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COVID-19,  mitigating actions and next steps

What's new in Insurance?

What's new in Insurance?

Insurance Insights May 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.

Implications of COVID-19 for insurers

To help businesses understand their exposure to COVID-19, and more importantly, position themselves to be resilient in the face of the current circumstances and prepare for the future, our teams are continuously working to provide up to date COVID-19 guidance and support. These timely insights are from KPMG Insurance leaders from across the globe.

  • Could liquidity challenges be on the way for insurers?
  • COVID-19 puts insurers on the fast track to technology adoption.
  • The future comes early: Insurance work force transformation through COVID-19.
  • COVID-19 insurance operations challenges.
  • Making sense of solvency, capital and COVID-19 for the insurance sector.

COVID-19: Return to the office - Considerations for employers

As the business world learns to adapt with working from home and adhering to government health advice, some focus is shifting to returning to offices. But when and how should an organisation prepare their workforce and office space for a return? In the ‘COVID-19: Return to the office’ document, KPMG, through an internationally led publication, sets out the guiding general principles, assumptions and Government actions surrounding organisations’ return to office life.

Central Bank of Ireland update

CBI publishes its response to Pearse Doherty TD on Insurance matters during COVID-19

In a published response to an email from Pearse Doherty TD dated 14 April 2020, the CBI has reiterated its expectations of the insurance industry within the current situation, providing assurance that the CBI is continuing to closely monitor the situation to ensure that insurance firms are meeting these expectations. The CBI has made it clear that recent Government advice to close a business should be treated as a specific direction to the business when assessing the validity of a claim under a policy providing business interruption cover; that firms must honour valid claims and pay them promptly, in line with the policy wording, legal requirements and the Consumer Protection Code; that where there is a doubt about the meaning of a term within policy wording, the interpretation most favourable to the customer should be adopted; that firms should proactively communicate in a clear and transparent manner about the level of cover provided and that the CEO, board and senior management of insurance firms should have oversight and take responsibility for how their firm is managing determinations of whether claims are covered or not in the context of COVID-19. The CBI has confirmed it is engaging with the larger insurance firms to ascertain their approach to dealing with specific elements of COVID-19, including the handling of claims under a policy providing business interruption cover..

CBI to extend scope of National Claims Information Database to Employers’ and Public Liability Insurance

The CBI has published a study on the merits and feasibility of including data on Employers’ Liability (EL) and Public Liability (PL) insurance in the scope of the National Claims Information Database (NCID). Commenting on the results Mark Cassidy, Director of Economics & Statistics, said there is a clear lack of information available in this area which in effect limits the ability to determine appropriate policy responses to address the issues. The study therefore finds there is merit in extending the scope of the NCID to include EL and PL data and it is feasible to do so, albeit with an incremental approach to data collection due to liability insurance consisting of a broad range of business sectors, types and sizes, and covering a variety of risks. The CBI intends to collect this data in the second half of 2020 and publish the first Employers’ Liability and Public Liability NCID Report in the first half of 2021, with annual publications of data thereafter. Aggregate data on premiums, claims and settlement costs will be published as part of the Report.

CBI actions will contribute to easing the economic impact of the pandemic

The Governor of the CBI has stated that the Bank will spare no effort to contain the economic effects of the crisis and will do everything in its power to protect consumers, households and businesses. Authors of an Economic Letter recently published note how the CBI are playing a role in developing and implementing monetary policy as a member of the Eurosystem, helping to prevent the coronavirus pandemic from morphing into another sovereign debt crisis by safeguarding conditions in financial markets. The Authors of a Financial Stability Note also reflect on the impact of the CBI’s decisions to release the Counter Cyclical Buffer (CCyB) in Ireland, the release of €940 million across the domestic banking sector enables the banking system to both absorb COVID-19 related losses and support the real economy during this challenging time.

CBI uses real-time economic data to determine the economic impact of COVID-19

The CBI is working to develop a number of real-time indicators of economic developments during the current crisis and has published two papers, one examining the effect of the pandemic on the global job market and the other examining the impact on retail card usage in Ireland since the onset of the crisis. The results show that job postings have generally fallen by 30% to 40% in countries with a higher proportion of employment in occupations with lower work-from-home potential. The second paper shows that overall card spending, and ATM withdrawals are continually dropping, predicting a 40% reduction for April 2020 in comparison with April 2019.

