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Insurance Insights July 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.

COVID-19 update

The effects of COVID-19 continue to be felt around the globe and organisations will need to anticipate and prepare for the changes in their consumers' needs, behaviours and preferences. In particular, what are the long-term shifts in consumer behaviours and how can organisations transform their business to successfully adapt to these changes? KPMG has published an executive summary which examines the evolution of consumer behaviours across 12 countries, regions and territories - Australia, Brazil, Canada, China, both mainland and Hong Kong (SAR), France, Germany, Italy, Japan, Spain, UK and the US.

Brexit update

There have been some significant developments on Brexit over the last few weeks. The decision not to extend the Transition Period beyond 31 December 2020 is particularly important. Likewise, the publication of papers on the implementation of the Protocol on Ireland/ Northern Ireland, the UK’s plans to phase in customs changes over 6 months, and the UK’s tariff schedule that will apply to GB imports from the EU if there is no Free Trade Agreement are also very important.
 
KPMG thought it was an appropriate time to take stock of where things are and what preparations businesses can be making in the coming months, with a particular focus on VAT & Customs actions that will need to be taken irrespective of whether an FTA is reached or not.  
 
  1. Key VAT & Customs changes
  2. Get ready for Customs & VAT
  3. Quantify exposure to UK Tariffs
  4. Keep a close eye on the Northern Ireland Protocol

Central Bank of Ireland update

CP131 - Regulations for pre-emptive recovery planning for (re)insurers

The CBI published a Consultation Paper to consult on proposals to introduce formal recovery planning requirements for (re)insurers under Section 48[1] of the CBI (Supervision and Enforcement) Act 2013. The consultation paper includes both draft regulations (i.e. a draft Statutory Instrument) as well as Pre-emptive Recovery Plans Guidelines for (Re)Insurers. The consultation period will end on 30 October 2020.

Third Quarterly Bulletin

The CBI’s third Quarterly Bulletin of 2020 focuses on the impact of the COVID-19 pandemic and the potential impact of a disruptive Brexit. The Bulletin explores the financial dislocations observed at the onset of COVID-19 and how the widespread shutdown of businesses caused by the pandemic triggered sudden and large-scale job losses and, allied to extreme uncertainty, gave rise to a severe negative shock to both consumer spending and investment.

Making the case for macroprudential tools for the market-based finance sector: Lessons from COVID-19 - Governor Gabriel Makhlouf

Speaking at a Bruegel online event, Governor Gabriel Makhlouf referred to the implications of the changing nature of the financial system, with a particular focus on the growth in market-based finance, and to the financial dislocations observed at the onset of the COVID-19 shock.

Protecting Consumers, Investors and SMEs during COVID-19 - Director General Derville Rowland

Addressing the Association of Compliance Officers, Director General for Financial Conduct spoke of how COVID-19 is like a storm; we first and foremost take extra precautions to deal with the impacts of the storm and in the aftermath we assess the damage done and actions needed to rebuild. She acknowledged that the scale of COVID-19’s impacts on people and businesses will be enormous by historic standards, that it will be a common challenge for all countries around the world in dealing with the impacts, the need to give borrowers breathing space and the importance of the role played by insurance providers. She advised that the CBI have commenced a programme of supervision and engagement 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.

Two new Economic Letters

The CBI has published two Economic Letters, which examine the topics of the impact of COVID 19 on the Irish economy and consumer perceptions of inflation in the Euro area. The letters advise that a decline in the Business Cycle Indicator in April suggests that the initial economic impact of COVID-19 was both sharper and deeper than the financial crisis of 2008/09. The CBI also looks at consumers’ perceptions of inflation in the Euro area.

European Supervisory Authorities updates

EIOPA: Financial innovation for the benefit of consumers

Speaking at the virtual European Forum for Innovation Facilitators, and addressing supervisors, innovation facilitators and innovators, Gabriel Bernardino acknowledged that “Thanks to innovation consumers can benefit from a wider range of products and services that are tailored specifically to their habits and needs”. However, Bernardino also said that “we are seeing issues linked to fairness and consumers at risk of bias or exclusion”. 

EIOPA: Publishes its second ‘Discussion Paper on Methodological Principles of Insurance Stress Testing

On 24 June EIOPA published a second Discussion Paper focusing on approaches, challenges and open points relating to the stress test framework on climate change, liquidity stress testing and a multi-period framework for the bottom-up insurance stress testing.  The Discussion Paper is part of a broader process to enhance EIOPA’s stress testing framework and is open for comments until 2 October 2020.

