Insurance Insights August 2024

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.

Introducing Inside Insurance, KPMG’s exclusive interview series that delves into the dynamic world of the insurance sector. KPMG explores the pressing topics shaping the future of insurance through candid conversations and interviews conducted by Jean Rea (Actuarial Partner), featuring industry leaders and other KPMG experts. 

Entities that adopted IFRS 17 by year-end 2023 have published their first full IFRS 17 financial statements. These “first wave” adopters are now focusing on improving processes, upskilling teams, and benchmarking against peers. A “second wave” of (re)insurers will adopt IFRS 17 later and can learn from the challenges faced by the first wave. Both groups will benefit from reflecting on initial implementation lessons to determine the best path forward. KPMG (led by Niall Naughton, Financial Services Audit Partner, Aoife O’Brien and David O’Shea, Actuarial Directors) discuss key challenges and potential next steps for both waves.

In this second publication of the four part series, the KPMG Actuarial team (led by Jean Rea, Actuarial Partner and Model Risk Leader) turn their attention to the insurance industry. They explore the use of models within the industry and the challenges that model risks can pose for insurers. They discuss why Model Risk Management is gaining momentum, including increased regulatory scrutiny; the demand, and the emerging area of climate risk modelling.

Effective complaints management has become a key component of financial institutions' operating models as firms increasingly strive to achieve better outcomes for customers and stakeholders.

The KPMG Consulting team (led by Gillian Kelly (Head of Consulting)) explores the opportunities firms can have by changing their complaints management culture and by leveraging Artificial Intelligence and technology in this article.

Internal Audit (“IA”) functions serve as the last line of defense to ensure organisational elements meet rising expectations. High-quality audits are crucial for maintaining the IA function's relevance to business needs. The Institute of Internal Auditors (IIA) International Standards outline quality assurance requirements for IA functions. Establishing a quality assurance function to continually assess IA effectiveness has become standard practice for large audit teams across all sectors. KPMG (led by Patrick Farrell (Risk Consulting Partner) and the Internal Audit team) delve into this topic further.

On 29 August, the Central Bank of Ireland (“CBI”) published a Dear CEO Letter following a  targeted Consumer Protection Risk Assessment (CPRA) of insurance firm’s consumer protection risk management frameworks, which assessed the appropriateness of insurance firms’ risk management frameworks and in particular, how they identify, manage and mitigate the risks posed to consumers. All firms are required to review and consider the expectations, findings and practices set out in this letter (and in the 2017 CPRA Guide), in the context of their own consumer protection risk management frameworks.

The Retail Intermediaries Authorisations Team of the CBI will be hosting a webinar on 17 September 2024 at 10:00am. The purpose of the webinar is to provide applicants with a better understanding of the requirements of the retail intermediary authorisation process, as well as tips for completing an Application Form for Authorisation as a Retail Intermediary - A Form, and to flag some common errors.

Any applicant interested in attending the webinar should email their contact details to RIAuthorisations@centralbank.ie.

In July, the CBI published updated guidance in relation to the requirements for obtaining authorisation as an insurance or reinsurance undertaking in Ireland. The CBI also published an updated checklist for completing and submitting life, non-Life or captive (re)insurance authorisation applications.  

In July, the CBI published a Consumer Research Report on Pension and retirement income: Key challenges for consumers. On its report, the CBI notes that considering the importance to the individual and to the economy, pensions are an important area of financial services on which the CBI seeks to engage with firms and within the broader ecosystem.  

On 5 August, EIOPA published its most recent technical information on the symmetric adjustment of the equity capital charge for Solvency II with reference to the end of July 2024. 

On 5 August, EIOPA published its most recent technical information relating to risk-free interest rate (RFR) term structures with reference to the end of July 2024. 

On 2 August, EIOPA launched a public consultation on the future implementation of the new proportionality framework under Solvency II. On 30 April 2024 the European Commission asked EIOPA to further clarify the methodology for classifying insurance undertakings as small and non-complex, as specified in the provisional agreement on the amendments to the Solvency II Directive, as well as the conditions for granting, or withdrawing, supervisory approval to use such proportionality measures by insurers not classified as small and non-complex. 

On 31 July, EIOPA published its July 2024 Insurance Risk Dashboard. The Dashboard, which is based on Solvency II data collected from 93 insurance groups and 2153 insurance undertakings, provides an overview of the main risks and vulnerabilities of the European insurance sector through a set of risk indicators. In respect of profitability and solvency risks, the Dashboard indicates solvency ratios for insurance groups and insurance undertakings showed a slight deterioration in Q1-2024, and that the latest available quarterly and annual data shows positive developments related to the profitability of both non-life and life undertakings.

