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Insurance Insights August 2021

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

Climate risk reporting: Are you up to speed?

Investors and lenders are increasingly challenging the performance of their investee companies and borrowers regarding climate risks, as are employees, customers, and other parts of their supply chain. Businesses are making Net-Zero and Science-Based Target commitments and decarbonising their businesses, with renewable-energy procurement, energy efficiency, and the circular economy supporting this objective. KPMG, led by Michael Hayes (Global Head of Renewables) and Conor Holland (Environmental, Social and Governance, Director) of our Sustainable Futures practice explain.

Central Bank (Individual Accountability Framework) Act

Details of the long-awaited draft legislation for an Individual Accountability Framework (IAF) and Senior Executive Accountability Regime (SEAR), as called for by the Central Bank of Ireland (CBI) in 2018, have been published. KPMG explains that the CBI expects firms to already have started preparation for the introduction of the IAF. KPMG has also published an article providing details of key questions that firms should address now and on how KPMG can assist with the preparations for the introduction of the IAF.

Differential pricing in Insurance

The CBI has published its final report into differential pricing in the home and motor insurance markets in Ireland. Using data gathered from almost 11 million policy records and consumer insights from a survey of c.5,500 consumers, the report identifies where some pricing practices can lead to unfair outcomes for car and home insurance consumers. Based on the evidence from the review, the CBI are proposing a series of measures to strengthen the consumer protection framework. KPMG, led by John O’Donnell (Director, Risk Consulting), Jean Rea (Director, Actuarial) and Yvonne Kelleher (Director, Risk Consulting), summarise what the CBI has found, the next steps and how KPMG can help.

CBI perspective on Operational Resilience

The KPMG Operational Resilience Team, led by Owen Lewis (Head of Management Consulting), Ian Nelson (Head of Regulatory, Head of Banking and Capital Markets) and David Polley (Director, Management Consulting) explain how strengthening resilience throughout the financial system is one of the strategic commitments by the CBI. KPMG notes that resilience includes understanding existing vulnerabilities and mitigating those risks to ensure the financial system can withstand and limit the impact of future disruptions.

Dynamic Risk Assessment

In these turbulent times, organisations need to approach risk assessment with fresh thinking and innovative solutions. As volatility becomes the norm and the past is no longer an indicator of things to come, seemingly separate risks can become inextricably linked. As demonstrated recently by the COVID-19 pandemic, the risks we now face are unpredictable, contagious and globally connected, which means that assessing our risk exposures is challenging.

KPMG, led by Brian Morrissey (Partner, Actuarial) and Jean Rea explain how focus needs to shift - it’s more important than ever to understand and monitor emerging risks and be aware of the “out of trend” risks that could arise in this age of disruption. 

Central Bank of Ireland Updates

Addendum to the CPC 2012

The CBI has published an Addendum to the Consumer Protection Code 2012 (“the 2012 Code”), introducing a new Standard Financial Statement (SFS) document which will amend and replace the SFS template available under the Appendix E of the 2012 Code, effective from 1 January 2022. The CBI has also published an accompanying feedback statement along with a Dear CEO letter.

Differential Pricing in the Private Car and Home Insurance Markets

In a press release, the CBI has published its Final report and Public consultation (CP143) on review of Differential Pricing in the Private Car and Home Insurance Markets. The closing date of the consultation is 22 October 2021.

Employers’ Liability, Public Liability and Commercial Property Insurance Report

The CBI has published the first Employers’ Liability, Public Liability and Commercial Property Insurance Report of the National Claims Information Database (NCID). This report follows the publication of the reports of the NCID on Private Motor Insurance in 2019 and 2020 respectively. The data produced relates to premiums and other income, claims and other expenses, and settlement costs.

Use of Service Companies for Staffing Purposes in the Insurance Sector

The CBI has published a consultation paper (CP144) to seek stakeholders’ views on its proposed Guidance on the Use of Service Companies for Staffing purposes in the insurance sector. Interested stakeholders are invited to provide feedback, using the template provided, on or before 6 November 2021.

Central Bank (Individual Accountability Framework) Bill

The Minister for Finance, Paschal Donohoe TD, has received agreement from his Cabinet colleagues to approve the drafting of the Central Bank (Individual Accountability Framework) Bill 2021, the main purpose of which is to improve accountability in the financial sector. The Bill intends to address four main aspects: 1) introduction of SEAR, 2) introduction of conduct standards, 3) enhancements to fitness and probity regime and 4) breaking the ‘participation link’.