EIOPA: Publication of the Annual Report 2019

EIOPA published its 2019 Annual Report, setting out its activities and achievements of the past year. EIOPA continued to play an essential role in the supervision of insurance and pensions in Europe, working closely with national supervisory authorities, European institutions and other stakeholders to fulfil its strategic objectives set out in its annual work programme.

EIOPA: Supervisory Activities in 2019

EIOPA published its report on supervisory activities in 2019 highlighting activities and achievements throughout the course of the year, covering both prudential and conduct of business supervision.

EIOPA: Results of the Peer Review on the Regular Supervisory Report

EIOPA has published the results of the Peer Review on the Regular Supervisory Report.

EIOPA: Discussion paper on (re)insurance value chain and new business models arising from digitalisation

EIOPA published a Discussion Paper on the (re)insurance value chain and new business models arising from digitalisation. EIOPA is trying to get a better picture on possible fragmentation of the EU insurance value chain, and related supervisory challenges, by way of consulting on the Discussion Paper. This is EIOPA's first step considering these issues. Its aim is to support supervisors with the challenges arising from new business models and the possible fragmentation of the insurance value chain as a result of new technologies, business models and actors entering the insurance market. Feedback on the Discussion Paper can be submitted until 7 September 2020. There are specific consultation questions set out in the document. EIOPA will assess the feedback to the Discussion Paper to better understand the situation and plan its next steps.

EIOPA: Supports the ESRB’s call on enhanced monitoring of liquidity risks in the insurance sector

EIOPA supports the views expressed by the European Systemic Risk Board (“ESRB”) regarding the importance of improving the monitoring of liquidity risks in the insurance sector with the aim to enhance Europe’s preparedness to potential future shocks. In this context, as a response to COVID-19, EIOPA already developed and put in place a proportionate framework to enhance the nature and the consistency of the information collected on liquidity risks. Until now there is no evidence of the materialisation of liquidity risks in the insurance sector. Furthermore, as part of the Solvency II Review, EIOPA has consulted on concrete proposals to reinforce the macro-prudential dimension of the regime, including elements to strengthen the tools available to assess and monitor liquidity risks. These proposals will be assessed in the coming months in face of the COVID-19 evidence. EIOPA will continue to contribute to the ESRB work in order to support the stability of the insurance sector and its contribution to the overall stability of the financial system.

EIOPA: Clarifies supervisory expectations on product oversight and governance requirements in the context of COVID-19

EIOPA has issued a statement calling on insurance companies to review their product oversight and governance measures because of the potential impact the COVID-19 pandemic can have on products and their utility for customers. They mention how it is vitally important that insurance companies place the fair treatment of customers at the heart of their response to the COVID-19 pandemic.

EIOPA: Publishes bi-weekly information for Relevant Risk-Free Interest Rate Term Structures and Symmetric Adjustment to Equity Risk

EIOPA published technical information on the relevant risk free interest rate term structures and symmetric adjustment of the equity capital charge with reference to the end of June 2020.

EIOPA: Decision of the Board of Supervisors on EIOPA's regular information requests towards NCAs regarding provision of occupational pensions information

The first Decision on EIOPA's regular information requests towards national competent authorities ("NCAs") regarding IORPs was adopted in April 2018. Its business requirements were mainly based on Solvency II 2.2.0 and the taxonomy was partially implemented in line with Solvency II taxonomy 2.3.0. On 2 June, EIOPA Board of Supervisors approved amendments to the Decision to realign the IORPs taxonomy with the Solvency II taxonomy, where relevant. Otherwise, EIOPA’s, NCA’s and entities’ implementation cost will increase due to divergences in taxonomy, dictionaries and databases. The amended Decision also includes the correction of a few inconsistencies that arose during the implementation of the Decision.

EIOPA: Responds to the European Commission’s Digital Finance Strategy consultation

EIOPA responded to the consultation of the European Commission (“EC”) on a new digital finance strategy for Europe. In its response EIOPA highlights that a sound approach to financial innovation should strike a balance between enhancing financial innovation and ensuring well-functioning consumer protection and financial stability frameworks. A level playing field and technological neutrality are crucial. 

