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Insurance Insights

Insurance Insights

Insurance Insights

Risk Free Rate Regulation Round-up

Across global jurisdictions, the financial services industry, working groups, and regulators are focused on efforts to choose and transition to alternative risk-free rates (RFR). In a highly uncertain environment, individual financial institutions must assess and plan for the potential impact of a transition away from LIBOR/ EONIA on their products, infrastructures, and customers. LIBOR/ EONIA are used within a broad range of financial instruments involving trillions in USD $ worldwide. Financial institutions can expect the decommission to significantly impact most of their functions and businesses.  There have been a number of key regulatory updates over the last couple of months that will help to further drive clients' priorities, which are explored in this article

Central Bank of Ireland Update

‘General Good Rules’

The CBI has published updated 'general good rules'. (PDF, 411KB) This document sets out some of the main general good rules that insurance distributors, insurers and reinsurers must adhere to when operating in Ireland. The topics covered include Consumer Protection Code 2012, Funding Levy, Health Insurance, Motor Insurance, Non-Life Premium Levy and The Life Regulations.

Speech by Deputy Governor of the CBI

Improvements are required for insurance firms to sustainably serve the needs of all policyholders and the wider economy long into our uncertain future.

On 8 May, the Deputy Governor of the CBI, Ed Sibley, while speaking at the Annual Insurance lunch by Insurance Ireland, spoke about the functioning of the insurance market, key issues that affect the whole industry and discussed the challenges ahead that need to be addressed. The key issues touched upon by the Deputy Governor included Brexit, Operational Resilience, Reinsurance, Investments, Individual Accountability and the Fitness & Probity regime, Recovery Planning and Diversity. He discussed the uncertainties that present opportunities and risks in future such as climate change, technology disruption, or demographic changes.

The Senior Executive Accountability Regime

The Central Bank’s Expectations and Insights for Boards

At the launch of the Irish Banking Culture Board, the CBI’s Director General, Financial Conduct, Derville Rowland, acknowledged the launch of the Culture Board with its intended focus on behaviour, ethics and culture and its proposed advocacy for the interests of bank customers and a sustainable banking industry, as a welcome step on the road towards building a consumer focused culture in retail banking.

Following the findings reported in its Behaviour and Culture report published by the CBI last summer, the CBI expects regulated financial services providers to have comprehensive risk management frameworks in place, including conduct and consumer risk frameworks, and to manage these risks effectively. Over the medium to long-term, the CBI expects to see concrete evidence of the effectiveness of behaviours, structures and controls in terms of Culture.

Boards must get to grips with outsourcing risks

While speaking at a Financial Services Industry board member event, Derville Rowland, Director General, Financial Conduct, shared thoughts on the CBI’s proposal for Senior Executive Accountability Regime (SEAR) and offered practical insights for the Board. Pointing out the need for rebuilding trust in Irish financial services sector as a conduct regulator, she stated that the reputational fallout from a misconduct is often not limited to the offending institution but has a contagion effect on other players and can also damage the wider economy. She added that internationally, the evolving regulatory landscape has prompted the Financial Stability Board to recommend national authorities to hold individuals accountable. Adding further, she explained the four key elements included in the CBI’s Culture Report for individual accountability that includes proposing enforceable conduct standards, proposing SEAR, proposing enhancements to current F&P regime and a unified enforcement process.

EIOPA / European Commission updates

Big Data Analytics in motor and health insurance

On 8 May 2019, EIOPA published its report on Big Data Analytics in motor and health insurance. (PDF, 2.9MB)

The report revealed a strong trend towards increasingly data-driven business models throughout the insurance value chain. Some of the key findings of the report are as set out below:

  • Traditional data sources such as demographic data or exposure data are increasingly combined (not replaced) with new sources like online data or telematics data, providing greater granularity and frequency of information about consumer’s characteristics, behaviour and lifestyles;
  • The use of data outsourced from third-party data vendors and their corresponding  algorithms used to calculate credit scores, driving scores, claims scores, etc. is relatively extended and this information can be used in technical models;
  • Big Data Analytics tools such as artificial intelligence or machine learning are already actively used by 31% of firms, and another 24% are at a proof of concept stage. Models based on these tools are often correlational and not causative, and they are primarily used on pricing and underwriting and claims management;
  • Big Data Analytics tools enable the development of very accurate assessments, without or with limited human intervention, increasing the efficiency and speed of decision making and therefore reducing operational costs; and
  • Cloud computing services, which reportedly represent a key enabler of agility and data analytics, are already used by 33% of insurance firms, with a further 32% saying they will be moving to the cloud over the next 3 years.

EIOPA’s Technical Advice on sustainability risks and factors

EIOPA’s Technical Advice on the integration of sustainability risks and factors in the Delegated Acts under Solvency II and IDD

EIOPA published its advice to the European Commission on sustainability (PDF, 2MB) in the areas of risk management, investment strategy, stewardship and product oversight. A key aspect of the advice is the integration of sustainability in the prudent person principle for investments under Solvency II. In particular, insurers should reflect the impact of their investments on sustainability, promoting a stewardship approach by insurers and reinsurers. At the same time, EIOPA emphasises the relevance of integrating sustainability risks in the investment decisions and underwriting practices. 

Expert Panel on Pan-European Personal Pension Product Regulation

EIOPA has issued a call for candidates to join an Expert Panel on the Pan-European Personal Pension Product (PEPP) Regulation (PDF, 437KB). EIOPA is setting up an Expert Panel on PEPP to inform EIOPA's policy work, to test policy proposals and to act as sounding board supporting EIOPA delivering on its mandate. The main tasks of the Expert Panel on PEPP will be to:

  • Meet regularly with EIOPA's working structure – in physical meetings, conference or video calls – to share technical expertise and evidence;
  • The key areas for input will be on:
    • PEPP Key Information Document (KID), conditions for its revision and provision of the PEPP KID.
    • PEPP Benefit Statement (PBS) and supplementary information;
    • Cost cap for the Basic PEPP; and
    • Risk-mitigation techniques.

EIOPA is seeking highly knowledgeable professionals with extensive practical experience of designing personal pension products. The deadline for applications is Tuesday, 21 May 2019 at 23:59 CET.

Workshop on Cyber Insurance

On 1 April 2019, EIOPA hosted a workshop on Cyber Insurance.  More than 100 representatives from the insurance industry, brokers, policyholders, regulators, think tanks and other stakeholders participated. The workshop continued the structured dialogue with the insurance industry on cyber insurance, which resulted in a first EIOPA report published in 2018. The goal of the workshop was to discuss and identify possible solutions to address the challenges facing the European cyber insurance market. Specifically, the workshop focused on two main challenges: covering cyber risks and quantifying cyber risks. Read the agenda, summary and presentations of the Workshop as well as the opening remarks of EIOPA's Chairman, Gabriel Bernardino.

Fourth InsurTech Roundtable

On 11 April 2019, EIOPA hosted its Fourth InsurTech Roundtable on "the use of cloud computing by (re)insurance undertakings". Over 70 participants from 48 different organisations from all over Europe participated. This Roundtable continued EIOPA's work outlined in the recently published report on "Outsourcing to the Cloud: EIOPA's Contribution to the European Commission Fintech Action Plan" (PDF, 593KB).

The aim was to discuss with the different market participants views and approaches to cloud outsourcing in a Solvency II and post-European Banking Authority Recommendations environment and determine best practises for the development of an informed decision of a principle based guideline.

The agenda and summary of the Roundtable and EIOPA's presentation can be obtained here.

