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Insurance Insights October 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.

Data governance in the insurance industry

While data governance and quality have always been a part of the Solvency II agenda, indications from the regulator are that there will be a greater degree of focus in these areas going forward. Advances in data analytics and modelling techniques highlight the need for insurers and re-insurers to treat data as one of their organisation’s most important assets. Strong data governance and quality processes are the key foundations, providing decision makers with the confidence to use their organisation's data to support strategic decisions and, ultimately, drive value and positive customer outcomes.

KPMG has developed an approach to data governance and quality for the insurance industry that will assist organisations with building the foundations, bringing value and insights to their organisation and fulfilling regulatory requirements.

Financial Services: Regulating the new reality

As the focus for government and businesses moves from initial response to the Covid-19 pandemic, through resilience concerns, to recovery and the new reality, financial services regulators are also expected to move into a new phase of adjustment and support. The EMA Financial Services Risk and Regulatory Insight Centre has launched the "Financial Services: regulating the new reality" publication series.

  • The first paper in the series looks at how the financial services industry is being called upon to support recovery.
  • The second paper in the series looks at how governance arrangements and controls need to be reinforced and enhanced in the new reality and what firms and regulators should do to seize the opportunities to do things differently. 
  • The third paper focuses on delivering sustainable finance. 

Insurtech Insights: Becoming a digital insurer

Responding to COVID-19 and its impact on business has been a necessary priority for insurance carriers for much of the year. However, this has not dampened carriers' longer-term ambitions. If anything, COVID-19 has accelerated them. Carriers worldwide have watched companies in many industries, including their own, transform themselves and their businesses through investments in digital technology and reinventions of business processes. Many carriers, well aware that their business and technology have changed little in decades, are more eager than ever to launch a digital transformation of their own as the world turns its attention to economic recovery in a new reality.

COVID-19: Consumers and the new reality

In the second "Consumers and the new reality" report, KPMG continues to examine the effects of COVID-19 on consumers’ needs, behaviours and preferences. The effects of Covid-19 continue to be felt around the globe and organisations will need to anticipate and prepare for the new reality. In particular, what are the long-term shifts in consumer behaviours and how can organisations transform their business to successfully adapt to these changes? 

Central Bank of Ireland Updates

Quarterly Newsletter

The Central Bank of Ireland (the “CBI”) has published the September 2020 edition of its Insurance Newsletter. The newsletter focuses on the following areas:

  • Key considerations for boards and executive leadership teams in responding to COVID-19;
  • Identifying emerging risks and the CBI’s upcoming “Emerging Risks” survey;
  • The role of the actuary in increasing transparency and driving cultural change;
  • CP 131 - Regulations for pre-emptive recovery planning for (re)insurers;
  • Diversity and Inclusion in the Irish Insurance Sector; and
  • The COVID-19 and Business Interruption Insurance Supervisory Framework.

The CBI also made reference to an Insurance Industry Briefing scheduled to take place on 12 November 2020. 

CBI Governor Gabriel Makhlouf: COVID-19 and the future of monetary policy 

Speaking at the Institute of International and European Affairs webinar, Governor Makhlouf spoke of how the post COVID-19 world could be different in a number of aspects, with economies likely to face new structural changes while changes already underway may accelerate or reverse. He pointed to the legacy of structural change left by the pandemic, noting two important changing areas: globalisation and digitalisation. He states these “will have implications for the way we live, work, consume and communicate and, therefore, the effective transmission of monetary policy across the euro area”.

Rescission of Guidelines on Reinsurance Cover on Primary Insurers and the Security of their Reinsurers

The CBI Guidelines on the Reinsurance Cover of Primary Insurers and the Security of their Reinsurers have been rescinded for (re)insurance undertakings subject to Solvency II with effect from 14 September 2020. These Guidelines have also been removed from the Solvency II section of the CBI website. 

Inclusion, Diversity and the Pandemic 

The CBI has re-published a blog post by Governor Makhlouf titled “Inclusion, Diversity, and the Pandemic”, originally published by the Institute of Directors in Ireland (“IoD”). Governor Makhlouf encouraged all IoD members to not forget the importance of diversity and inclusion and challenges regarding COVID-19, as they plan ahead, and discussed the evidence emerging that COVID-19 is having a disproportionate impact on certain groups in society such as women, people from ethnic minority backgrounds and others from socio-economically disadvantaged backgrounds.

European Supervisory Authorities Updates

EIOPA: Risk mitigation techniques by insurance undertakings

The European Insurance and Occupational Pensions Authority (“EIOPA”) published a consultation paper on a draft supervisory statement on the use of risk mitigation techniques by insurance and reinsurance undertakings. The aim of the statement, EIOPA writes, is to promote supervisory convergence when assessing the use of risk mitigation techniques, as it is recognised that potential divergent practices or potential supervisory arbitrage in this area could contribute to an unlevel playing field. It also aims to raise awareness and ensure that while the insurance sector continues to use risk mitigation techniques adequate to their risk profile, prudency and effective risk transfer is duly considered when recognising risk mitigation techniques in the solvency capital requirement calculation. Comments can be made until 24 November 2020. EIOPA will consider the feedback received and publish a final report.

EIOPA: Supervising use of climate change risk scenarious in ORSA

EIOPA has published a consultation paper on a draft opinion on supervising the use of climate change risk scenarios in the ORSA. The opinion recommended that (re)insurers consider climate risks beyond the one-year time horizon through the system of governance, risk-management system and their ORSA. EIOPA considered that further work would be needed to define a consistent set of quantitative parameters, which could be used in climate change-related scenarios. Undertakings could then adopt as appropriate in their ORSA, risk management and governance practices, also recognising that other parameters will depend on the specificities of each undertaking. Comments can be made on the consultation paper until 5 January 2021. EIOPA intends to publish the final opinion in spring 2021. 

