Insurers and insurtechs are increasingly adept at using data to gain important insights into customers' needs and behaviours. Yet when it comes to health, insurance products (life, health, accident and even travel insurance) are sold on financial outcomes rather than health needs. This article provides some recommendations on how insurers can delve into this further.
On 3 October 2019, Legerity and a panel of experts, including Jean Rea, an Actuarial Director with KPMG, engaged in a discussion on how regulation and digital transformation are changing the finance and actuarial functions within insurance firms. Listen to the webinar here.
A speech by the Deputy Governor of the Central Bank of Ireland (CBI), Ed Sibley, focussed on areas where (re)insurer’s attention is warranted over the short and longer term. The speech addressed the key matters of: (1) Brexit; (2) Risks, challenges and opportunities of innovation, climate change and demographic development; (3) the CBI’s increased focus on recovery and resolution planning; and (4) CBI’s work to drive the insurance industry on lack of progress in improving diversity at senior levels. Ed also said that “Recovery planning is, therefore, an important part of the overall risk management process of insurers and should be considered a governance arrangement within the meaning of the 2015 Regulations”.
The CBI has published a package of new rules to be included in the Consumer Protection Code 2012 on the payment of commission to financial intermediaries, involving new requirements on transparency for consumers and prohibitions on certain types of commission arrangements. Under the new rules, the CBI will require intermediaries to publish details of the commissions they receive from product producers on their website. In addition, the CBI will no longer permit intermediaries to describe themselves and their regulated activities as ‘independent’ where they accept and retain commission in circumstances where advice is provided.
On the 15 October 2019, EIOPA launched a public consultation on an Opinion that sets out technical advice for the 2020 review of Solvency II. The Opinion will respond to the call for advice of the European Commission of 11 February 2019 on the 2020 review of Solvency II.
The call for advice comprises 19 separate topics. Broadly speaking, these can be divided into three parts.
• Firstly, the review of the long term guarantee measures. These measures were always foreseen as being reviewed in 2020, as specified in the Omnibus II Directive. A number of different options are being consulted on, notably on extrapolation and on the volatility adjustment.
• Secondly, the potential introduction of new regulatory tools in the Solvency II Directive, notably on macro-prudential issues, recovery and resolution, and insurance guarantee schemes. These new regulatory tools are considered thoroughly in the consultation.
• Thirdly, revisions to the existing Solvency II framework including in relation to freedom of services and establishment; recovery and resolution planning; reporting and disclosure; and the solvency capital requirement.
The key findings from a thematic review on travel insurance were published on 9 October 2019, with one of the key findings noted that the travel insurance market as a whole does not appear to face a general market failure, and travel insurance products remain valuable for consumers. However, there are heightened conduct risks leading to consumer detriment due to problematic business models with remuneration structures based on extremely high commission levels.
On 9 October 2019 EIOPA launched - as part of the 2020 Solvency II reporting and disclosure review – Wave 1 - a field test on the revised and newly proposed templates. As indicated in the context of the consultation on supervisory reporting and public disclosure the revision covers both content and structure of different templates.
The aim of the field test is to provide undertakings the possibility to implement the new and revised reporting requirements, to identify main issues and to report on them. The field test does not aim that National Competent Authorities (NCAs) receive real data. The field test is open for all solo undertakings and service providers. EIOPA appreciates the participation of different types and sizes of undertakings. The field test is open until 31 January 2020.
On 8 October 2019, EIOPA published the first parallel calculation on the relevant risk free interest rate term structures (RFR) with reference to the end of September 2019 based on Refinitiv data and an updated version of the source code used for the monthly risk-free interest rate term structures (RFR) calculation. This parallel publication will allow stakeholders to compare their own calculations with those conducted by EIOPA before the use of Refinitiv as main source of market data for the RFR calculation becomes official for end of January 2020.
On 4 October 2019, the three European Supervisory Authorities (EBA, EIOPA and ESMA - ESAs) published their second joint Opinion on the risks of money laundering (ML) and terrorist financing (TF) affecting the European Union's (EU) financial sector. Drawing on data and information provided by national anti-money laundering (AML) and countering the financing of terrorism (CFT) competent authorities (CAs), the ESAs found that the monitoring of transactions and suspicious transactions reporting still raise concerns, particularly in sectors where a financial institution's business model is based on frequent transactions. This Opinion contributes to strengthening the EU's AML and CFT efforts.
On 30 September 2019, EIOPA published an Opinion on Sustainability and Solvency II. The Opinion addresses the integration of climate-related risks in Solvency II Pillar I requirements. Climate change increases the uncertainty about the occurrence and the impact of physical or transition risks, which can happen at any time and suddenly, with far-reaching consequences. Hence, undertakings should not be complacent about these risks. (Re)insurance undertakings are called to implement measures linked with climate change-related risks, especially in view of a substantial impact to their business strategy. Consequently, EIOPA stresses the importance of scenario analysis in the undertakings' risk management.