CBI publishes research on understanding SMEs in the COVID-19 pandemic

The CBI has published two papers discussing Small and Medium Enterprises (SMEs) within the current climate, which employ over 1 million people in Ireland, accounting for 68.4% of employees in the business economy. Papers ‘SME liquidity needs during the COVID-19 shock’ and ‘COVID-19 and the transmission of shocks through domestic supply chains' discuss the increasing likelihood of SMEs requiring some form of external liquidity if they are to re-open after the shock. The papers also mention that due to the substantial economic activity that occurs between cross sector businesses in Ireland, a loss of liquidity would amplify the economic downturn domestically.

Statement on Extension of Payment Breaks

The CBI reflects on the Banking and Payments Federation (BPFI) decision that its members are to extend available payment breaks from three to six months for affected borrowers, making it clear that an extension of six months will not be specifically identified on the borrower’s credit report and that lenders should ensure to have appropriate solutions available to borrowers wishing to exit the payment break arrangements at any stage.

The macroeconomic effects of COVID-19 in Ireland

Deputy Governor Sharon Donnery delivered a speech via video-link, outlining the economic effects of COVID-19, the CBI’s response, looking towards recovery, and the wider CBI mandate. In her speech, the Deputy Governor recognises the need to understand differing sectoral effects and areas which need support in order to minimize the long-term ‘scarring’ economic effects of COVID-19.

CBI prudential flexibility measures for insurance and reinsurance firms

The CBI has created a dedicated webpage providing information on the steps they are introducing to introduce flexibility for insurance and reinsurance firms in light of the ongoing public health crisis.

CBI provides feedback on internal model profit and loss attribution, validation, and model change reporting following thematic review

During 2019, the CBI performed a review of documentation for companies with an approved internal model or partial internal model. The review focused on three areas: profit and loss (P&L) attribution, validation and model changes. In particular the review focused on:

  • Compliance with Solvency II Standards
  • Appropriateness of the internal model and demonstration that the resulting capital requirements are appropriate; and
  • Governance and reporting activities which ensure the on-going appropriateness of the internal model and the calculated SCR.

The main areas of improvement identified as part of the review include:

  • Content of the validation report including details of testing activities and results; validation tools applied; and independence of validators.
  • Governance of validation findings including tracking of validation findings.
  • Granularity and use of the profit and loss attribution. 
  • Reporting of minor model changes including model versioning and qualitative description of the change.

European Supervisory Authorities Updates

Consumer guide: Understand your insurance coverage during the COVID-19 Outbreak

The European Insurance and Occupational Pensions Authority (EIOPA) has provided a consumer guide to help consumers understand their insurance coverage during the COVID-19 outbreak.

EIOPA will now publish weekly information for Relevant Risk Free Interest Rate Term Structures and Symmetric Adjustment to Equity Risk

Due to the COVID-19 outbreak, in the coming weeks EIOPA will carry out extraordinary calculations on a weekly basis to monitor the evolution of the relevant risk-free interest rate term structures (RFR) and the symmetric adjustment to equity risk (EDA). EIOPA is publishing this information in order to support insurance and reinsurance undertakings in the monitoring of their solvency and financial position. The information will be published on a specific area of the website created for this purpose both for RFR and EDA named “Extraordinary weekly updates”.

ESAs consult on environmental, social and governance disclosure rules

The three European Supervisory Authorities (EBA, EIOPA and ESMA - ESAs) have issued a Consultation Paper seeking input on proposed environmental, social and governance (ESG) disclosure standards for financial market participants, advisers and products. The developments seek to strengthen protection for end-investors, improve the disclosures to investors from a broad range of financial market participants and financial advisers and improve the disclosures to investors regarding financial products. The ESAs welcome feedback to this consultation by 1 September 2020.

EIOPA Chair speaks at annual conference of German Association of Actuaries on digital responsibility and the role of actuaries.

In his speech, among other things, Mr Gabriel Bernardino, EIOPA Chair, considers the use of Big Data Analytics (BDA) in the insurance sector. Mr Bernardino explains that, through its expert group on digital ethics in insurance, EIOPA is working to address the issues it identified under the review. The expert group aims to provide guidance to the market in the operationalisation of digital ethics principles for insurance, through the following three workstreams:

  • • Fairness and non-discrimination, that is, considering issues such as data bias and other fairness issues, grey areas and dilemmas that arise with the use of digital technologies in insurance.
  • • Transparency and explainability, that is, preventing "black-boxes" and ensuring accountability by being clear on what data is to be used, how and for what purposes.
  • • Governance, that is, ensuring adequate levels of human oversight, security and resilience of machine learning models.

