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Impact of Digital innovations on Insurance

What's new in Insurance?

What's new in Insurance?

Insurance Insights January 2020

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.

Central Bank of Ireland Update

First Motor Insurance Report of the National Claims Information Database Issued

The CBI’s Cost of Insurance Working Group, established in 2016 to examine the factors contributing to the increased cost of insurance, announced the release of the Private Motor Insurance Report of the National Claims Information Database (NCID), a report providing key statistics on the Irish Private Motor Insurance industry for the first time. This (now annual) report has gathered and analysed data not previously captured from insurance undertakings providing private motor insurance products in Ireland (which includes foreign companies selling into the Irish market) providing key statistics in a number of areas such as changing costs of premium, details of how claims are being settled and the legal fees associated with these; comparison of settlement channels and a breakdown of insurers income and expenditure for private motor insurance. 

Deputy Governor, Sharon Donnery, raises the importance of capturing better data to inform better policy

The CBI’s Deputy Governor, in her opening remarks at the Sixth Conference on Household Finance and Consumption, reflected on the NCID report as a work towards capturing better data to inform better policymaking. She believes there is one key comparison within the report that will undoubtedly draw market attention; with the average cost of claims per policy between 2009 and 2018 decreasing by 2.5% and contrastingly the average premium per policy increasing by 42%. Reflecting on capturing good data, the Deputy Governor describes it as the ‘key to understanding both the origin and transmission of shocks, and to develop policy to build resilience moving forward’.

Insurance Newsletter – December 2019

In the most recent issue of the Insurance Newsletter, the CBI shares its key findings from a themed inspection on the Solvency Capital Requirement calculation; discusses regulatory expectations regarding liquidity risk management; and provides a summary update of recent regulatory developments, including on the 2020 Review of Solvency II.

ASP Sanctions Guidance

The CBI launched and published the ‘ASP Sanctions Guidance’ (November 2019). The Guidance provides further insight into the application of each of the sanctioning factors set out in the Outline of the Administrative Sanctions Procedure 2018. Speaking at the launch of the guidance, Derville Rowland, Director General - Financial Conduct emphasised that the conduct of the regulated firm or individual after the breach will always be a relevant consideration, including the degree of co-operation with the Central Bank during the investigation. 

The same month, the Central Bank agreed its 133rd settlement with regulated financial services providers (“RFSP”) and persons concerned in the management of RFSPs since 2006 under its Administrative Sanctions Procedure (“ASP”), bringing total fines imposed by the Central Bank to over €99 million.

European Supervisory Authorities Updates

2019 Consumer Trends Report identifies areas that remain high risk for consumers

EIOPA reflects on the findings of its 2019 Consumer Trends Report which considered all major developments, issues and trends affecting life and non-life insurance consumers throughout the year. The report concluded that conduct issues related to unit-linked, credit life/credit protection insurance and add-on products to have become increasingly prevalent. Claims management in motor insurance also remains an area of concern whereas, accident and health insurance products continue being ‘good value for money’. For pensions, with life expectancy increasing, a strain is being put on the decumulation phase. To address this issue, changes and innovations (such as lifecycling or delayed retirement) are being put in place. The regulatory changes that took effect in 2018 under the Insurance Distribution Directive ((EU) 2016/97) (IDD) and the Regulation on key information documents for packaged retail and insurance-based investment products (PRIIPs) (1286/2014) (PRIIPs Regulation) are already resulting in some positive developments, mainly in relation to disclosures. Looking forward, the report anticipates increasing focus on product oversight and governance, with the report pointing to the product design and review process as the current causers of poor consumer outcomes. 