EIOPA: Start of a European-wide comparative study on diversification in internal models 

EIOPA has launched a European-wide comparative study on diversification in internal models. The objective of the study is threefold:

  • to gain an overview of the current approaches in the market and, on best effort basis, analyse and compare the levels of diversification;
  • to facilitate a better understanding of modelling dependencies, aggregation and resulting diversification benefits; and
  • to enhance quality and convergence of supervision on diversification in internal models.

The study will be carried out in two phases to balance complexity and completeness. The first phase of the study, starting early October 2020, focuses on top-level risk dependencies between market, credit, life, non-life, health and operational risks, with the lower level inter-risk dependencies being assessed in the second quarter of 2021 in the second phase of the study.

EIOPA sets up its key priorities in the light of the pandemic

EIOPA has published its priorities for 2021-2023 taking into account the current market situation in the light of the Covid-19 pandemic, as well as the political priorities defined by the European Commission. At the centre of EIOPA's activities will be continued Covid-19 crisis management, risk mitigation and active support of the recovery of the European economy. Other key priorities include:

  • Consumer protection, particularly in the light of increasing risks arising from the Covid-19 pandemic;
  • Digitalisation and cyber risk;
  • Sustainable finance;
  • Supervisory convergence; and
  • Financial stability of the insurance and occupational pensions sectors.

In respect of Brexit, EIOPA comments that the withdrawal of the UK will lead to greater fragmentation of EU financial markets, which strengthens the case for it to continue its work on regulatory harmonisation and supervisory convergence. EIOPA is committed to maintaining good relationships with relevant UK and other third-country authorities. EIOPA has a dedicated webpage.

EU financial regulators assess risks to the financial sector after the outbreak of COVID-19 and call for enhanced co-operation 

The three European Supervisory Authorities (European Banking Authority, EIOPA and European Securities and Market Authority – European Supervisory Authorities) have issued their first joint risk assessment report of the financial sector since the outbreak of the COVID-19 pandemic. The report highlights how the pandemic has led to further amplified profitability concerns across the board and heightened liquidity challenges in segments of the investment fund sector. It particularly points to economic and market uncertainty as a key challenge going forward.

Prudential Regulation Authority Updates

Responses to CP3/20 "Occasional Consultation Paper"

The Prudential Regulatory Authority (“PRA”) issued a policy statement providing feedback to responses to Chapters 2 to 7 of CP 3/20 “Occasional Consultation Paper”. Specific to insurance the updates relate to:

  • Replacing a reference to LIBOR with Sterling Overnight Index Average (“SONIA”) in calculation of mathematical reserves;
  • Minor updates to National Specific Templates (“NSTs”), and NST LOG files and market risk sensitivities
  • Senior Managers and Certification Regime (“SM&CR”) application form updates.

UK withdrawal from the EU: Changes before the end of the transition period 

The PRA and Financial Conduct Authority  jointly published a consultation paper proposing changes to certain existing instruments before the end of the Brexit transition period on 31 December 2020. The proposed changes are highlighted below:

  • An update on the Bank of England’s and PRA’s intended use of the temporary transitional power; and
  • Proposals to fix deficiencies arising from the UK’s withdrawal from the EU.

Comments are expected by 17 November 2020.

PRA review of the Solvency II effective value test 

The PRA published its review of Solvency II effective value test (“EVT”), applicable from 30 September 2020

  • retained the minimum deferment rate used in the EVT at 0.5% per annum
  • retained a value for the volatility parameter to be used in the EVT of 13%

This is applicable to firms which apply the matching adjustment. Firms that have applied to use a minimum deferment rate of 0% to conduct EVT prior to 31 December 2021 may continue to do so, notwithstanding the published rate. 

Other Updates

Paving the way forward: managing climate risk in the insurance sector

The Bank of England (“The Bank”) published a speech delivered by Anna Sweeney on managing climate risk in the insurance sector. The regulator’s approach to help the insurance sector includes:

  • Setting expectations and promoting good practice about how firms manage climate related financial risks internally
  • Conducting scenario analyses to help firms prepare for the crystallisation of climate risks
  • Global engagement with the industry and other regulators to facilitate the understanding and encourage mitigation of physical and transitional risks.

Ask not what the economy can do for insurers - ask what insurers can do for the economy

The Bank published a speech delivered by Anna Sweeney highlighting the role of insurers in economic recovery from COVID-19. This role includes providing protection for significant financial losses, channelling investment into a wide range of assets, providing security of retirement income and facilitating stable demand of goods and services.

Insurers call for level regulatory playing field for new market entrants and business models

Insurance Europe (“IE”) has published its response to a consultation by EIOPA on the (re)insurance value chain and new business models arising from digitalisation.

IAIS issues a survey invitation on the existing prudential treatments for investments in infrastructure and strategic equity (Public)

As part of its work on the Insurance Capital Standard (“ICS”) over the 2020-2024 Monitoring Period, the International Association of Insurance Supervisors (“IAIS”) is exploring whether there should be a differentiated capital treatment of certain eligible infrastructure (both equity and debt) as well as strategic equity investments within the ICS.

In that context, the IAIS is seeking input from the public regarding quantitative and qualitative material and data sources that could be used to support the aforementioned work. The survey also provides an opportunity for stakeholders to share with the IAIS their experience with respect to such investments.

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