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Insurance Insights September 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 Embedding Resilience

The impact of the coronavirus (COVID-19) is being felt by all businesses around the world. Leaders are navigating a broad range of interrelated issues that span from keeping their employees and customers safe, shoring-up cash and liquidity, reorienting operations and navigating complicated government support programs.

To help you understand the implications of COVID-19 and, more importantly, best position your business to be resilient in the future, KPMG professionals from around the world have put together the latest thinking and insights:

Central Bank of Ireland Updates

Commencement of the Consumer Insurance Contracts Act 2019

The Consumer Insurance Contracts Act 2019 will significantly change the way insurers contract with Irish consumers. 

The Act provides increased protection to consumers and applies a consumer centric lens to insurance contracts, noting that the interpretation of pre-contractual questions and contract terms most favourable to the consumer will prevail. This requires the insurer to take on additional responsibility in respect of its consumer interactions at all key phases of the customer journey.

The majority of the 2019 Act’s provisions came into effect on 1 September 2020. However, some of the more controversial aspects of the 2019 Act contained in sections 8, 9, 12 and 14 will not be commenced until 1 September 2021 to allow insurers time to comply with those requirements.

KPMG’s Consulting experts in the conduct, regulatory and insurance sectors have summarised this here.

Response letter on insurers and dividends

On 7 August 2020 the Central Bank of Ireland (CBI) published a response letter to Chris MacManus, a Member of the European Parliament (MEP), on insurers and dividends. The CBI’s response addresses some of the MEP’s questions and provides some further information on the matter, specifically:

  • The European Insurance and Occupational Pensions Authority’s (EIOPA) monitoring of dividend distributions following the EIOPA and National Competent Authorities (NCAs) statements; and
  • The background to and the objectives of EIOPA and the CBI in respect of dividend distributions by (re)insurers at the current time.

Read more here.

CBI review highlights overall improvement in retail intermediaries’ compliance with annual return reporting requirements

The CBI has published the findings of a Thematic Review of the Retail Intermediary Annual Return (RIAR). In summary, the report concluded that annual return submission levels have risen from 81% in 2013 to 98% in 2020 but that further improvement is needed by some firms in relation to accuracy of data submitted, producing audited accounts, and voluntary revocation when no longer trading. There is follow-up supervisory engagement underway with firms where gaps have been identified. Director of Consumer Protection, Gráinne McEvoy stated “We will continue to engage directly with those firms who currently fall short and expect them to take all remedial actions necessary. This includes making use of the full extent of our supervisory powers where required, to ensure firms are both compliant and consumer-centric in their approach going forward”.

Read more here.

CBI sets out requirements to firms following first phase of review of differential pricing in the insurance sector 

The CBI has concluded the first phase of its Review of Differential Pricing in the Motor and Home Insurance Markets and issued a "Dear CEO" letter to the insurance sector setting out its expectations in respect of the pricing of insurance policies. The Review, which commenced in January 2020, is being conducted in three phases: (1) market analysis; (2) quantitative analysis and consumer insight; and (3) findings, conclusions and recommendations.

The key issues observed include: failure to recognise differential pricing practices, inadequate governance and controls over differential pricing practices, and weaknesses in culture and conduct. The CBI requires firms immediately to:

  • Assess their own pricing methodologies against the CBI’s definition of differential pricing.
  • Take responsibility at Board level for the impact of differential pricing on customers.
  • Ensure that a fully embedded consumer protection risk framework is in place to manage conduct risk and drive positive behaviours.

The summary report produced by KPMG’s Actuarial experts can be found here.

European Supervisory Authorities updates

EIOPA: Regulation of the pan-European Personal Pension Product

EIOPA has delivered to the European Commission (EC) a set of draft Regulatory and Implementing Technical Standards (RTS & ITS) and its advice on Delegated Acts to implement the framework for the design and delivery of the Pan-European Personal Pension Product (PEPP). EIOPA consulted on the draft RTS and ITS and the content of the technical advice in December 2019 and February 2020. EIOPA explains that stakeholders supported the proposals. However, it highlights industry concerns around the PEPP's business proposition's viability given the cap on costs and fees of the Basic PEPP (which is the default option), due to the initial cost of advice. It also suggests that further consideration and guidance is needed to ensure that the advice process fits with the specificities of the PEPP and to the opportunities of digitalisation and online distribution.  All PEPP proposed legal instruments, technical advice and other documents of the proposal are saved at the bottom of the webpage for ease of reference. 

EIOPA: Risk Dashboard

EIOPA published a risk dashboard based on first quarter 2020 Solvency II data for 81 Insurance groups and 2,488 solo insurance undertakings. The impact of COVID-19 and ultra-low yields has resulted in risk exposures remaining high compared to April 2020 results. The results from the report highlight the following:

• Market and credit risks remain high. The pandemic continued to cause disruptions in all financial sectors and economic activities, with insurers being particularly exposed to very high levels of macro risk. Market, credit, and profitability and solvency risks are at a high level.

  • Assets over liabilities and SCR ratios for groups and non-life solo have weakened. A further deterioration is anticipated over the next quarter mainly driven by possible depreciation of assets due to COVID-19 shock and the low yield environment.
  • Insurance risk decreased to medium levels.
  • Stocks of life and non-life insurance undertakings continued to underperform relative to the market.
  • Insurers’ credit default swaps spreads returned to lower levels, with insurers’ external outlook showing a net increase in negative revision as of June 2020.