Report: Potential undue short-term pressure from financial markets on corporates

EIOPA published a report offering advice on the potential undue short-term pressure from financial markets on corporations. The report concluded that while there is no clear evidence of behaviours that could be labelled as undue short-termism in insurance which could eventually put pressure on corporations, there are a number of areas that require attention. These include remuneration practices, particularly remuneration policies of key staff members making investment decisions, which EIOPA advise the application of consistent regulatory principles is required to limit short-term focus. Further, EIOPA is encouraging consideration of risk and investment strategies which could materialise in three to five years. While EIOPA has also found there to be no clear evidence of undue short-term pressures from financial markets on (re)insurance undertakings and IORPs, it recognises that their investment behaviour practices are sensitive to macroeconomic circumstances, such as the persistent low interest rate environment. This implies a shift from insurance and pension products being long-term investments for clients, which will ultimately affect the investment behaviour of these corporations. The report recognises that there is a lack of adequate set-up for assessing the existence of undue short-term focus and the proposes the Commission take further initiatives to ensure long-term perspectives are adequately considered. 

Report for 2019 on long-term guarantees measures and measures on equity risk

EIOPA published its fourth annual report on long-term guarantees measures and measures on equity risk for 2019, as required under the Solvency II Directive until 1 January 2021. The results showed similar results to previous years, showing most measures to be widely used with the volatility adjustment and the transitional measure on technical provisions the most prevalent. The report recognises the importance of the measures for the financial position of (re)insurance undertakings, recording the average Solvency Capital Requirement (SCR) ratio of undertakings using the voluntary measures as 234% which would drop to 159% if the measures were not applied. 

Report on asset and liability management relating to Solvency II illiquid liabilities

EIOPA published a report on insurers' asset and liability management relating to the illiquidity of their liabilities. The report provides information on insurance liabilities, asset management of insurers, long-term guarantee measures and market valuation of insurance liabilities. The report includes an analysis of illiquidity of insurance undertakings from two perspectives; a total balance-sheet approach with a focus on how undertakings can hold on to their investments and a liability perspective that focuses on the predictability of the timing of the cash flows. EIOPA will draw upon the analysis in the report in its Opinion on the 2020 Review of Solvency II. 

EIOPA consults on draft guidelines on information and communication technology security and governance

EIOPA published a consultation paper on proposed guidelines on information and communication technology (ICT) security and governance. The draft guidelines provide guidance to national competent authorities (NCAs) and firms on how requirements on operational risk set out in Solvency II Directive (2009/138/EC) and Solvency II Delegated Regulation (2015/35), as well as EIOPA's Guidelines on System of Governance, are applied in the case of ICT security and governance. The objective of these guidelines is to create a common baseline for information security throughout the EU Member states as well as enhancing convergence of supervisory practices in this area.  

Third EIOPA annual report on use of capital add-ons by NCAs under Solvency II

EIOPA published its annual report on national competent authorities (NCAs) use of capital add-ons (CAOs) under the Solvency II Directive (2009/138/EC) for 2018. The report showed that the amount of capital add-ons imposed on undertakings using the standard formula remains very low overall, accounting for 1% of the total Solvency Capital Requirement (SCR) in 2018. However, this is more significant when considering the amount at individual level. In sum the weight of the capital add-on increased to 32% (30% in 2017) when looking at the amount of capital add-ons as a percentage of the total SCR for those undertakings using the standard formula with capital add-ons.

EIOPA outlines key financial stability risks of the European insurance and pensions sector

The December 2019 Financial Stability Report of the (re)insurance and occupational pensions sectors in the EEA has shown that the global and European economic outlook has deteriorated in the past months with weakening industrial production and business sentiment and ongoing uncertainties about trade disputes and Brexit. The ‘low for long’ risk has resurfaced in the EU, as interest rates reached record lows in August 2019 and an increasing number of countries move into negative yield territory for their sovereign bonds. Protracted low interest rates form the key risk for both insurers and pension funds and put pressure on both the capital position and long-term profitability. Cyber risk and climate change risks continue to demand attention from insurers, pension funds and supervisors, as insurers and pension funds are increasingly susceptible to cyber risks as the digital transformation continues. Despite the challenging environment, the European insurance sector remains overall well capitalised with a median SCR ratio or 212% as of Q2 2019. Considering the findings, Gabriel Bernardino, Chairman of EIOPA comments ‘In this regard, we continue to see the clear benefits of Solvency II, as the market-consistent and risk-based regulatory framework has helped price in the risk of low interest rates, build resilience and enhance the risk management practices of insurers. At the same time, it is important that the regulatory framework continues to remain robust in the future and adequately reflects the risks faced by insurers in a low for long environment. As such, it is crucial that these elements are addressed in the currently ongoing Solvency II review to ensure that promises can continue to be met in the future."

