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Insurance Insights December 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

KPMG Annual Insurance Update

On 1 December, KPMG’s Insurance Team, led by Brian Morrissey (Head of Insurance and Actuarial, KPMG), hosted its annual Insurance Update. At the session, Andrew Candland, Head of Actuarial, Advisory and Major International Insurance Firms at the Central Bank of Ireland (“CBI”) provided an update on the progress on the 2020 regulatory priorities and gave his perspective on the key focus areas for the CBI in 2021. Complementing the regulatory update, current hot topics impacting (re)insurers across financial reporting, risk, regulatory, tax and consumer/conduct themes were also discussed. The recording and slides are available by clicking on the link below. 

COVID-19 - Board considerations for year-end 2020 reserves

COVID-19, the global story for 2020, has resulted in huge operational disruptions, market volatility and reserving uncertainties for Irish insurers. As the pandemic escalated in Europe during Q1 2020 most Irish insurance companies were preparing to submit year-end 2019 annual regulatory returns and apart from additional disclosures submissions were largely unaffected.

Insurers can expect a greater level of scrutiny on adequacy and accuracy of year-end 2020 Technical Provisions from various stakeholders, including regulators, external auditors and, where relevant, the external Reviewing Actuary. As insurers begin to plan year-end 2020 financial statements and regulatory returns, there are several areas that will be of particular focus for the CBI and external auditors which will need to be carefully considered by Boards.

The KPMG team, led by Noel Garvey (Managing Director, KPMG Actuarial) and Marie Phelan (Director, KPMG Actuarial), spoke to various stakeholders and published an article on key learnings and considerations that can help Boards prepare for year-end 2020.

Solvency II – Validation of Technical Provisions

Formal validation of technical provisions has been a key area of focus for the Actuarial Function of many life (re)insurers. This is not surprising given the explicit requirements set out in Articles 264 and 265 of the Solvency II Delegated Regulation, along with increasing scrutiny from Regulators, External and Internal Auditors, Reviewing Actuary, External Heads of Actuarial Functions and a myriad of other interested parties.

The bar continues to be raised, with the view that if the validation is not evidenced, then it has not been completed. The KPMG Actuarial team has benchmarked approaches across the industry through the work in many of the roles outlined above. 

2020 Technical Practices Survey

The KPMG UK team, led by James Isden (Director, KPMG UK) has published the results of the 2020 Technical Practices Survey. The focus of the Technical Practices Survey is to enable life insurance firms to identify the key technical issues within the industry, and the range of methodologies and approaches that have been adopted by their peers. KPMG is incredibly pleased to see continued support for the survey as it evolves, with 24 participants submitting responses this year, including full submissions from eight and partial submissions from three internal model / partial internal model firms.

Each year, in response to market developments and participant feedback, thematic areas are selected to explore in more detail in our report. This year those areas include:

  • Methodologies underpinning calibration of fundamental spread under stress, which showed the granularity with which firms re-calculate the components of fundamental spread in stressed conditions and the importance of the glidepath assumptions;
  • Firms preparedness for climate change reporting and stress testing. Two of the areas identified for potential developments were firms’ allocating sufficient resources dedicated to climate risk and the challenges of accessing the data required for a detailed assessment of climate risk; and

Operational Risk modelling remains an area of focus and development. We were therefore keen to understand how recent events, such as the focus on operational resilience and the emergence of COVID-19, had impacted the approach. The results show that these issues are on the radar of insurers, with both leading to changes to the scenarios and the calibration.

Product Assurance - Insurance

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.

KPMG, led by Gillian Kelly (Head of Conduct Risk Services, KPMG Risk Consulting), has designed a bespoke methodology, which harnesses data collected across the product lifecycle and reduces the cost burden and manual nature of assurance processes. The methodology highlights how firms can centre their Product Oversight and Governance programme on consumer interests and address Regulators’ supervisory expectations with regard to the new requirements. In addition, it arms clients with a comprehensive understanding of their products and underlying control environment, unlocking key insights to managing product sets and assisting with assessing product value.

