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Insurance Insights November 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.

KPMG Updates

Model risk management

The KPMG Actuarial practice, led by Jean Rea, recently published a paper on Model Risk Management focusing on the current challenges and sound practice for insurance companies.

Models are increasingly being used in every aspect of our day to day lives. In the current COVID-19 environment, statistical and mathematical models are literally everyday news, given the key role of the Irish Epidemiological Modelling Advisory Group in supporting and advising the Chief Medical Officer and the National Public Health Emergency Team, which in turn advise the Government in its response to the COVID-19 pandemic.

COVID-19: Central Bank Business Interruption Insurance Supervisory Framework

The KPMG Conduct Risk Team, led by Yvonne Kelleher, have published thought leadership on the CBI’s Business Interruption Insurance Supervisory Framework (“the Framework”).

COVID-19 has caused significant hardship to many Irish businesses, especially those within the hospitality sectors. Many small and medium sized businesses have had to close their doors or cease operations as a result of COVID-19. Not only has this severely impacted their ability to serve their customers, but, for some, it has led to indefinite disruptions that are impacting their bottom line. Many businesses have Business Interruption policies ("BI") which provide cover for losses arising from an interruption. The focus has now turned to determining if these policies provide cover for the losses arising from the measures taken by the Government following the outbreak of COVID-19.

The CBI recently published the "COVID-19 and Business Interruption Insurance Supervisory Framework". This Framework sets out what it expects from insurers when dealing with claims arising from BI insurance policies as a result of the current pandemic. This Framework also sets out how it will engage with the insurers and its overall approach to supervision including escalation of any issues identified.

The KPMG cross functional team made up of Regulatory, Actuarial, Risk Consulting and Legal experts can help you establish a project in response to the Framework. We are also working with clients to assess their response to the Framework and in particular assess our clients’ consideration of both the regulatory and customer lens that would be expected by the CBI to have been applied in reaching its determinations and the related evidence / audit trail to support this. The team has extensive experience and will support you to get in front of this and to make decisions that are right for you, your customers and aligned to the CBI expectations. 

Insurtech’s place in a COVID-19 world - Who will benefit as insurers accelerate innovation efforts?

COVID-19 has impacted every sector of the economy, and insurance is no exception. The pandemic has highlighted inefficiencies and created new friction points for carriers and customers alike — but the experience has also validated carriers’ efforts to innovate and invest in a digital future. Insurtech is sure to play a vital, ongoing role in bringing digital innovation to the insurance sector overall. However, in the short term, many insurtech companies may face significant challenges.

In the latest edition of Insurtech Insights, Gary Plotkin, Ali Geramian and Pat Kneeland discuss the challenges insurtechs face doing business in a COVID-19 world and what type of insurtech is likely to succeed in this uncertain market. 

Resilience Challenged

The KPMG Financial Services Risk, Regulatory, and Compliance practice, led by Brian Hart, recently released a paper on Operational resilience: Common challenges in risk management.

COVID-19, social unrest, and severe market dislocation surfaced an important question for KPMG financial services clients: What happens when traditional business continuity plans or scenario analysis are no longer adequate? The paper answers this question and addresses the impacts of these events on operational resilience. You will find the ten most common challenges to resilience along with examples of the steps proactive firms are taking to stand out from the competition.

Managing change – The constant need to adapt

Just six months ago, no one could have predicted the degree of change across the globe and that many of the challenges facing the world prior to the COVID-19 pandemic would be amplified. If there’s one thing that’s certain in a year filled with unprecedented uncertainty, it is the constant need to adapt. Even under the best of circumstances, enterprise organisations often find themselves in a constant state of flux to remain relevant and competitive. KPMG’s Grace Lavery and Conor McCarthy have published an article on the impacts of COVID-19 and the need to continually manage change.

FASB defers effective date for long-duration insurance contracts

KPMG US reports on Accounting Standards Updates (“ASU”) 2020-11, which helps insurance companies adversely affected by COVID-19 by:

  1. Giving them an additional year to implement ASU 2018-12; and
  2. Making it easier and more cost effective for insurers who do not need the extra time, to maintain their current timelines and early adopt that standard.

Jennifer Austin has published an article summarising the key facts and the impacts of the deferral.