Any resulting framework must take into account the new realities of the big data landscape. It is also important for the framework to be forward-looking and flexible, so it can adapt to an ever-changing environment. Mr Bernardino emphasises that data ethics and data privacy are complex topics and the right answer is not always clear. The expert group is considering how to find the correct balance between enabling financial innovation and safeguarding consumer protection and financial stability. Mr Bernardino concludes that COVID-19 is likely to accelerate the significant trends in digital technology, for example, through the development and use of track and trace apps, for which individuals are required to share personal data. The actuarial profession can play an important role. The vast increase in data availability in the digital economy can be an enabler to better assess risk and provide insurance solutions. Actuaries can combine data scientist skills with insurance business risk knowledge, leveraging traditional concepts like mutualisation and fairness.

EIOPA Chair interview on response to pandemic

EIOPA published an interview given by Mr Bernardino, on its response to the COVID-19 pandemic. Mr Bernardino explains that mitigating the effects of COVID-19 is EIOPA's top priority. In responding to this, EIOPA has put in place measures that will help insurers to focus on ensuring business continuity and continuing to serve their customers. Also, in the short term, EIOPA will limit its consultations and requests for information from the industry, focusing only on essential elements needed to assess and monitor the impact of the current situation in the market. Where possible, it is also extending deadlines.

Mr Bernardino explained that since the implementation of the Solvency II Directive (2009/138/EC), the sector has better aligned capital to risk. However, it is still too early to understand the full impact of COVID-19. Thus, he said, given the overall uncertainty of the scale and duration of the crisis, it is important that insurers preserve capital.

EIOPA has also asked insurers and intermediaries to remember their obligations to customers and policyholders. EIOPA highlighted that it is essential that insurers continue to provide access to and continuity of service.

On the longer-term impact, Mr Bernardino noted that digital technology is becoming more essential, more available and more normal in the sector. EIOPA has seen some insurers offering payments to their motor insurance customers because they are driving less. This could eventually lead to a growth in "pay-as-you-drive" insurance. However, Mr Bernardino stressed, EIOPA needs to make sure that increased digitalisation does not put people at a greater risk to fraud, cybercrime or financial exclusion. Mr Bernardino also said that policymakers and national competent authorities (NCAs) should be looking to provide the environment needed to support this transformation while mitigating the emerging risks.

Although EIOPA is dedicating considerable resources to monitoring and mitigating the effects of COVID-19, it is also able to continue with other priorities: The Solvency II 2020 review, its work on digitalisation, cyber risk and cyber insurance, sustainable finance and contributing to the Capital Markets Union (CMU).

EIOPA revises timetable for advice on Solvency II 2020 review

EIOPA published a press release announcing that it is revising its timetable for providing advice on the review of the Solvency II Directive (2009/138/EC). EIOPA will now send its advice to the European Commission by the end of December 2020. The announcement follows a March 2020 statement that extended the deadline of the impact assessment for the review by two months to 1 June 2020. EIOPA will update the impact assessment with a collection of data with a reference date of 30 June 2020. That information request will be carried out from July to mid-September 2020. It will be addressed to a sub-sample of those subject to the ongoing information request.

The European Commission has published a consultation on the renewed sustainable action plan.

The initiative is part of one of the key strategic goals of the new European Commission – the EU Green new Deal – and invites replies before 15 July 2020 via an online questionnaire.

EIOPA releases statement on principles to mitigate the impact of COVID-19 on the occupational pensions sector in Europe

The statement recognises the stabilising role that Institutions for Occupational Retirement Provision (IORPs) can play as long-term investors in the current economic climate. Addressed to national competent authorities, the statement outlines principles related to business continuity and operational risk, liquidity position, funding situation and pro-cyclicality, protection of members and beneficiaries and communication.

Update from the Pensions Authority

The Pensions Authority has provided an update on regulatory matters and suspension of employer pension contributions. The Pensions Authority (PA) make it clear they do not have the power to waive statutory reporting and disclosure requirements under the Pensions Act but confirm they will take into account current circumstances when assessing compliance with these requirements, including compliance with disclosure and member communication obligations. In response to queries on temporary suspension of employer pension contributions during the business disruption caused by COVID-19, the PA has advised that each employer’s situation differs and has advised any employer considering the suspension of pension contributions to discuss the matter with the scheme trustees and to liaise with their service providers and advisers including seeking legal advice.

Other Articles

Minister for Finance emphasises his concerns to Insurance Ireland regarding the response of the sector to date to the COVID-19 crisis

On 27 March 2020, the Minister for Finance and Public Expenditure and Reform, Paschal Donohoe wrote to Insurance Ireland, and amongst other things, requested that Insurance Ireland’s members ensure that they take a more customer focussed approach when dealing with businesses and consumers and that they are pro-active in setting out clearly what measures they are taking to provide certainty for consumers at this extraordinary time.