COVID-19 - CBI Business Interruption Insurance Supervisory Framework (Update)

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

The KPMG cross functional team made up of Regulatory, Actuarial, Risk Consulting and Legal experts can help clients 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 clients in getting in front of this and making decisions that are right for themselves, their customers and aligned to the CBI expectations.

Climate change – towards net zero

More than half of the world’s 250 largest companies now acknowledge climate change as a financial risk to their business in their corporate reporting. KPMG’s new study, led by Russell Smyth (Partner, KPMG Corporate Finance) aims to help by proposing a set of quality criteria for climate-related disclosure and analyses how the world’s 250 largest companies measure up against these criteria. 

Responding to consumer trends in the new reality

Significant change has been experienced throughout the world due to COVID-19. In this report, KPMG, led by René Vader (Global Head of Consumer and Retail, KPMG), reflects on how business should respond to new customer expectations while also analysing how the key consumer trends impact organisations in the Banking, Consumer and Retail, Insurance and Travel and Leisure sectors.

KPMG Regulatory Horizons – October Edition

The latest edition of KPMG‘s Regulatory Horizons publication, from our EMA Financial Services Risk and Regulatory Insight Centre ("RRIC"), has just been published. In the latest issue, we focus on the outlook for financial services regulation, in particular:

  • Regulators set out their agendas
  • New EU digital finance package
  • Retail payments: four pillars
  • Capital Markets Union version 2
  • Markets In Financial Instruments Directive II Review takes shape
  • Financial and operational resilience for banks
  • Growing focus on product governance

Central Bank of Ireland Updates

CBI publishes interim report of differential pricing review

On 14 December, the CBI published the Interim Report on its Review of Differential Pricing Practices in the Irish private car and home insurance markets. The Report provides a progress update on the Review and outlines new insights from the CBI’s ongoing market analysis and consumer research.

As part of the second Phase of its Review, the CBI undertook extensive market analysis and in-depth research with consumers. This work is ongoing. Given that differential pricing can be associated with both benefits and costs for consumers, completion of this detailed analysis is essential in order to ensure a full market perspective, evidence-based conclusions, and appropriately calibrated regulatory interventions. Consideration of the likely costs and benefits of any potential solution to risks identified is also essential, with any potential market and consumer price effects given appropriate regard.

The CBI’s market analysis confirmed that the majority of insurance providers apply some form of differential pricing. It found the following:

  • A number of pricing practices were identified that led to customers with a similar risk and cost of service paying different premiums for reasons other than risk and cost of service.
  • Dual pricing is evident across the private car and home insurance markets, where new and renewing customers are charged different premiums for reasons other than risk and cost of service.
  • There are significant differences between what different groups of customers pay relative to their expected cost – with those customers with the longest tenure paying the most.
  • Insurance providers failed to demonstrate consideration of how these pricing practices may impact certain groups of consumers differently, and the potential for certain consumer groups to be impacted more than others.

KPMG, led by John O’Donnell (Head of Insurance, Risk and Regulatory, KPMG) and Jean Rea (Director, KPMG Actuarial), published an article following Phase One observations exploring what was discovered, next steps, KPMG’s response to this and how KPMG can help clients.

CBI inspection finds weaknesses in firms’ compliance with Fitness & Probity Regime

On 17 November, the CBI issued a “Dear CEO” letter setting out its expectations for firms to take appropriate action to address the significant issues identified by thematic inspections concerning their legal obligations under the Fitness and Probity regime. The issues identified include: succession plans with no skills matrix for the Board and executive team; lack of evidence of Board approval of Pre-Approval Controlled Function appointments; and initial and ongoing due diligence procedures that are below regulatory expectations.

Financial Stability Note - Differential Pricing: The Economics and International Evidence

The CBI published a Financial Stability Note on the economics of, and international evidence on, differential pricing. The Note refers to the academic literature exploring the direct link between behavioural biases and the incidence of differential penalties, and notes that these biases have been widely linked with financial decision-making errors. The Note acknowledges that potential policy measures to address differential pricing practices need to consider potential competition, consumer price effects and the impact on vulnerable consumers. 