Product Assurance

The KPMG Conduct Risk Team will soon be publishing Thought Leadership on EIOPA’s Approach to the Supervision of Product Oversight and Governance that was recently released. Firms are expected to be consumer-centric – aligning products to consumers’ needs throughout the product lifecycle. Ongoing challenges such as an evolving and expanding Regulatory landscape, the exposure of vulnerable consumer segments due to COVID-19 and Government / media scrutiny on insurance firms are converging on consumer protection and product issues. Assuring products is complicated, as firms rely heavily on manual assurance processes, a complex IT environment and third party outsourcing to deliver their product offering.

KPMG has designed a bespoke methodology, which harnesses data collected across the product lifecycle and reduces the cost burden and manual nature of assurance processes. Our Thought Leadership and methodology will highlight how firms can centre their Product Oversight and Governance programme on consumer interests and address Regulators’ supervisory expectations with regard to the new requirements.

Future of Tax and Legal webcast series

DAC 6/ MDR is now live in the European Union ("EU") after a previous deferral in most EU countries due to COVID-19. The first reports under DAC 6 are due to be made by 31 January 2021 with no further extensions anticipated at this stage at an EU level. Certain countries including Germany, Finland and Austria did not opt for the previous DAC reporting extension and have recently completed the initial DAC 6 reporting for the look-back period starting on 25 September 2018. With less than 3 months to go until all intermediaries and taxpayers affected across the EU need to comply, the rules continue to be highly complex and uncertainty remains. Some jurisdictions have issued initial guidance. However, a number of important questions remain subject to discussion with European tax authorities. Meanwhile financial services organisations must continue with their programs to identify transactions and analyse whether they are reportable and by whom.

KPMG's Gareth Bryan, James Kelly and Liam Lynch are delighted to invite you to join the EMA webcast on Wednesday, 25 November 2020: EU Mandatory Disclosure Regime – an update on the state of play for Financial Services. Please click on the link below to register for this webcast. 

Central Bank of Ireland Updates

Sustainable Finance: the changing regulatory landscape

The CBI has published a speech delivered at Sustainable Finance Ireland's third annual Environmental, Social and Governance Day, where Gerry Cross, Director of Financial Regulation: Policy and Risk, discussed Sustainable Finance and the changing regulatory landscape in the markets and asset management, banking and insurance sectors.

Second Motor Insurance Report of the National Claims Information Database Issued

The CBI published on 3 November 2020 the second annual Private Motor Insurance Report of the National Claims Information Database. The aim of the Report is to improve the overall transparency of the private motor claims environment, and to provide an analysis of the cost of claims, the cost of premiums, how claims are settled, the variance in, and components of settlement costs. It is expected that the Report will inform policymaking.

Small and medium-sized enterprises play a vital role in the Irish economy and will be central to Ireland’s economic recovery

Speaking at a Small Firms Association Webinar, Deputy Governor of the CBI, Ed Sibley highlighted the vital role played by small and medium-sized (“SMEs”) businesses in the Irish economy including SMEs covering business disruption caused by COVID-19. In his speech, the Deputy Governor set out the CBI’s observations as to the effects of the pandemic on these businesses.

CBI publishes additions to the list of PCFs

The CBI has announced three new Pre-Approval Controlled Functions (“PCFs”) with PCF-49, Chief Information Officer (general application) applying to all regulated financial service providers (including insurers and intermediaries) other than credit unions. This will typically apply to the most senior individual at the firm with responsibility for information technology matters.

2019 Solvency and Financial and Condition Reports published

The Solvency and Financial Condition Reports (“SFCR”) for 2019 are now available on the SFCR depository of the CBI’s website.

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

The CBI has published a rescission of Guidelines on Reinsurance Cover of Primary Insurers and the Security of their Reinsurers. The 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 and have been removed from the Solvency II section of the CBI website.

Pension Funds

The CBI has published an explanatory note on Pension Funds. The European Central Bank has introduced Regulation on statistical reporting requirements for pension funds (“the Regulation”). The Regulation requires pension funds to report information on assets, liabilities and member numbers. The CBI is responsible for the collection of this data in Ireland. The reporting requirements are mandatory for all pension funds resident in Ireland.

European Supervisory Authorities Updates

EIOPA: Third annual European Insurance Overview

European Insurance and Occupational Pensions Authority (“EIOPA”) has published its third annual European Insurance Overview and accompanying data document. The European Insurance Overview report is published by EIOPA as an extension of its statistical services in order to provide an easy-to-use and accessible overview of the European insurance sector. The report is based on annually reported Solvency II information. This ensures that the data has a high coverage in all countries and is reported in a consistent manner across the European Economic Area ("EEA"). For more information, EIOPA has a dedicated webpage.