Insurers play a key role in enabling the transformation to the digital economy: not only are insurers susceptible to cyber threats directly themselves, but they also offer coverage for cyber risk through their underwriting activities. This report analysed cyber risk from both angles based on responses from 41 large (re)insurance groups across 12 European countries with the aim to further enhance the level of understanding of cyber risk for the European insurance sector.
CRO Forum: Managing liquidity risk: Industry practices and recommendations for CROs
More than ten years on from the global financial crisis (GFC), liquidity risk remains an important theme for the financial services industry, including for (re)insurers. The crisis triggered changes in market dynamics. The paper highlights the unintended consequences of the monetary and regulatory response to the GFC, and new uncertainties. The paper also looks at developments in liquidity risk management since the GFC, and provides an overview of current practices of the (re)insurance industry based on a survey conducted amongst CRO Forum members. Read more here.
Insurance Europe: Publication on Insurers’ role in EU cyber resilience
On 9 October 2019 Insurance Europe launched a new publication entitled “Insurers’ role in EU cyber resilience”, which highlights the key role insurers play in assisting the EU in its efforts to increase cyber resilience and competitiveness. Read more here.
Insurance Europe: EU insurers call for flexibility on implementation timeline for EIOPA cloud outsourcing guidelines
European insurers say they will likely need additional time to implement proposed guidelines on outsourcing to cloud service providers, which EIOPA is currently developing. Based on past industry experience, this will be necessary to facilitate a smooth transition from current operational practices. Read more here.
Insurance Europe: Solvency II proportionality principle
Insurance Europe and AMICE have issued a joint call for the European Commission to improve Solvency II proportionality rules to ensure that insurers are not disproportionately burdened by the regulatory framework. EU insurers have warned that the principle of proportionality is, in practice, hardly ever applied under Solvency II and have jointly called on the European Commission to make changes. The industry’s proposed improvements would help to ensure that the principle of proportionality is applied effectively and consistently across all member states and across all three pillars of Solvency II. Read more here.
30 September: Solvency II: the quality of capital instruments
The PRA published the final policy following publication of the proposed updates to supervisory statement SS3/15 which were initially published in June 2019, following updates to the Solvency II Delegated Regulations. No changes were effected to the proposed changes. The new policy will come into effect for all instruments issued on or after Monday 30 September 2019.
27 September: CP 23/19 Solvency II - Income producing real estate loans and internal credit assessments for illiquid, unrated assets
In this Consultation Paper, the PRA is proposing to revise SS3/17 to:
• add expectations in respect of income producing real estate (IPRE) loans within Solvency II internal models; and
• amend expectations around the use of internal credit assessments for assigning fundamental spreads for illiquid, unrated assets.
The consultation closes on 27 December 2019 and the proposed implementation date is 31 March 2020.
27 September: Solvency II: Equity release Mortgages- Part 2
The PRA published its revised version of SS3/17 Solvency II: Matching adjustment – illiquid unrated assets and equity release mortgages. After considering responses to a prior consultation paper the PRA has made a number of changes, which become effective from 31 December 2019.
24 September: Speech by Charlotte Gerken- Insurance risk management in a changing world
The PRA published a speech delivered at an Annual Financial CEO conference by Charlotte Gerken, Director of Cross-cutting and Insurance Policy. In her speech, the PRA expectations on investment risk management, the prudent principle person, liquidity risk management and investment in income-producing real estate were highlighted. A supervisory statement on outsourcing is expected in October 2019, and this is aimed to address the risks arising from changes in business models as a result of technology.
24 September: Liquidity Risk Management for Insurers
The PRA published a policy statement (PS18/19) on liquidity risk management including a supervisory statement (SS5/19), which sets out expectations relating to both an insurer’s assets and liabilities. The focus on liquidity has been driven, in part by changing investment trends and increased exposure to illiquid assets.
Insurers are expected to:
• Develop their own liquidity risk management framework and contingency plans
• Hold liquidity buffers
• Test liquidity under stress.
The expectations set out in SS5/19 are effective from date of publication.
18 September: CP 22/19: Prudent Person Principle
In this Consultation Paper (CP), the PRA sets out its expectations of how firms should comply with the Prudent Person Principle (PPP) as set out in the Investments Part of the PRA Rulebook and how firms should manage investment risk. There are no longer prescriptive counterparty and market concentration risk limits as was the case under Solvency I. However, insurers’ freedom to invest in the assets they so wish under Solvency II is not absolute and is constrained by the PPP. The PRA has observed inconsistencies in the way the PPP is understood and applied by firms. In particular, the PRA is concerned with how firms in the life sector have increased their exposure to non-traded assets and the lack of appropriate expertise and systems to identify, measure and manage investment risks for such types of assets. This consultation closes on 18 December 2019 and the SS will apply from date of final publication.