EIOPA Updates

EIOPA Supervisory activities

European Insurance and Occupational Pensions Authority (EIOPA) has published its annual report on supervisory activities in 2020. The report highlights activities and achievements from the year, covering both prudential and conduct of business supervision.

Retail Investment Strategy

EIOPA has published a call for advice from the European Commission (EC) relating to its Retail Investment Strategy for the EU. The Commission published a consultation paper on its Retail Investment Strategy in May 2021.

A European view of the insurance market

EIOPA has published a speech by Fausto Parente, Executive Director of EIOPA, wherein he has shared his thoughts on the changes that the insurance market is facing and what this means for supervisors. The topics discussed include, fairness, product oversight and governance, the shift to digitalisation, cyber risk and climate change and sustainable finance.

Solvency II supervisory reporting and disclosure requirements

EIOPA has published a cover note for consultations on amendments to implementing technical standards (ITS) and guidelines on supervisory reporting and disclosure requirements under the Solvency II Directive. EIOPA's proposals are set out in documents available on the webpage for the consultation. The deadline for responses is 17 October 2021.

Supervision of run-off undertakings

EIOPA has published a consultation paper on a draft supervisory statement on supervision of run-off undertakings under the Solvency II Directive. The draft supervisory statement is intended to ensure that supervision of run-off undertakings or portfolios that are subject to regulation under Solvency II is of high-quality and convergent. In a related press release, EIOPA explains that acquisition of run-off portfolios and run-off undertakings by other insurance undertakings is increasing and is attracting interest from specialised investment entities, such as private equity. The last date of providing comments is 17 October 2021.

Conduct of business supervision

EIOPA has published a paper setting out its 2021 strategic approach to a comprehensive risk-based and preventive framework for Conduct of Business (CoB) supervision at the EU level. In the paper, EIOPA explains that since its adoption of CoB supervision strategy in 2015, the EU regulatory environment has become increasingly developed in the conduct area, following implementation of the Insurance Distribution Directive (IDD) and the Packaged Retail and Insurance-based Investment Products Regulation.

COVID-19: ORSA

EIOPA has published its supervisory statement on the Own Risk and Solvency Assessment (ORSA) in the context of COVID-19 addressed to national competent authorities.

The statement specifically addresses the pandemic situation; however, the recommendations are applicable to any similar situation with the necessary adaptations.

The statement is accompanied by the resolution of comments from the public consultation, the feedback statement to stakeholders and the impact assessment developed based on the input provided during the consultation period.

Contract boundaries and on valuation of technical provisions

EIOPA has published the following two consultations papers:

  • ·Consultation paper on Revision of the Solvency II guidelines on contract boundaries of insurance and reinsurance contracts. In the paper, EIOPA explains that during its 2020 review of the Solvency II regime, it identified several divergent practices relating to contract boundaries assessment. The end date of the consultation is 12 November 2021.
  • Consultation on the Revision of the guidelines on valuation of technical provisions. EIOPA has clarified that where contracts with material options and guarantees exist, undertakings are expected to use a valuation method that captures the time value of these contracts. The consultation paper closes to comments on 12 November 2021.

Development of pensions dashboards

In response to the EC's request for technical advice on the development of best practice for national pension tracking systems and pension dashboards, EIOPA has launched the following two consultations.

  • Consultation paper on technical advice on pension tracking services: Technical advice on the development of pension tracking systems looks at best practice for setting up a national pension tracking tool, an online system to enable individuals to see an overview of their aggregate retirement income from all schemes in which they participate.
  • Consultation paper on technical advice on pension dashboards: Technical advice on the development of pension dashboards and the collection of pensions data sets out EIOPA's draft technical advice to the European Commission on the development of what it refers to as "pension dashboards", which will support the EU in monitoring the adequacy and sustainability of national pension systems.

Responses must be received by 8 September 2021. EIOPA plans to publish its final advice to the European Commission on 1 December 2021.

SCR breach under Solvency II

EIOPA has published a supervisory statement on supervisory practices and expectations in case of breach of the solvency capital requirement (SCR) under the Solvency II Directive. The aim of the supervisory statement is to promote supervisory convergence in situations where insurance and reinsurance undertakings breach their SCR. Alongside the supervisory statement, EIOPA has published a resolution of comments, a feedback statement in which it addresses the main comments it received, and an impact assessment that takes into account stakeholder feedback.