EIOPA updates representative portfolios to calculate volatility adjustments to the Solvency II risk-free interest rate term structures

EIOPA have published updated portfolios which EIOPA will start using for the calculation of the volatility adjustments from end of March 2020. The updated portfolios enable more accurate reflection of the impact of market volatility under the Solvency II framework

ESAs transform the way competent authorities cooperate with each other on AML/CFT matters

EIOPA announce a report published by the three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) providing joint guidelines on cooperation and information exchange, establishing colleges of anti-money laundering and countering the financing of terrorism (AML/CFT) supervisors for the first time in the EU. These guidelines seek to ensure effective cooperation and information exchange between competent authorities in order to strengthen the EU's AML/CFT efforts.

EC: Two Commission Implementing Regulations made under Solvency II published in OJ

The following Regulations were published in the Official Journal of the EU (OJ):

  1. Commission Implementing Regulation (EU) 2019/2102, which amends Implementing Regulation (EU) 2015/2452 with regard to the disclosure of information used in calculating the adjustment for the loss-absorbing capacity of deferred taxes in accordance with Article 56 of the Solvency II Directive (2009/138/EC). Amendments made to the Solvency II Delegated Regulation ((EU) 2015/35) by Delegated Regulation (EU) 2019/981 requiring the disclosure of information used in calculating the adjustment for the loss-absorbing capacity of deferred taxes apply from 1 January 2020. The amendments made by Implementing Regulation (EU) 2019/2102 incorporate these requirements into the relevant templates laid down in Implementing Regulation (EU) 2015/2452. This Regulation was made on 27 November 2019. It enters into force on 30 December 2019 (that is, twenty days following publication in the OJ) and applies from 1 January 2020. 
  2. Commission Implementing Regulation (EU) 2019/2103, which amends and corrects Implementing Regulation (EU) 2015/2450 laying down implementing technical standards (ITS) with regard to templates for the submission of information to supervisors in accordance with Articles 35(10) and 244(6)(3) of the Solvency II Directive. In particular, the reporting templates and related instructions laid down in Implementing Regulation (EU) 2015/2450 have been amended to take account of amendments made to the Solvency II Delegated Regulation by Delegated Regulation (EU) 2018/1221 and Delegated Regulation (EU) 2019/981. This Regulation was made on 27 November 2019 and enters into force on 30 December 2019 (that is, twenty days following publication in the OJ).

EC: European Commission adopts Delegated Regulation correcting Solvency II Delegated Regulation on look-through approach and risk weights for flood risk

The European Commission adopted a Delegation Regulation (C(2019) 8951 final) correcting the Solvency II Delegated Regulation ((EU) 2015/35).  The explanatory memorandum explains that corrections are required following certain previous amendments to the Delegated Regulation under Delegated Regulation (EU) 2019: Look-through approach. The previous amendments to Article 84(4) of the Delegated Regulation were intended to extend the scope of the look-through approach to undertakings related to an insurance or reinsurance undertaking, the main purpose of which is to hold or manage the assets on behalf of that insurance or reinsurance undertaking. Collective investment undertakings (CIUs) and other investments packaged as funds are already subject to the look-through approach in line with Article 84(1), regardless of whether or not they are so related. There was no intention to change this. However, an unintended reference to Article 84(1) in the current text of Article 84(4) excludes from the look-through approach CIUs and other investments packaged as funds that are also related to an insurance or reinsurance undertaking. Article 1(1) of the Delegated Regulation therefore corrects Article 84(4) to remove this unintended exclusion. 