In response, Insurance Ireland released a statement outlining the measures its members are taking in response to the crisis. For business customers these include a reduction in premiums to reflect reduced level of exposure as a result of COVID-19 restrictions for Employers Liability, Public Liability and Commercial Motor, the provision of a 28 day grace period for payment at renewal, maintaining cover for unoccupied commercial buildings/premises for a maximum 90 days and supporting requests for a change of property use during the crisis for businesses impacted by COVID-19 restrictions. For personal customers the measurers also include a 28 day grace period for payment at renewal, waiver of cancellation fees or missed direct debit fees, extension of credit facilities with relevant brokers, working from home cover extensions for standard household policies and volunteer driving associated with COVID-19 is to be covered on private car policies.

Regarding standard business interruption policies, which typically do not cover pandemics such as COVID-19, Insurance Ireland assured that where there is ambiguity surrounding a contractual term, their members will give the benefit of the doubt to the customer.

The Minister subsequently released a statement on 17 April 2020 which announced his intention to direct officials from the Department of Finance to engage with Insurance Ireland on how best the insurance industry can support their business customers in the current challenging economic climate. He emphasised the need for major insurers within the Irish industry to exercise forbearance to honour the commitments made by Insurance Ireland. The Minister also raised the concern that some insurers may have adopted “blanket” rejection of business interruption claims, cautioning that failure to pay certain claims in the context of Insurance Ireland’s clarifications was, in his view, causing reputational damage to the industry. The Minister also called on motor insurers to be pro-active and generous in their treatment of policyholders by providing premium rebates reflective of the reduction in risk arising during the pandemic.

Motor insurers commit to premium relief due to COVID-19

Insurance Ireland has announced that five of Ireland’s leading motor insurers have committed to implementing premium relief measures, such as refunds or discounts, to reflect the fact that insurers can expect a lower volume of claims on motor insurance policies due to the travel restrictions imposed to slow transmission of the virus. Since each insurer has a different mix of customers and different claims experience, they will individually assess the impact on their customers and apply appropriate financial supports, such as discounts or refunds, to reflect the customers claim experience to date. The Minister called on insurers to be pro-active and generous in their treatment of motor insurance policyholders during this period and called individual insurers to quickly come forward with information on the scale of likely premium refunds. Other motor insurers, while not signing up to the Insurance Ireland commitment, have said that they will introduce alternative means of supporting customers such as deferring premiums or suspending insurance cover.

Update from Private Health Insurers during COVID-19 crisis

Insurance Ireland released a statement welcoming the agreement between private hospitals and the Health and Safety Executive (HSE) which allow beds in private hospitals to become public beds for the duration of the crisis. Private health insurers have confirmed they will still pay claims for their customers that fall outside the scope of the agreement. Private Health Insurers have committed to providing COVID-19 related support to their customers, whilst ensuring to maintain customer value and to be a in position to pay customer claims in the future. They have said that they will deal “fairly, flexibly and on a case-by-case basis” with any customers who are facing financial difficulties.

Insurance Ireland publishes brochure on key priorities of the Irish insurance industry in Europe for 2020

Insurance Ireland issued its new brochure on “Key Priorities of the Irish insurance industry in Europe” confirming its commitment to the EU project and outlining the six main areas of focus for the creation of a true single market for insurance. These main areas consist of:

  • Assessing the existing and future regulatory framework with the aim of removing unnecessary regulatory burdens on insurers;
  • Strengthening innovation, integration and sustainability within the review of Solvency II;
  • Development of regulation to encourage supervisory convergence, consistent application of proportionality and clear communication with retail consumers;
  • Engagement on sustainability and enhancing EU data strategy;
  • Regulatory developments for new technology; and
  • Committing to diversity and inclusion throughout the European Insurance Market.

The report also references their commitment to continuing to work with customers to reduce the COVID-19 impact.

Insurance Europe publishes a joint letter to the European Commission on DAC6 deferral

A group of associations who are members of Insurance Europe wrote to the European Commission to request they consider providing an extension of time for reporting obligations under the Council Directive (EU) 2018/822 of 25 May 2018 amending Directive 2011/16/EU (DAC6), in response to a number of challenges including the COVID-19 pandemic.