Risk mitigation techniques by insurers and reinsurers under Solvency II

EIOPA has published an opinion on the use of risk mitigation techniques by insurers and reinsurers under the Solvency II Directive. Alongside the opinion, EIOPA has published an impact assessment and a feedback statement addressing the comments received to its September 2020 consultation.

Non-life underwriting and pricing in light of climate change

EIOPA has published a final report on non-life underwriting and pricing in the light of climate change. EIOPA consulted on the contents of the report in a discussion paper, which it published in December 2020, and has taken the consultation feedback on board in finalising it.

Inclusion of climate change in Solvency II natural catastrophe standard formula

EIOPA has published a report on a methodology for the potential inclusion of climate change in the standard formula under the Solvency II Directive when calculating natural catastrophe (Nat Cat) underwriting risk. In the report, EIOPA outlines the methodology used so far for the Nat Cat solvency capital requirement (SCR) calibration. 

Key financial stability risks

EIOPA has published its Financial Stability Report that addresses key financial stability risks in the European insurance and pension sector. The Financial Stability Report also includes two thematic articles, the first focusing on the impact of EU-wide insurance stress tests on equity prices and systemic risk and the second on the risks of climate change for the real economy and the potential mitigating role of insurance.

Technical screening criteria for EU taxonomy

The EC has published a draft report produced by the “Platform on Sustainable Finance (Platform)” on preliminary recommendations for technical screening criteria (TSC) for the EU taxonomy, with an accompanying call for feedback. The draft report is a working document by the Platform and contains preliminary TSC developed by the Platform's Technical Working Group (TWG).

Other European and International Supervisory Authority Updates

Climate Training Alliance (CTA)

International Association of Insurance Supervisors (IAIS) announces the Climate Training Alliance (CTA), a joint initiative to enhance the availability of training resources for authorities responding to climate risks. The CTA is a collaboration between the Bank for International Settlements, the IAIS, the Central Banks and Supervisors Network for Greening the Financial System, and the UN-convened Sustainable Insurance Forum.

IAIS June Newsletter

The IAIS has published its newsletter for June. This newsletter includes updates on IAIS activities, publications, and the events IAIS leadership and Secretariat management participated in over the past weeks.

UK Updates

Review of Solvency II: Call for Evidence - Response

HM Treasury published their response on the Review of Solvency II: Call for evidence. The Call for Evidence was broad in scope and asked respondents to raise any issues relating to Solvency II, including views and evidence covering areas such as the risk margin, matching adjustment, and calculation of the solvency capital requirement.

Review of Part VII insurance business transfers

The Financial Conduct Authority (FCA) published a guidance consultation (GC21/3) where they propose to update the finalised guidance, FG18/4: The FCA’s approach to review of Part VII insurance business transfer.

Regulation of funeral plans

FCA published policy statement (PS21/8) regarding legislation to bring pre-paid funeral plans into FCA regulation from 29 July 2022. Firms engaged in funeral plans activities should consider the final rules set out in this PS and consider whether they wish to continue in this market beyond 29 July 2022 when FCA regulation begins and these rules take effect. Firms that are not authorised or exempt from 29 July 2022 will not be permitted to carry out regulated activities for funeral plans. FCA also published CP21/20 with further proposals on rules and guidance for the funeral plan sector. FCA is seeking comments on CP 21/20 by 31 August 2021.

Review of Solvency II: Reporting (Phase 1)

The Prudential Regulation Authority (PRA) published a consultation paper (CP11/21), proposing to make amendments to a number of Solvency II reporting requirements applicable to UK insurers. The consultation period ends on 8 October 2021 and new rules will be effective from 1 April 2022.

EIOPA Q&As

Look through approach

EIOPA confirmed in the Q&A (#1856) that look through approach should be applied to a loan made to a subsidiary which only carries out the activity of holding properties, and therefore the property risk charge would apply to the underlying properties in the subsidiary.

Private credit ratings in Solvency Capital Requirement

EIOPA clarified in the Q&A (#2288) that the private ratings as referred in Article 2(2)(a) of Regulation (EC) No 1060/2009 cannot be used for the calculation of SCR in accordance with the standard formula. 

Long-Term Equity qualification in Solvency Capital Requirement

EIOPA clarified in the Q&A (#2198) that, in relation to the Long-Term Equity qualification, if the average holding period of the sub-set of equities is lower than 5 years, the undertaking cannot sell any equity investments within the sub-set until the average holding period exceeds 5 years, even if the average holding period of the portfolio remain unchanged. 