IAIS: Report following peer review of ICPs 4, 5, 7 and 8

IAIS published a report covering the thematic topic of corporate and risk governance, which sets out the aggregate assessment results and observations from the IAIS peer review process (“PRP”) on the mandate for supervisors and supervisory powers. The PRP covers IAIS Insurance Core Principle (“ICP”) 4 (Licensing), 5 (Suitability of persons), 7 (Corporate governance) and 8 (Risk management and internal controls) which were adopted in November 2015. A total of 70 authorities participated in the PRP. Participants were asked to respond to open questions and share their supervisory practices. The PRP results show that the observance rate per ICP has increased since the last assessment in 2014. The detailed results by standard and jurisdiction are set out in Annex 4 to the report (available to IAIS members only). In summary, for ICP 4, all participants in the self-assessment scored themselves as observed or largely observed. For ICP 5, 98% (and for ICP 7 and 8, 93%) of participants scored themselves as observed or largely observed. The remaining jurisdictions scored themselves as partially observed. The report also highlights useful practices reported by IAIS members. Members may consider these as a tool to better understand and effectively implement the standards. In addition, the report includes a description of the PRP (Annex 1), a list of the participating IAIS members by category (Annex 2) and a list of aggregated ICP results by IAIS region (Annex 3).

IAIS: Application paper on liquidity risk management

IAIS published an application paper on liquidity risk management. The application paper provides guidance to supervisors about the application of liquidity risk management standards in the ICPs and the Common Framework for the supervision of internationally active insurance groups (“ComFrame”). In particular, it is related to the material in ICP standards 16.8 and 16.9 (ICP 16 Enterprise Risk Management (“ERM”) for Solvency Purposes) and ComFrame 16.9.a to 16.9.d.

The paper provides guidance and examples on:

  • Applying liquidity risk management measures in a proportionate way and how supervisors can tailor requirements.
  • The elements for more detailed risk management processes contained in ICP standard 16.9 (on liquidity stress testing, maintaining a portfolio of unencumbered highly liquid assets, a contingency funding plan, and submitting liquidity risk management reports).
  • Integrating liquidity risk into insurers' ERM frameworks.

European Commission: Consults on Solvency II 2020 Review

  • European Commission launched a consultation relating to the 2020 Review of the Solvency II Directive (2009/138/EC). The consultation questionnaire is accessible via a Commission webpage. In the consultation, the Commission seeks views on issues grouped under the following headings:Long-termism and sustainability of insurers' activities and priorities of the EU framework. Among other things, the consultation seeks views on the role played by insurers in the wider economy, including incentives for insurers to make investments in small and medium-sized enterprises (“SMEs”).
  • Proportionality of the EU framework and transparency towards the public. The consultation considers the scope of Solvency II and the extent to which authorities should use proportionality in applying its requirements.
  • Possibilities to improve citizens' trust, to deepen the single market in insurance services and to enhance policyholder protection and financial stability. Among other things, the consultation considers issues relating to cross-border supervision, preventing and addressing insurance failures and insurance guarantee schemes (“IGSs”).
  • New emerging risks and opportunities that may need to be addressed by the EU framework. The consultation considers issues relating to sustainable finance, cyber-insurance and cyber-risks.

The deadline for responses to the consultation is 21 October 2020.  The consultation is intended to complement the work currently being undertaken by EIOPA on technical advice relating to the Solvency II Review.

Other articles

Insurance Europe: Why does getting the Solvency II Review right matter?

Insurance Europe have published their views on why the 2020 Solvency II Review is so important and the need to get it right. They detail what they view to be the current problems with the existing Solvency II regime, the opportunities offered with the Review and what they believe should or should not change.

European Commission digital finance strategy must address barriers to innovation in insurance, while ensuring a level regulatory playing field

Insurance Europe has responded to a consultation by the EC on its digital finance strategy. Insurance Europe believes that EU rules for insurance should enable innovation and allow consumers, established companies and new market entrants to benefit from the opportunities that digitalisation can offer. However, this is currently not the case. For example, regulatory barriers exist to providing insurance to consumers online, such as requirements for documents to be provided on paper.

Views on EIOPA’s Solvency II holistic impact assessment

Insurance Europe has submitted a paper to the EC setting out its views on the holistic impact assessment exercise carried out by the EIOPA between March and June 2020 to inform its technical advice on the 2020 Review of the Solvency II regulatory framework. In its submission to the EC, Insurance Europe welcomes EIOPA’s impact assessment exercise and provides detailed comments on specific EIOPA proposals. It argues that the Solvency II regime is unnecessarily conservative and that a net reduction in aggregate capital levels is justified, rather than EIOPA’s aim to achieve a “balanced outcome” from the 2020 Review. The EC is due to start a public consultation on the Solvency II Review on 1 July and EIOPA is due to deliver its advice on the Review to the EC by the end of the year.

