Insurance Insights October 2023

The KPMG Insurance and Regulatory team (led by Jean Rea, Partner - Actuarial and Applied Intelligence and John O’Donnell Managing Director – Insurance Regulatory) highlights recent areas of regulatory focus in relation to reinsurance activities, and the considerations firms should be aware of. This is based on recent communications from the Central Bank of Ireland (‘Central Bank’) and European Insurance and Occupational Pensions Authority (‘EIOPA’) highlighting the increased scrutiny on insurers reinsurance arrangements. These include:

• January 2023: the Central Bank of Ireland (the ‘Central Bank’) published their guidance for (Re)insurance Undertakings on Intra-Group Transactions;
  
• July 2023: The European Insurance and Occupational Pensions Authority (‘EIOPA’) launched a public consultation on its draft supervisory statement on the supervision of reinsurance arrangements entered into with third-country (i.e. non-EEA) reinsurers; and
• July 2023: The Central Bank share observations from their supervision of reinsurance activities in the June 2023 quarterly insurance newsletter. 

A critical component on managing the potential risks associated with artificial intelligence (‘AI’) is appropriate regulation. The European Union (‘EU’) is taking a proactive approach to governing AI technologies to ensure they align with fundamental rights, privacy, and safety standards.

This framework, articulated in the European Commission (‘EC’) 's proposals on regulating AI through the ‘AI Act’ aims to strike a balance between promoting innovation and safeguarding human values. In this article, KPMG (led by Ian Nelson, Head of Financial Services and Regulatory, Matt Greene, Managing Director – Regulatory Consulting, Gillian Kelly, Head of Consulting and Jean Rea) discuss how firms can proactively embrace AI while simultaneously preparing for and complying with evolving regulations in Europe.

KPMG’s Ryan McCarthy has been thinking a great deal about the role and function of the board in recent times. As a senior audit partner with KPMG, he has engaged with the boards and leadership teams of some of Ireland’s biggest and most successful publicly listed companies. Also, as a long-time member of the firm’s Private Enterprise Team, McCarthy has also worked with a wide variety of privately-owned companies also. McCarthy, a KPMG partner since 2006, is now taking that experience to a new role with the KPMG Board Leadership Centre. KPMG operates the Centre in a number of other countries, but it is now coming to Ireland with McCarthy taking the lead on the project.

Rapid advancements in AI and the implications for governance and board oversight are front and centre. The era of AI has begun with startling speed. AI and machine learning are progressively shaping business strategies and operations, with increasing demands – from customers, regulators, and other stakeholders – for greater transparency into how these data-driven technologies and algorithms are being used, monitored, and managed. KPMG (led by Ryan McCarthy, Audit Partner and Board leadership Centre Lead) discuss AI’s implications for governance and board oversight and the eight core principles to guide responsible AI.

In KPMG’s analysis (led by Bob Owel, Director - KPMG International Standards Group) of the first half-year reports of 64 insurers we share our key observations on the disclosures under IFRS 17 Insurance Contracts and IFRS 9 Financial Instruments, and their comparatives. In particular, we analysed disclosures under IFRS 17 on:

• the discount rates applied;
• confidence levels; and
• the expected release of contractual service margin (“CSM”) to profit or loss.

We also share our key observations on the key performance indicators reported by the 64 insurers.

On 26 September, EIOPA elected Ms Margardia Corrêa de Aguiar, President of the Portuguese Insurance and Pensions Funds Supervisory Authority and Mr Domhnall Cullinan, Director of Insurance Supervision at the Central Bank of Ireland as Members of EIOPA’s Management Board. The role of EIOPA’s Management Board is to ensure that EIOPA achieves its mission and completes the tasks assigned to it, and it is composed of the EIOPA Chair, six representatives from national supervisory authorities and a representative from the European Commission. The Management Board is elected for a term of two-and-a-half years, which can be extended once.

On 27 September, the three European Supervisory Authorities (‘ESAs’) (EBA, EIOPA and ESMA) published an indicative overview of information and communication technology (‘ICT’) third-party providers (‘TTP’) as part of their preparations for the Digital Operational Resilience Act (‘DORA’). The analysis aims to map the provision of ICT services by TPPs to financial entities in the European Union and to support the ESA’s policy making process. The exercise identified around 15,000 ICT TPPs directly serving around 1600 EU financial entities included in the sample.

The joint committee of the ESAs on 28 September published their second annual Report on the extent of voluntary disclosure of principal adverse impacts (‘PAI’) under the Article 18 of the Sustainable Finance Disclosure Regulation (‘SFDR’). While there is still a significant variation in the extent of compliance with the PAI disclosure requirements both across financial markets providers and jurisdictions, the results of this year’s survey show an overall improvement in the application of voluntary disclosures.

On 28 September, EIOPA submitted its technical advice on the review of the IORP II Directive, which regulates the activities and supervision of institutions for occupational retirement provisions (‘IORPs’). The advice provided focuses on ensuring the reviewed directive can embrace the future while protecting the legacy. In particular the advice proposed the following:

• Proposes changes to keep the regulatory framework for IORPs relevant;
• Recognises the need for existing defined benefit IORPs to be properly regulated and supervised;
• Enhance the proportionality measures. 

On September 28, the ESAs published their joint response to the European Commission’s Call for advice on two delegated EC acts under the DORA specifying further criteria for critical ICT third-party service providers (‘CTTPS’) and determining oversight fees levied on such providers. 