EIOPA: ESA’s Board of Appeal dismisses case against EIOPA on alleged non-application of Union law as manifestly inadmissible

The Joint Board of Appeal of the European Supervisory Authorities (“ESAs” – European Banking Authority, EIOPA and European Securities and Markets Authority) published its decision in relation to an alleged non-application of Union law by six national competent authorities (“NCAs”) brought by Mr. Howerton against EIOPA. In its decision, the Board of Appeal dismisses the Appellant’s claim as inadmissible as the facts described do not seem to involve insurances and occupational pension funds or any other subject matter within the remit of EIOPA nor of the Board of Appeal.

EIOPA: Report on approach to supervision of IDD product oversight and governance requirements

EIOPA has published a report on its approach to the supervision of product oversight and governance (“POG”) requirements under the Insurance Distribution Directive (“IDD”). The report aims to give insurance manufacturers and distributors more clarity on the supervisory approach to POG requirements and to support them when they implement their own POG policies, so they can better engage with their supervisors. 

The report sets out the supervisory approach for assessment. The report also emphasises that, while addressing the process implemented by insurance manufacturers and distributors, the objective of POG supervision is to ensure that manufacturers and distributors take a customer-centric approach to their product approval, distribution, and monitoring and review processes. This should ensure that products produce good consumer outcomes. For more information EIOPA has a dedicated webpage.

EIOPA: ICT security and governance

EIOPA has published its final guidelines on information and communication technology (“ICT”) security and governance. The guidelines provide guidance to NCAs on how insurance and reinsurance undertakings should apply the governance requirements in the Solvency II Directive and the Solvency II Delegated Regulation in the context of ICT security and governance. They build on Articles 41, 44, 46, 47, 93, 132 and 246 of the Directive and Articles 258 to 260, 266, 268 to 271 and 274 of the Delegated Regulation. They also build on the guidance provided by EIOPA's guidelines on system of governance and its guidelines on outsourcing to cloud service providers. The guidelines aim to:

  • Provide clarification and transparency to market participants on the minimum expected information and cyber security capabilities (that is, the security baseline).
  • Avoid potential regulatory arbitrage.

·     Foster supervisory convergence regarding the expectations and processes applicable in relation to ICT security and governance as a key to proper ICT and security risk management.

They will apply from 1 July 2021. EIOPA consulted on the draft guidelines in December 2019 and has published its feedback to stakeholders' comments in a separate annex

EIOPA: Reminder to complete preparations for end of UK transition period

EIOPA has published a press release reminding the insurance sector to complete preparations for the end of the UK transition period on 31 December 2020. Following this date, all EU primary and secondary law will no longer apply to the UK, including the Solvency II Directive and the IDD. In the press release, EIOPA:

  • Warns the insurance sector to be prepared for the consequences of UK and Gibraltar insurance undertakings becoming third-country undertakings and no longer benefiting from the Solvency II authorisation to provide services in the EU. There are also other legal repercussions concerning insurance contracts, insurance disclosure and group supervision.
  • Urges insurers to finalise preparations and implement suitable and realistic contingency plans in advance of the end of the UK transition period. In particular, EIOPA expects (re)insurance undertakings to have measures in place to prevent insurance activity without authorisation and ensure service continuity of cross-border business to minimise the detriment to policyholders and beneficiaries. EIOPA published an opinion on this in December 2017.
  • Reminds insurance undertakings and insurance intermediaries of their duty to inform customers about the possible impact of the withdrawal of the UK from the EU on insurance contracts.
  • EIOPA will continue to monitor the preparations of the sector, especially the development and implementation of contingency plans.

The previously agreed memoranda of understanding on co-operation and information exchange concluded by EIOPA, and all national competent authorities of the EEA with competencies in the insurance sector, with the PRA and the Financial Conduct Authority (“FCA”) remain valid. They will come into effect on the date the European treaties and secondary legislation cease to apply in the UK.

EIOPA: Introductory statement of Gabriel Bernardino at hearing of the ECON Committee

The speech addressed to the Economic and Monetary Affairs Committee focused on steps taken by EIOPA to mitigate the impact of COVID-19, the broader implications of EIOPA's supervisory work and the role for insurance and pensions in the recovery.

EIOPA's activities after the outbreak of the COVID-19 have been focused on coordinating supervisors' actions to ensure a common and consistent supervisory approach across all members states.

