational organizations, which in general are created by governments of several countries. Due to the (unknown) composite nature of the underlying issuers the credit risk is assumed to be higher than regular government bonds issued by a single country.
CIC13/14-classified bonds are Regional government bonds resp. Local authority bonds. The credit risk in these bonds is assumed to be related to the country of issuance. Depending on the assumed credit risk of the issuing country these bonds are either allocated to the government bond portfolio or corporate bond portfolio. It is worth mentioning that in general the exposure to such bonds by insurance undertakings is minimal if at all.
Further information
For more on any of the items above, or any Insurance-related queries, contact Brian Morrissey, Head of Insurance.