2020 Insurance Industry Briefing - Domhnall Cullinan, Director of Insurance Supervision (CBI)

In his opening remarks at the Insurance Industry Briefing held on 12 November, Domhnall Cullinan, Director of Insurance Supervision, argued that greater transparency and individual accountability is fundamental to rebuilding consumer trust in the industry. The Director of Insurance Supervision also touched on climate related risks, financial and operational resilience and the Own Risk Solvency Assessment, pre-emptive recovery plans, and Brexit-related contingency plans.

EIOPA updates

EIOPA - Discussion paper on non-life underwriting and pricing in light of climate change

On 10 December, the European Insurance and Occupational Pensions Authority (“EIOPA”) published a discussion paper highlighting challenges associated with current non-life underwriting practices and options to ensure the availability and affordability of insurance products, in the context of climate change.

The discussion paper builds on work stemming from the Opinion on Sustainability within Solvency II, published in 2019, and is part of EIOPA’s overall sustainable finance agenda. EIOPA is inviting stakeholders to provide comments on the discussion paper by 26 February 2021.

EIOPA launches discussion paper on a methodology for integrating climate change in the standard formula

On 2 December, EIOPA published a discussion paper on a methodology for the potential inclusion of climate change in the Solvency II standard formula when calculating natural catastrophe underwriting risk. This discussion paper is a follow-up to EIOPA’s Opinion on Sustainability within Solvency II issued in September 2019, which concluded that there is a need to consider if and how climate change-related perils could be better captured in the Solvency II framework under the natural catastrophe risk sub-module.

EIOPA consults on insurers’ key performance indicators on sustainability for non-financial reporting

On 30 November, EIOPA issued a Consultation Paper on the relevant ratios that (re)insurers within the scope of the Non-Financial Reporting Directive will be required to disclose. In this consultation, EIOPA seeks comments on proposed capital expenditure, operating expenditure and turnover ratios; their suitability and relevance; and whether there should be insurance and reinsurance Key Performance Indicators.

EIOPA consults on the application of the Solvency II supervisory ladder

EIOPA is also consulting on a proposed Supervisory Statement on the Solvency II requirement for (re)insurers to submit a realistic recovery plan to regulatory authorities when they observe that their Solvency Capital Requirement (“SCR”) has been breached or when there is a risk of non-compliance with their SCR in the next following months. The proposed Supervisory Statement sets out the information that should be included in the realistic recovery plan, including an analysis of the causes of non-compliance and the recovery measures to restore their solvency position and sustain it in a medium to long-term period.

Survey on the application of the Insurance Distribution Directive

EIOPA launched a survey on Insurance Distribution Directive (“IDD”) to assess how it has been applied across the EU. In particular, the objective of this survey is to gather information on the impact of IDD on advice and distribution methods and on insurance intermediaries that are small and medium sized enterprises.

EIOPA calls for sound supervisory practices in registering or authorising IORPs to foster a level-playing field across the EU

EIOPA published a Supervisory Statement on 12 November on supervisory practices across the European Union for registering or authorising Institutions for Occupational Retirement Provision (“IORPs”), including the assessment of suitability for cross-border activities. The primary objective of the Supervisory Statement is to ensure that IORPs operating cross-border do it under prudent conditions, regardless of the different authorisation or registration regimes, and foster a level-playing field across the European Union, as well as to ensure adequate protection of the members and beneficiaries.

EIOPA publishes its updated Risk Dashboard

The EIOPA published its updated Risk Dashboard based on the second quarter of 2020 Solvency II data.

The risk exposures of the European Union insurance sector are now slightly reduced compared to the previous assessment in July. Listed below are the key observations from the dashboard review: 

  • Macro risks remain at a very high level given the persistent global impact of the outbreak of COVID-19 on economic activities.
  • Profitability indicators show the expected signs of deteriorations.
  • Insurance risks remain at medium level, driven by general concerns over decrease in premium growth and over reserve adequacy.

Prudential Regulation Authority Updates

The time to push ahead on tackling climate change – speech by Andrew Bailey

The Bank of England published a speech delivered by Andrew Bailey, the Governor of the Bank of England, which highlights climate change risks as being more complex and bigger to manage and the launch of a climate stress test exercise in June 2021. This exercise will explore three different climate scenarios, testing different combinations of physical and transition risks over a 30-year period.