EIOPA: Discontinuance of extraordinary RFR/EDA processes

EIOPA has discontinued producing and publishing extraordinary processes for risk-free interest rate term structures (“RFR”) and symmetric adjustment to equity risk (“EDA”). EIOPA will continue to monitor the financial situation closely to support insurance and reinsurance undertakings in their own monitoring of their solvency and financial position. The production of monthly RFR/EDA will continue.

Prudential Regulation Authority Updates

PS21/20: Extending policyholder protection for building guarantee policies

The Prudential Regulation Authority (“PRA”) Policy Statement (“PS”) contains a rule change to increase protection for eligible policyholders of building guarantee policies (“BGP”) from 90% to 100%. It makes amendments to the Policyholder Protection Part of the PRA Rulebook (Appendix). This amendment is particularly relevant in light of the Grenfell tragedy, subsequent changes to building regulations and high-profile court cases. The rule change takes effect on Thursday 8 October 2020. It is worth noting that the PRA considered this change to be ‘urgent’ and therefore did not go through the ordinary process of consulting the public. Additionally, based on the PRA’s current understanding of liabilities within the BGP market, the PRA did not consider the costs of this change for the general insurance sector are likely to be material. 

PRA and the FCA jointly issued a ‘Dear CEO’ letter to insurance firms

The PRA and the FCA jointly issued a ‘Dear CEO’ letter to insurance firms to remind them of final preparations on the following areas, as Brexit transition period comes to an end on 31 December 2020:

  • Contingency planning and continuity of cross-border business in respect of EU liabilities
  • Part VII saving provision
  • Data: use of standard contractual clauses
  • EEA bank account closures
  • EEA passporting firms

TPR firms’ Part 4A application submission timeline.

PRA: Resilience in a time of uncertainty - speech by Nick Strange

The PRA delivered an update on operational resilience in a speech on 6th October setting out feedback to the PRA's consultation paper 29/19, and an update on how the industry has coped during the pandemic.

The key observation was how successful firms and the industry as a whole have adapted to the crisis. There was significant warning about the risk, which gave firms plenty of lead time to prepare and subsequently adapt to the changing circumstances. The fact that it affected the entire industry rather than specific firms has also helped – no single firm was an outlier, and all were adapting together.

Firms have also needed to relax risk appetite and controls to facilitate staff working from home, which naturally increases risks to fraud and data leaks. However, firms are now re-thinking the benefit of maintaining disaster recovery sites given the success of working from home.

Letter from Sam Woods 'Information request: Operational readiness for a zero or negative Bank Rate'

This letter has been sent to specific firms to help the Bank of England and PRA to understand the operational implications of implementing a negative or zero policy rate.

The PRA is requesting specific information about firm's current readiness to deal with a zero Bank Rate, a negative Bank Rate or a tiered system of reserves remuneration – and the steps the firm would need to take to prepare for the implementation of these. 

Other Updates

IAIS: Supervision of climate-related risks

The International Association of Insurance Supervisors (“IAIS”) has published for consultation a draft application paper on the supervision of climate-related risks in the insurance sector. The IAIS has also published a consultation tool setting out the questions on which responses are sought. The draft paper provides background and guidance on how the IAIS supervisory material can be used to manage the challenges and opportunities arising from climate-related risks. The purpose of application papers is to provide additional guidance to assist implementation and provide examples of good practice, rather than establish standards or expectations. In the context of this consultation, the topics and Insurance Core Principles (“ICPs”) that are in scope are ICP 9 on supervisory review and reporting, ICP 7 on corporate governance, ICP 8 and 16 on risk management, ICP 15 on investments, and ICP 20 on disclosures. The IAIS explains that several ICPs not in scope for this paper do have relevance for assessing and mitigating climate-related risks (for example ICPs on valuation and capital requirements, conduct of business and macroprudential supervision) but may be covered in future work. A related IAIS webpage states that the deadline for responses to the consultation is 12 January 2021. The IAIS held a public background session via webinar on 26 October 2020 to discuss the paper. The paper was developed by the IAIS jointly with the Sustainable Insurance Forum (SIF), a leadership group of insurance supervisors convened by the United Nations Environment Programme (UNEP). In February 2020, the IAIS and SIF jointly published an issues paper on implementation of the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). Climate risk and broader sustainability issues are a key theme of the IAIS' Strategic Plan 2020-2024. For more information IAIS have a dedicated webpage.