Solvency Capital Requirement – Medical expenses

EIOPA clarified in the Q&A (#2189) that in case of medical expenses according to Article 155 of the Delegated Regulation, for the calculation of gross SCR the scenario producing higher net solvency capital requirement is to be used similar to other parts in the SCR calculation.

Lease assets and liabilities in Solvency Capital Requirement

EIOPA clarified in the Q&A (#2172) that undertakings should include all interest rate sensitive assets and liabilities in the calculation of the capital requirement for the interest rate risk sub-module. Therefore, in relation to a lease arrangement, where the lease liability is sensitive to interest rates, it should be included in the calculation of the capital requirement for interest rate risk. Similarly, if the lease right-of-use asset or the lease liability are sensitive to currency risks, they should be included in the calculation of the capital requirement for currency risk.

Inclusion of treaties in S.30.03

EIOPA clarified in the Q&A (#1578) that treaties for which the existing policies are still in force subject to the terms and conditions of the treaty, until their natural extinction should be reported in S.30.03.

Use of alternative GAAP for pension schemes

EIOPA clarified in the Q&A (#1274) that, in relation to pension schemes which are not valued under IAS19, if market-consistent valuations are ensured under alternative generally accepted accounting principles, then undertakings are exempted from using IFRSs under Article 9(4) of the Delegated Regulation.

Use of transitional measure on technical provision for participations

EIOPA clarified in the Q&A (#1083) that where the adjusted Solvency II equity method is used for participation in an insurance company, the application of transitionals in technical provisions will depend on the implementation in the Member State and the available choices within the group.

Supra national bonds

EIOPA clarified in the Q&A (#2281) that the CIC code 12 “Supra-national bonds” refers to bonds issued by public institutions established by a commitment between national states, that fulfil the condition of a government bond. The example in definition of CIC 12 is not a closed list.

Technical Provisions-taking up and pursuit of the business of Insurance and Reinsurance

EIOPA clarified in the Q&A (#2257) that if an undertaking has real expenses which are permanently and systematically higher than those projected for best estimate valuation, it should base the assumptions on expenses on undertakings specific real experience and observations as a prudent, reliable and objective valuation of technical provisions without that information is not possible.

Own Risk and Solvency Assessment Solvency Capital Requirement

EIOPA clarified in the Q&A (#2246) that Annex VII does not only include European Economic Area countries, but also third countries such as the Swiss confederation, thus regions and flood risk factors continue to apply in UK even post-Brexit.

Non-life Catastrophe module

EIOPA clarified in Q&A (#2242) that the natural catastrophe risk capital for the United Kingdom should be based on the sum insured. The methodology for sum insured as input is also valid for countries which are not European Union Member States such as Switzerland. EIOPA also clears out that the UK should not be treated differently for the Non-life catastrophe risk sub-module.

Market Risk Concentrations - Excess exposure - Calculation base ("Total Assets")

EIOPA clarified in Q&A (#2044) that in case a look-through is to be applied to a real estate entity which is a related undertaking, the underlying assets shall be taken into account in determination of single name exposures and shall be included in determination of the calculation base unless they fall under one of the categories set out in Article 184(2).

Mortgage lending products

EIOPA states in Q&A (#2220) that Mortgage lending products (not in scope of Solvency II) should be distinguished from mortgage protection insurance products (In scope of Solvency II). Additionally, insurers can invest in assets from mortgage lending providers or derive income from rental property subject to prudent person principles.

Structured notes issued by sovereign governments

EIOPA clarified in Q&A (#2190) that structured notes issued by sovereign governments should not be classified as structured notes, they should rather be classified as government bonds: “CIC 5-structured notes are hybrid securities”, combining a fixed income instrument with a series of derivative components. Fixed income securities that are issued by sovereign governments are excluded from this category.

Instruments sold, payment still pending –treatment in QRTs

EIOPA clarified in Q&A (#2215) that the conclusion from Q&A 1904 will also apply to bonds and selling of own shares. If the Instrument has been sold, but the payment is still pending on the reference date, then the value should be reported as XT79, “Other cash and deposits”.

Disclosure Templates

EIOPA states in Q&A (#2216) that in Quantitative Reporting Template S.26.01, both direct and indirect impacts should be considered while reporting currency risks

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.