Other updates

Dear CEO Letter: Updates on Temporary Permissions Regime Requirements for Third Country Branches

The Prudential Regulatory Authority (PRA) published a letter by Sam Woods, PRA Deputy Governor, directed to all PRA regulated firms that are preparing for the end of Brexit transition period and entering into Temporary Permissions Regime (TPR). The letter reminds firms that the transition period is due to end at 11pm on 31 December 2020 when the temporary permissions will take immediate effect. The PRA has updated its approach and key requirements for branches falling under the TPR. The actions to be taken by firms to ensure operational readiness are varied and updated information is included on the EU withdrawal page. The key highlights are set out below and firms are encouraged to review the TPR updated information as part of their operational readiness process.

  • Firms that have submitted a valid Notification or submitted Part 4A application (not subsequently withdrawn), will automatically enter the TPR.
  • During the TPR, a firm will have a deemed Part 4A permission to carry on existing activities up to a maximum of three years from end of transition period.
  • A passporting firm that already has a top-up permission will obtain a deemed variation of that permission.
  • A more limited set of rules will apply to firms in the TPR without a branch in the UK. 

Financial Stability Board: Key attributes assessment methodology for insurance sector

The Financial Stability Board (FSB) has published a Key Attributes Assessment Methodology for the insurance sector (insurance KAAM). The methodology sets out essential criteria to guide the assessment of the compliance of a jurisdiction's insurance resolution framework with the FSB's key attributes of effective resolution regimes for financial institutions (Key Attributes). Implementation of the Key Attributes allows authorities to resolve financial institutions in an orderly manner without taxpayer exposure to loss from solvency support, while maintaining continuity of their vital economic functions. However, not all attributes are equally relevant for all sectors. The insurance KAAM provides an insurance sector-specific interpretation of individual key attributes. It stresses that a jurisdiction's insurance resolution regime should be proportionate to the size, structure and complexity of the jurisdiction's insurance system. The FSB has also published a note explaining the application of the insurance KAAM and the Key Attributes during the period of suspension of the designation of global systemically important insurers (G-SIIs). The note states that the Key Attributes continue to apply during the suspension period to any insurer that could be systemically significant or critical in failure. National authorities may apply to certain insurers the requirements specific to G-SIIs. These are the requirements for a crisis management group, institution-specific cross-border cooperation agreements and resolvability assessments. The FSB will, in November 2022, based on the initial years of implementation of the holistic framework, review the need to either discontinue or re-establish its annual identification of G-SIIs in consultation with the IAIS and national authorities.

Insurance Europe’s Response to Solvency II review impact assessment

Insurance Europe (IE) has published its response to a consultation conducted by the EC on its inception impact assessment regarding the review of Solvency II (SII), the regulatory framework that governs EU insurers. IE welcomes the EC Inception Impact Assessment and agree to a significant extent with its objectives and policy options. However, there are some key omissions and some refinements that are necessary to ensure the right outcomes. SII is strongly supported but is excessively conservative and has some measurement flaws and excessive operational burdens that create unnecessary costs and barriers, in particular relating to the provision of long-term products and investments. The SII review should not lead to an increase in capital requirements and, for certain products, a better reflection of the real risk will lead to a justified release of capital. This outcome is necessary for insurers to continue to provide long-term products and fulfil their role in supporting recovery, sustainable growth and transformation to a net-zero carbon economy. 

Insurance Europe Annual Report

IE has published its 2019-2020 Annual Report, that presents the European insurance industry’s positions on COVID-19 responses and solutions, as well as its work in relation to future pandemics. Other topics covered include: climate adaptation, sustainable finance, Solvency II, financial reporting, pensions, the PRIIPs Regulation, distribution, insurtech, cyber risks and motor insurance.

Insurance Europe’s Position Paper: ECB strategy review

IE has published its response to a consultation by the European Central Bank (ECB) on its ongoing strategy review. Interest rates are very significant for the insurance industry: they impact product offering, as well as the measurement of insurers’ balance sheet positions and, more broadly, their solvency ratios. The insurance sector agrees that a loose monetary policy was an appropriate reaction to the global financial crisis, as well as to the eurozone debt crisis. With the COVID-19 pandemic severely affecting the economy, responses also need to be timely, targeted and strong. However, they must be temporary. The ECB strategy review should therefore include a plan to exit loose monetary policy measures as quickly as possible. Market participants and governments should know that central bank support can only be temporary.

Insurance Europe Insurers call on EC to give more prominence to adaptation in EU climate change strategy

IE has published its response to a consultation by the EC on the EU’s strategy for adaptation to climate change. Europe’s insurers urge the EU to enhance its efforts to increase climate change adaptation, which, given the scale of the challenge it presents, must be ambitious. Indeed, some of the consequences of climate change are already becoming apparent. This means that mitigation actions alone are not enough to address the economic, social and environmental implications of a changing climate. IE outlined that it is essential to collect, share and monitor data at various governance levels to provide a clear overview of what kinds of adaptation measures need to be taken by member states. While it is important to recognise that each member state is affected by climate change differently and that therefore there is no one-size-fits-all solution at a European level, the EU has a key role to play in coordinating adaptation efforts. As part of the response, IE also shared this position paper.

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.