The table in the section entitled "Risk weights for flood risk" of Annex X to the Solvency II Delegated Regulation fixes the standard parameters to be used for the calculation of the solvency capital requirement (SCR) for flood risk. The "United Kingdom of Great Britain and Northern Ireland" region is split in 124 risk zones. Before the previous amendments, the table contained 124 rows corresponding to the 124 risk zones of that region. However, following the previous amendments, the table was wrongly replaced with a table containing only 123 rows. Article 1(2) of the Delegated Regulation therefore provides that this section of the table in Annex X is replaced with the table in Annex I to the Delegated Regulation (which contains the corrected table of 124 rows).

Other Articles

Isle of Man: Corporate Governance Code of Practice

The Isle of Man Financial Services Authority has issued a Consultation Paper to obtain views and evidence in relation to proposed changes to the current Corporate Governance Code of Practice for Commercial Insurers (which came into operation on 1 January 2019), including extending the proposed amended code on a proportionate basis to all Isle of Man authorised insurers.  The consultation is relevant to the boards and senior management of existing and prospective insurance companies, and registered insurance managers. Other parties involved in the Isle of Man insurance sector, including general insurance intermediaries and the legal and auditing professions may also find this discussion paper and the issues raised of interest. The closing date for comments is 14 February 2020.

IAIS: Consults on draft issues paper on implementation of TCFD recommendations

The International Association of Insurance Supervisors (IAIS) published for consultation a draft issues paper on the implementation of the recommendations of the Financial Stability Board (FSB) Task Force on Climate-related Financial Disclosures (TCFD). Feedback on this material is invited by 5 February 2020. 

IAIS reports on 2019 G-SII identification process

The IAIS published a report on the 2019 identification process of global systemically important insurers (G-SIIs). The IAIS participates in a global initiative with other standard setters, central banks and financial sector supervisors to identify global systemically important financial institutions (G-SIFIs). It focuses on identifying G-SIIs, a class of G-SIFIs, whose distress or disorderly failure would potentially cause significant disruption to the global financial system and economic activity.

IAIS: Speech on FinTech developments

The IAIS published a speech (dated 10 December 2019), given by Jonathan Dixon, IAIS Secretary General, on FinTech developments. Among other things, The IAIS is keen to enable the use of FinTech to bring significant potential for societal good and welfare, especially in the developing world. As insurance is, at is core, a data business, digitisation of insurance models has the potential to deliver significant dividends. The IAIS has leveraged FinTech expertise from across its membership by establishing a virtual FinTech Forum. The Forum provides a platform for supervisors' experts to share practical experiences and insights on a range of technological innovations impacting the sector. The IAIS' working groups are continuing to look at developing supervisory guidance on the risks, trends and opportunities posed by FinTech. The IAIS has seen common themes emerge that are equally relevant to members in both developed and developing jurisdictions. These include data protection and the fair and ethical use of data, the entry of third-party cloud providers and other non-traditional players into the sector, and affordability and inclusion challenges. 

PRA Related Updates

9 January: Solvency II: Longevity risk transfers - simplification of pre-notification expectations

This PRA Policy Statement (PS) provides feedback to responses to Consultation Paper (CP) 3/19 ‘Solvency II: Longevity risk transfers – simplification of pre notification expectations’ (see page 2 of 2). It also contains the PRA’s final policy in an updated version of Supervisory Statement (SS) 18/16 ‘Solvency II: longevity risk transfers’ (see Appendix).

23 December: PRA announces special requirements regarding whistleblowing systems and controls at the Society of Lloyd’s

Following the Society of Lloyd’s self-identification and disclosure to the PRA that aspects of its internal whistleblowing systems and controls had been ineffective for a period of time, the PRA has concluded that these arrangements require enhanced monitoring and scrutiny. 

Further information

For more on any of the items above, or any Insurance-related queries, contact Brian Morrissey, Head of Insurance.

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