On 2 October, EIOPA publishes an updated technical documentation for calculating the risk-free interest rate term structures (‘RFR’). The new date for the updated technical RFR documentation to become applicable is set for 1 January 2024. Therefore, the first calculation based on the updated technical RFR documentation will be end of January 2024.

On 4 October, the Joint Committee of the ESAs published today its Work Programme for 2024 outlining the areas of work and planned deliverables for 2024. The joint committee will focus on the following areas in 2024:

• Consumer and investor protection, and financial innovation;
• Sustainable finance;  
• Cross-sectoral risk assessment; 
• Digital operational resilience;
• External Credit Assessment Institutions (‘ECAIs’);
• Financial conglomerates; and
• Securitisation. 

On 5 October, EIOPA published their report on how the current inflationary environment impacts Insurers in Europe. The analysis considers the effects higher than expected inflation and interest rates have had on the insurance sector until now and looks ahead to assess potential future risks and vulnerabilities. The report reviews the effect the current environment is having on Capital Position, Profitability and Liquidity. 

On 5 October, EIOPA published technical information on the relevant risk-free interest rate term structures (RFR) with reference to the end of September 2023. 

On 5 October, EIOPA published technical information on the symmetric adjustment of the equity capital charge for Solvency II with reference to the end of September 2023.  

On 6 October, EIOPA outlined its strategic priorities for the period 2024-2026. EIOPA is focusing on managing the uncertainty in times of transformation so that the insurance and pensions sectors can continue to deliver value to policyholder and beneficiaries, to businesses and the EU economy. EIOPA has identified the following strategic priorities: 

• Integrating sustainable finance considerations across all areas of work;
• Supporting the consumers, the market and the supervisory community through digital transformation;
• Enhancing the quality and effectiveness of supervision, particularly in view of increased cross-border business;
• Ensuring technically sound prudential and conduct of business policy;
• Identifying, assessing, monitoring and reporting on risks to the financial stability and conduct of business and promoting preventative policies and mitigating actions;
• Providing effective recruitment, management and development of EIOPA’s human capital to further enhance its position as an attractive employer. 

On 6 October, EIOPA launched a public consultation on its Opinion regarding the supervision of and regulatory requirements applicable to captive (re)insurance undertakings, with a particular view on intra-group transactions (in particular ‘cash pooling’) and their impact on the captive’s SCR calculation, ORSA and on their compliance with the prudent person principle. EIOPA’s draft Opinion also covers the fitness of the captive’s board of directors and the need to appoint a designated person considered to be the person responsible for outsourced key functions. Stakeholders are invited to provide their feedback by responding to the questions in the online survey by 5 January 2024.

On 12 October, EIOPA published its digital strategy for the next three years. The strategy will guide EIOPA’s priorities and defines the focus areas over the next three years. The strategy provides and integrates EIOPA’s view and mission on how to support the digitalisation of the insurance and pensions sectors of national competent authorities (NCAs) and of EIOPA itself. Under the objective of promoting consumer protection and financial stability, EIOPA identified three key long-term priorities: 

• ensuring innovation is aligned with the best interests of consumers taking into account digital ethics and financial inclusion;
• strengthening business model sustainability and resilience of all insurance market players; and 
• enhancing the supervisory capabilities of EIOPA and NCAs by maintaining the standard of efficient prudential and conduct supervision as well as responding to and using technological innovation.

On 23 October, Petra Hielkema, the Chairperson of EIOPA participated in the annual hearing of the Economic and Monetary Affairs Committee of the European Parliament. The introductory statement focused on the following: 

• Importance of closing the Insurance Protection gaps;
• Cyber insurance gap; and
• Pensions savings gap. 

On 25 October, the ESAs published their joint criteria on the independence of supervisory authorities. Supervisory independence is key to ensure that fair, effective and transparent decisions are taken by appropriately resourced supervisory authorities. The independence criteria is organised around four key principles: 

• Operational independence: so supervisory authorities operate without any form of undue influence from the supervised sector and the government, have adequate legal powers and operational resources.
• Personal independence: with transparent rules for the appointment, selection and removal of members of the supervisory authority’s governing body, and high ethical standards for members of the supervisory authority’s staff and governing body.
• Financial independence: with sufficient financial resources for supervisory authorities to fulfil their mandates.
• Accountability and transparency: so supervisory authorities conduct their tasks in a transparent and accountable manner.

On 5 September, the Financial Conduct Authority (‘FCA’) published a Consultation Paper which sets out our proposals for transferring part of the regulatory requirements on insurance firms from current legislation into our rules.

On 20 September, the FCA published a dataset which measures data for a wide range of general insurance products for January to December 2022.

On 20 September, the FCA published numerous letters which outlines the FCA’s priorities for the Insurance market 2023-2025.

On 02 October, the FCA published a review of insurance companies’ approaches to terminal illness benefits to make recommendations for improvement.

On 20 September, the PRA published a speech which update you on the reforms to Solvency II, to create a new UK prudential regime for insurers known as Solvency UK.

On 25 September, the PRA published a consultation paper whichsets out the Prudential Regulation Authority’s (PRA) proposed rules and expectations aimed at improving diversity and inclusion in PRA-regulated firms.

On 28 September, the PRA published a consultation paper which sets out the PRA’s proposed reforms that will enable broader and quicker investment by insurers in their matching adjustment (MA) portfolios, while improving responsiveness to risk and enhancing firms’ responsibility for risk management.