ESRB: Solvency II review

The European Systemic Risk Board (“ESRB”) has published its response to the European Commission's (“EC”) July 2020 consultation paper on the review of the regime under the Solvency II Directive. In its response, the ESRB comments that Solvency II has contributed to make individual insurers safer and that EIOPA has been central to making the regime a success. However, it recognises that there are gaps in the Solvency II framework. It considers that the EC's review is a unique opportunity to close the gaps in the years to come, or sooner if the situation requires. The ESRB highlights changes that it considers should be made in a number of areas, including the following:

  • The Solvency II framework should be revised so that it better reflects macroprudential considerations, to reducing systemic risk in the financial sector.
  • A harmonised recovery and resolution framework for insurers should be established across the EU, together with additional harmonisation in the area of insurance guarantee schemes.
  • Ensuring that risks are properly captured under Solvency II.
  • The Solvency II framework should be reviewed and updated in the light of the COVID-19 pandemic. Five lessons identified by the ESRB General Board are outlined in the response, which highlight the need for Solvency II to be completed with new tools.

Insurance Europe: EIOPA and ESRB approach to Solvency II review would undermine insurers in facilitating EC CMU and Green Deal objectives

Insurance Europe (“IE”) – together with other insurance sector bodies – have written to the EC to highlight how the Solvency II review provides a key opportunity to enhance insurers’ ability to support the Commission’s growth and sustainability objectives. At the same time, the industry raised serious concerns about the approach of EIOPA and the ESRB towards the review of Solvency II, which would needlessly undermine insurers' abilities to do so.

IE: Response to second EIOPA discussion paper on methodological principles of insurance stress testing

IE has published its response to a discussion paper by EIOPA, where it outlines its views on climate change, liquidity risk and multi-period stress testing. The European insurance industry reiterated its views that any stress test exercise should have clear objectives, appropriate timescales and be communicated appropriately. In particular, the results of any stress test should only be published at aggregate level.

Official Journal: EEA Joint Committee Decision incorporating into EEA Agreement Implementing Regulation on calculation of technical provisions and basic own funds under Solvency II

A Decision of the EEA Joint Committee was published in the Official Journal of the EU. The Decision concerns incorporating Commission Implementing Regulation laying down technical information for the calculation of technical provisions and basic own funds for reporting with reference dates from 31 December 2017 until 30 March 2018 under the Solvency II Directive into Annex IX (Financial Services) to the EEA Agreement. The Decision was made on 31 May 2018. Its date of entry into force is specified as 1 June 2018, provided that all notifications under Article 103(1) of the EEA Agreement have been made.

EC: European Commission Annual report on International Platform on Sustainable Finance

The EC published a first annual report which provides an overview on International Platform on Sustainable Finance ("IPSF"). The IPSF work is focused on developing standards and labels for sustainable finance products, improving climate-related disclosures and developing common group taxonomy. The report outlines work done in previous years and the role of sustainable finance in the context of the COVID-19 pandemic. Specific to the EU, there are advancements being made on the implementation of the 2018 Action plan on financing sustainable growth. The key areas are:

  • In 2019, the EU amended its benchmark regulation to create a Paris aligned Benchmark and EU Climate Transition Benchmark.
  • Adopted a regulation on sustainability related disclosures for the financial services sector.
  • In June 2020, the EU adopted the Taxonomy regulation.
  • The Delegated Acts on climate mitigation and adaptation will be adopted by the end of 2020.

The EC aims to adopt a Renewed Sustainable Finance Strategy in early 2021.

Solvency II review – call for evidence

HM Treasury has launched a call for evidence as the first stage of the review of Solvency II. The government is seeking views on how to tailor the prudential regulatory regime for insurers post Brexit in order to support the unique features of the insurance sector and regulatory approach in the UK. The call for evidence is open for responses until 19 January 2021.

Brexit Update

Government publishes Brexit Readiness Plan and new Brexit Omnibus Legislation

The Irish government has decided to plan for the possibility of the UK leaving the transition period on 31 December 2020 with no long-term trade agreement in place with the EU. The Brexit Readiness Action Plan outlines the government’s approach to various sectors in order to deal with such disruption. The general scheme of a new “omnibus” bill dealing with the potential consequences of the UK leaving the transition period without a deal has been published. The proposed legislation extends the three year temporary run-off regime for UK and Gibraltar based insurers and intermediaries, that was provided for in the Withdrawal of the United Kingdom from the EU (Consequential Provisions) Act 2019, to 15 years.

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