Bank for International Settlements publishes a Brief on the Insurance regulatory measures in response to COVID-19

A brief written by staff members of the Financial Stability Institute (FSI) of the Bank for International Settlements (BIS) provided a summary of the international insurance regulatory measures introduced in response to COVID-19. In summary, the report highlights that insurers are more likely to experience losses from financial market volatility than from higher insurance claims arising from COVID-19, few insurance supervisors have seen a need to strengthen or adjust prudential requirements to insulate insurers from current financial market uncertainties, authorities have so far responded mainly by taking measures to provide operational relief to insurers from regulatory and supervisory requirements so that they can continue providing insurance services, with some authorities setting out expectations for insurers to conserve capital through prudent exercise of dividend and variable remuneration policies aiming to enhance their resilience against huge uncertainties from potential COVID-19 fallout. The brief concludes that the far-reaching impact of COVID-19 calls for sustained vigilance by both supervisors and insurers and that after the pandemic is over, the extraordinary measures currently warranted will need to be unwound through a carefully crafted exit strategy that preserves sound risk management practices and protects policyholders’ interests.

EU insurers respond to consultation on review of GDPR, call for the European Commission to scrutinise impact on innovation

Insurance Europe has published its response to a roadmap consultation by the European Commission on its upcoming report on the review of the General Data Protection Regulation (GDPR). Insurance Europe warned that it would be premature for the European Commission to already reopen the text of the GDPR for amendments, given that only two years have passed since the Regulation became applicable. Like many other sectors, insurers have invested significant resources in order to understand the Regulation and to ensure its proper implementation. Opening the GDPR for review at such an early stage would therefore undermine the industry’s efforts and investment to comply with the Regulation. Instead, the European Commission’s report should take stock of the experiences gained since the application of the Regulation in May 2018. If areas where the GDPR has failed to meet its objectives are identified, the European Commission should then consider the development of further or different guidance, together with the European Data Protection Board (EDPB), where relevant.

Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA)

FCA seeks legal clarity on business interruption insurance alongside package of measures to help consumers and small businesses

The Financial Conduct Authority (FCA) has announced it intends to seek legal clarity on business interruption (BI) insurance to resolve doubt for businesses who are facing uncertainty on their claims. It is also proposing a series of measures to support both consumers and businesses who hold insurance products and who are facing other issues as a result of coronavirus (COVID-19). The package of measures sets out the FCA’s expectations that insurance firms should consider whether their products still offer value to customers in the current situation and whether they can be doing more for those suffering a financial impact because of coronavirus.

PRA publishes statement on Solvency II Illiquid unrated assets

The PRA published an updated supervisory statement (SS3/17) relevant to UK (re)insurance companies holding or intending to hold income-producing real estate, loans and internal credit assessment for illiquid unrated assets within Solvency II internal models. The PRA proposed that the output of the risk identification exercise should, where relevant, inform a firm’s assessment of its standard formula appropriateness and/or the scope, methodology and calibration of an internal model. This revised statement came into effect on 2 April 2020.

PRA publishes statement on decision by insurance companies to pause dividends

The PRA published a statement welcoming the decision by some insurance firms to pause dividends payments given the uncertainties surrounding the COVID-19 pandemic. This was a follow-up to the Dear CEO letter published in March 2020 in regards to insurers’ distributions of profits.

PRA outlines its 2020/2021 Business Plan

The PRA has outlined its strategy for the next 12 months in the business plan for 2020/21. As risks due to COVID-19 have crystallised, the PRA expects to reassess its plans in line with further insights gained.

Some of the key areas of focus on insurers include:

  • Adapting to market changes and horizon scanning in order to maintain the dynamic resilience of the regulatory framework by scanning for emerging and evolving risks which include climate change risks, regtech, digital currencies, artificial intelligence (AI) and machine learning.
  • Ensuring financial resilience, the PRA will assess if firms are adequately capitalised. The implementation of Prudent Person Principle (PPP) in Solvency II is expected to be finalised in 2020 with the publication of a supervisory statement which outlines expectations for firms.
  • For EU withdrawal, the PRA expects a smooth transition to a sustainable and resilient UK financial regulatory framework. Specific to insurance the focus is on risk margin, regulatory data, and calibration of the matching adjustment. This transition includes risk free rate calculation and developing capabilities to independently produce the various Solvency II risk free rate components.
  • Ensuring adequate recovery and resolution plans are in place to enable recovery from stress events and application is aimed at reducing systemic risk whilst considering proportional application in relation to firm size.

Follow-up note to insurers on the Dear CEO Letter from Sam Woods - ‘COVID-19: IFRS 9, capital requirements and loan covenants’

The letter Sam Woods sent to CEOs of banks on 26 March 2020 provided guidance on IFRS 9 accounting for default and also regulatory treatment under Capital Requirements Regulation (CRR). While the letter is not directly applicable to insurers, the PRA’s follow-up note advises insurers to read the guidance and consider its applicability in relation to internal credit ratings for unrated assets and to which Supervisory Statement (SS3/17) applies in terms of their internal credit assessment methodologies, risk identification and the application of judgements.

Transition to IFRS 17

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

 

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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