EIOPA should further clarify and streamline reporting requirements for the PEPP

Insurance Europe has published its response to a consultation by EIOPA on its Implementing Technical Standards for supervisory reporting and cooperation and the exchange of information between authorities for the Pan-European Personal Pension Product (“PEPP”). Insurance Europe called on EIOPA to clarify and streamline the quantity of information that will need to be reported and suggested that PEPP reporting should be incorporated into the annual Solvency II reporting to minimise costs and the burden of compliance. Regarding the frequency of reporting, insurers support reporting PEPP-related information on an annual basis. Insurance Europe highlighted that the insurance industry is also concerned that the suggested granularity - at basic PEPP level - of the reporting will be extremely burdensome and conflict with sectorial frameworks applicable to providers and with the PEPP Regulation itself. Finally, Insurance Europe called on EIOPA to clarify many aspects of the Regulation in relation to PEPP supervision to ensure legal certainty and consistent implementation across Europe. 

Insurance Europe responds to EIOPA cyber underwriting strategy

Insurance Europe has commented on the strategic priorities that EIOPA published in February 2020 for the European cyber insurance market. In its key messages, Insurance Europe particularly welcomes EIOPA’s recognition that a lack of quality data on European cyber incidents is impeding the growth of the market and highlights several key points to be taken into account when seeking to address this issue. It agrees with EIOPA that it would be worthwhile to explore a common taxonomy for cyber risks, stresses the need for insurers to continue to be able to develop innovative cyber products and opposes any introduction of minimum coverage requirements. 

Insurers respond to EC consultation on Non-Financial Reporting Directive

Insurance Europe has published its response to the EC’s Non-Financial Reporting Directive (“NFRD”) consultation. There is strong support in the insurance industry for the EC to require investee companies to directly report transparent Environmental, Social and Governance ("ESG") data/assessments. This will help address issues with the availability and quality of data that would hinder insurers' work to comply with their regulatory obligations in relation to ESG data. The revised NFRD should be consistent with the requirements of the disclosures and taxonomy regulations to ensure investors have all the data they need to comply efficiently and consistently. Data and relevant assessments should be published in a standardised data format and be available electronically in a way that allows access and minimises the cost for investors and other users of the information. To significantly increase efficiency, ease of access and to reduce costs, the ESG data should be made available in a centralised database/electronic register. The materiality of disclosures and proportionality considerations need to be included explicitly in any non-financial reporting standard to avoid an excessive financial and operational burden on smaller companies. Any requirements which would go beyond what is required to comply with the disclosures and taxonomy regulations should only be included if the benefits outweigh the costs.

Response to EBA draft anti-money laundering risk factor guidelines published

Insurance Europe has published its response to a consultation by the European Banking Authority on its draft anti-money laundering risk factor guidelines, and welcomed the updated guidance for life insurers. However, it raised concerns about insurance-specific guidance on risk-reducing factors related to tax relief, as well as guidance related to the identification of the beneficiary. Insurance Europe also raised concerns over proposed guidance that would require financial institutions to specifically identify customers common to several group entities.

Financial services associations call for development of centralised public register for ESG data

A group of financial services trade associations - including Insurance Europe - has called for the creation of a centralised public register for ESG data in the EU. New regulatory obligations that come from the EU Sustainable Finance agenda require financial market participants to have access to comparable and reliable ESG data. Financial institutions and investors also need more ESG data to be able to steer their portfolios towards the objectives of the Paris Agreement and of the European Green Deal. This has created an urgent need for such data to become publicly available. Unfortunately, the availability of high quality and comparable public ESG data is currently rather limited and is insufficient to comply with new regulatory requirements, including sustainability disclosures and taxonomy regulations. While the changes planned for the NFRD should ensure that companies under its scope will disclose the ESG data needed by financial market participants, this will not address the need for efficient access to the data. Therefore, ensuring the availability of high quality and comparable ESG data should be regarded as a strategic infrastructure project to meet the EU’s sustainability objectives under both the Action Plan on Sustainable Finance and the EU Green Deal. The European data register should focus on the ESG data that is necessary for financial market participants to comply with the sustainability disclosures regulation and taxonomy.

A letter from the Chairman of the European Systemic Risk Board on Liquidity risks in the insurance sector

The Chairman of the ESRB addressed a letter to the Chairman of EIOPA detailing ESRB’s views of on how to monitor the liquidity risks in the insurance sector so as to enhance Europe’s preparedness to potential future shocks.

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.

Further reading