EIOPA: 2018 supervisory activities and 2019 priorities

On 26 April 2019, EIOPA reported on its 2018 supervisory activities and 2019 priorities which include: 

  • Continue to focus on the practical implementation of the common supervisory culture, the assessment of risks to the internal market and to the level playing field as well as the supervision of emerging risks

New supervisory activities include work on conduct of business supervisory practices under the Supervisory Handbook, analysis of the consistency of technical provisions best estimate calculation and the supervision of run-off undertakings

Supervision of Solvency Capital Requirement

In April, EIOPA issued a Supervisory Statement on the application of the proportionality principle (PDF, 668KB) in the supervision of the Solvency Capital Requirement (SCR) calculated in accordance with the standard formula. EIOPA states that consistent implementation of the proportionality principle is key to ensure supervisory convergence for the supervision of the SCR. To guarantee supervisory convergence and consistent application of the proportionality principle EIOPA considers the following key areas:

  • Proportionate approach;
  • Prudent calculation;
  • Risk management system and Own Risk and Solvency Assessment (ORSA);
  • Supervisory reporting and public disclosure; and
  • Supervisory review process.

EIOPA’s Risk Dashboard

This Risk Dashboard based on Solvency II data (PDF, 1.4MB) summarises the main risks and vulnerabilities in the European Union insurance sector through a set of risk indicators of the fourth quarter of 2018. The results of the April 2019 Risk Dashboard show that the risk exposure of the European Union insurance sector remains overall stable. This data is based on financial stability and prudential reporting collected from 96 insurance groups and 2,873 solo insurance undertakings.

2018 Insurance Stress Test Recommendations

During the course of 2018, EIOPA carried out a European-wide stress test (PDF, 586KB). The Recommendations, which were issued to the National Competent Authorities (NCAs) in order to address issues identified in the Stress Test, included:

  • EIOPA highlights the need to strengthen the supervision of the affected groups and requests the NCAs to review and, where necessary, to challenge capital and risk management strategies of those groups. Furthermore, NCAs should require groups to identify the range of possible management actions, assess whether these actions are realistic and consider potential second-round effects.
  • EIOPA requests NCAs to check the adequacy and flexibility of systems and risk models used by groups for stress testing. Furthermore, for future stress tests NCAs should ensure sufficient resources and,

EIOPA  calls  upon  NCAs  to  enhance  cooperation  and  information  sharing with relevant authorities, such as the ECB Single Supervisory Mechanism and/or other national  supervisory authorities of  affected insurers  that are  part  of  a  financial conglomerate.

PRA related updates

The following updates, while UK specific, may be of interest to Irish based (re)insurers:

18 April 2019: PS5/19 ‘The Bank of England’s amendments to financial services legislation under the European Union (Withdrawal) Act 2018’

The Bank of England (Bank) and PRA have published PS5/19 ‘The Bank of England’s amendments to financial services legislation under the European Union (Withdrawal) Act 2018’ – April 2019, which includes final versions of policy materials including EU Exit Instruments, Supervisory Statements (SSs), and a Statement of Policy, which were published as near final on 28 February 2019. Of particular interest to those working with or at PRA-regulated firms are:

For further information and materials about the PRA’s work on the UK’s withdrawal from the EU, please see the dedicated EU withdrawal pages.

15 April 2019: Avoiding the storm: Climate change and the financial system – speech by Sarah Breeden

In this speech Sarah Breeden, Executive Director, International Banks Supervision, sets out how the financial risks from climate change are far-reaching, foreseeable and for action today. She notes that to avoid the impending storm, the financial system needs to plot a new course to safer waters.

15 April 2019: Feedback on CP23/18: Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change

This PRA Policy Statement provides feedback to responses to CP23/18 ‘Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change’. It also contains the final SS3/19 ‘Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change’.

This PS is relevant to all UK insurance and reinsurance firms and groups, i.e. those within the scope of Solvency II including the Society of Lloyd’s and managing agents (‘Solvency II firms’) and non-Solvency II firms, (collectively referred to as ‘insurers’), banks, building societies, and PRA-designated investment firms (collectively referred to as ‘banks’). ‘Firms’ will be used to refer to both insurers and banks.

Transition to IFRS 17

Every month KPMG Ireland's IFRS team is producing an update on the progress of the industry to date on the implementation of the new insurance accounting standard