Bank of England to launch the Climate Biennial Exploratory Scenario exercise in June 2021

The Bank of England announced plans to launch the Climate Biennial Exploratory Scenario (“CBES”) in June 2021. In December 2020, the Bank will inform participants about the high-level approaches for the CBES in a number of key areas, including counterparty exposure data with the expectation to release a set of draft data templates as well as a draft qualitative questionnaire for feedback from participants in February 2021. This aims to test the resilience of the current business models of the banks, insurers and the financial system to climate related risk and the scale of adjustment required to make the system to remain resilient.

Letter to general insurance firms ‘Insights from PRA review work on reserving and exposure management’

The Prudential Regulation Authority (“PRA”) issued a letter to the Chief Risk Officers of general insurance firms, setting out insights from its supervisory review work focusing on reserving and exposure management. 

Response to the general insurance industry – A framework for assessing financial impacts of physical climate change

The PRA outlined its response to the industry feedback received on the framework for assessing the financial impact of physical climate change. The framework was published in May 2016 as a practitioner’s aide for the general insurance sector. The feedback highlighted the value in having a more streamlined expert judgement method for use when assessing the impact from physical climate change and recognition of the opportunities from physical climate change.

Further development includes assessing each hydro-meteorological region-peril, assessing how current catastrophe model calibrations allow for climate change that has crystallized to date and assessing the insurance industry’s experience on quantifying physical climate change risk on the liability side of the balance sheet to develop a similar framework for assessing the risk on the assets and investment side of the balance sheet.

Other Updates

Action Plan for Insurance Reform - December 2020

In September 2020, the Government set up a Cabinet Committee Sub-Group on Insurance Reform within the Cabinet Committee on Economic Recovery and Investment to be chaired by An Tánaiste.

The Government committed to insurance reform in the proposed Programme for Government (“Programme”). The Programme prioritises improving the insurance environment as part of the recovery agenda as insurance cover is important in supporting development and expansion of businesses.

The first task of the Sub-Group was the development of an Action Plan to reflect the commitments made in the Programme, the relevant government departments and agencies/bodies, and the associated time frames for delivery of these commitments.

The Action Plan sets out the range of work that Government is taking on. It crosses over different policy areas such as justice, finance, competition and is focused on reducing costs and fraud, and increasing transparency.

FCA Supervision Strategy for Lloyd’s & London Market Insurers and Others

This was a Dear CEO letter covering firms ranging from traditional London market insurers, reinsurers, run-off firms and Property and Indemnity Insurance clubs. In this letter, the Financial Conduct Authority (“FCA”) highlights what it considers are the key risks to customers and markets, and outlines its expectations of firms in the following areas:

  1. Ineffective governance and oversight: FCA expect senior managers not just to take reasonable steps to prevent issues but also to act quickly and effectively to address and remediate when things go wrong. FCA are carrying out extensive analysis to establish how firms are dealing with claims arising from the current pandemic.
  2. Culture and non-financial misconduct - a failure to confront poor culture: FCA expects firms to assess and address the drivers of culture in a firm, considering leadership, purpose, governance and firms’ approach to recruiting, managing and rewarding employees.

Inefficient and poorly controlled general insurance distribution chains: Where business models employ elongated distribution chains, and then product oversight is poor both in design and purpose; this could result in products that are poor value being distributed and cause direct customer harm. FCA expects all firms to have robust controls for sales and renewals arrangements, management of conflicts of interest and oversight of distribution arrangements.

IAIS: Draft Application Paper on Resolution Powers and Planning

IAIS is developing supporting material on recovery and resolution actions which aims to provide guidance to insurance supervisors to ensure smooth exit from the market whilst maintaining supervisory cooperation and coordination. This includes the criteria for determining the circumstances in which the supervisor initiates resolution of an insurer (“entry into resolution”). IAIS proposes that entry into resolution should be initiated when an insurer is no longer viable (“failing”) or is likely to be no longer viable (“likely to fail”) and has no reasonable prospect of recovering to viability. The resolution regime should have a forward-looking trigger that would provide for entry into resolution before an insurer is insolvent or is unable to pay its obligations as they come due.

This consultation closes on 5 February 2021. 

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