On 31 July, EIOPA launched a public consultation on the treatment of insurers’ direct exposure to qualified central counterparties (CCPs) when calculating their capital requirements using the standard formula. Stakeholders are invited to provide their comments by 23 October 2024.

The consultation paper discussed three policy options:

• No change to the current regime (i.e., no recognition of the risk specificities of new access models and direct exposures),
• Extending the treatment of indirect exposures to CCPs, to direct exposures to CCPs (i.e., more risk sensitivity but without capturing the particularities of default fund contributions),

or

• Further aligning the treatment of default fund contributions with the Capital Requirements Regulation – EIOPA’s preferred option as it also extends risks sensitivity to default fund payments.

On 31 of July, EIOPA published its quarterly risk assessment of the occupational pensions sector. The IORP risk dashboard, which is based on individual occupational pensions regulatory reporting, summarises the main risks and vulnerabilities in the Institutions for Occupational Retirement Provisions (IORPs) sector of the European Economic Area (EEA) for defined contributions (DC) and defined benefits (DB) pension schemes. It includes a set of risk indicators covering risk categories, such as market and credit risks, liquidity risks, reserve and funding risks, ESG risks, and cyber risks.  

EIOPA found that market and asset return risks are stable at a high level with volatility increasing in the fixed income and equity markets at the end of June, and the latest data pointing to a continued decline in real estate prices across the Euro Area, mainly driven by commercial real estate.

On 26 July, the three European Supervisory Authorities (EBA, EIOPA and ESMA – the ESAs) published their joint Final Report on the Draft Regulatory Technical Standards (RTS) specifying how to determine and assess the conditions for subcontracting (i.e. sub-outsourcing) information and communication technology (ICT) services that support critical or important functions under the Digital Operational Resilience Act (DORA).

On 29 July 2024, the Financial Conduct Authority (FCA) published a discussion paper with the aim of ensuring that customers in the commercial insurance market are protected appropriately, while also not placing unnecessary regulatory costs on firms or affecting innovation.

On 3 July 2024, the FCA published the minutes the FCA Board Meeting which took place on 23 May 2024.

On 8 July 2024, the FCA published a paper where they consult on proposed miscellaneous amendments to our Handbook. These tend to be minor changes, but they want to get feedback on their proposals.

On 16 July 2024, the FCA published a report in response to the FCA Credit Information Market Study. 

On 18 July 2024, the FCA published a multi-firm review which sets out our findings on how effectively firms are following our current Guidance on the treatment of politically exposed persons (PEPs) for anti-money laundering purposes.

On 1 August 2024, the Artificial Intelligence Act (AI Act) entered into force. The AI Act aims to ensure that AI systems deployed in the EU are safe, respect fundamental rights and EU values, and encourage the development of a single market for AI applications. The AI Act follows a risk-based approach requiring AI systems to be classified and assessed based on risk level and imposing corresponding requirements.

Please see below for EIOPA’s response to recent queries which have been raised by the public for further clarification on the Solvency II requirements. The Solvency II requirements may change or become more prescriptive over time.

EIOPA clarified in Q&A (#3080) that the total amount of LACDT should be reported in cell R0310/C0100 and the total amount of LACTP in cell R0300/C0100 of template S.25.05.02.01. In template S.25.05.01.01, LAC DT and LAC TP should be included in C0010 based on what is reported in C0060.

EIOPA clarified in Q&A (#3016) that the configuration of the setting of thresholds for risk concentrations is within the remit of the Group supervisor, please also refer to Article 244 (3) of the Solvency II Directive.

EIOPA clarified in Q&A (#2954) that column C0200 shall reflect the value of assets held in relation to unit-linked or index-linked life insurance contracts. The risk concentrations templates capture the exposures to counterparties that could threaten the group solvency or liquidity position. See also Article 376 of the Delegated Regulation.  

EIOPA clarified in Q&A (#2904) that for C0293 from S.06.02 the identification whether the asset is subject to bail-in rules shall be done in line with Articles 43 and 44 of the Directive 2014/59/EU. On the reporting of C0296 and C0297: Plant and equipment should be included in the calculation of property potentially exposed to physical risk. As plant and equipment are reported in a single line undertaking are therefore invited to use their own judgment and apply a look through approach, similarly as for indirectly held properties.