KPMG's Regulatory Barometer

The new KPMG Regulatory Barometer aims to help firms identify the key areas of pressure across the evolving UK and EU regulatory landscape and measure the impact of the likely change.

Financial services firms have to handle frequent regulatory updates from multiple sources and it can be difficult to distil the volume and complexity of regulatory change into a single view. The first edition of the Barometer identifies nine key regulatory themes and assigns them each a regulatory impact score based on attributes such as volume of updates, complexity and time to implementation. The theme scores are aggregated into an additional single metric to represent the overall level of regulatory pressure — over time, we will track these scores to gauge whether the relative pressure is rising, falling or remains constant.

We don’t expect all of the key themes to impact equally across all sectors or even all firms in a sector — certain topics or aspects within themes may be more or less relevant for insurers and, at individual firm level, there may be different interplays, trade-offs and tensions depending on business models and exposures.

Below we pull out the key messages for insurers to help direct you to the most relevant sections of the Barometer for your business. We hope you find this useful and welcome your feedback.

ESG considerations are of critical importance for insurers from a number of angles — from the potential impacts of climate change on business models, underwriting and managing supply chains to broader obligations driven by government and other commitments. Stress testing and the measurement and management of climate-related financial risk will require continuing efforts as methodologies evolve and mature. There are capital considerations too, with regulators in both the UK and EU considering how best to reflect climate and environmental risks in the ORSA. Meanwhile, ESG disclosure requirements are ramping up to improve transparency and comparability for all stakeholders. All insurers must engage proactively on the topic and be making demonstrable changes.

Reviews of the Solvency II regimes are underway in both the UK and EU, and the direction in which the two versions develop — and critically, interact — will have a material impact on how firms arrange themselves and potentially on the lines of business they choose to operate. Solvency II reform is not just one of the most significant reviews of the post-financial crisis regulatory regime — it is also an early test case for how far a post-Brexit UK financial services framework could end up diverging from the EU when reviews are simultaneous. The evidence so far suggests that recognisably similar issues are being considered by both jurisdictions, alongside the significant tension between the overall resilience of the sector and the desire to increase productive investment. The ability for the sector to influence the outcomes of the reviews will diminish as both reviews progress through their respective consultation processes and therefore the sector needs to continue to engage with the regulator and government on its concerns.

Both in the EU and UK, we are seeing regulators seeking to enhance levels of policyholder/consumer protection, and this will have a material impact on all retail insurers. The pace and significance of change is very different from what has gone before — regulators are moving away from prescription and focusing more on culture, behaviours and outcomes. The impacts are not just operational — with scrutiny of pricing/value for money, there may be direct commercial implications for insurers' bottom lines.

Given the number of recent stresses that many insurers have had to endure, operational resilience continues to be a key area of focus and regulators expect it to become more embedded within firms. As a result of the volume of data (and personal sensitive data) they hold, the potential for increases in the number and sophistication of cyber-attacks on insurers is very high.

There has been a significant increase in digitalisation, accelerated by the pandemic, driving more immediate communication with customers through online tools. Insurers have embraced this opportunity. Online delivery of insurance services and products can be dynamic and customised, and therefore more engaging, educative and persuasive. Many insurers are also exploring where and how they can apply Artificial Intelligence and machine learning but, again, firms need to strike a balance between their commercial interests and those of their customers.

Insurers are continuing to respond to the implications of new arrangements — both proactively and reactively. For example, some have adapted their operating models to respond to the loss of passporting rights, typically establishing subsidiaries in the EU and UK branches. At a more reactive level, EEA insurers not seeking authorisation to continue operating in the UK will need to consider how they comply with the Supervised Run-Off (SRO) or Contractual Run-Off (CRO) regimes. Divergence between the UK and EU will increase frictional compliance costs on their business. The review of Solvency II, as summarised above, is a good example of this.

Compared to other sectors, insurers tend to have mature and static governance arrangements. However, recent developments (including the move towards more hybrid working) have resulted in many insurers revisiting and right-sizing their corporate governance and broader control environments. Reviews are also being driven by many of the other themes captured in the Barometer, where a more agile and coordinated approach is required. In addition, increasing regulatory focus on diversity and inclusion is likely to require changes in insurers' corporate governance arrangements and how they operate.

Although insurers may not be directly impacted by the EU statutory reviews on regulation relating to capital markets, or by UK policymakers and regulators adapting them to the UK market post-Brexit, they are likely to feel consequential impacts. Therefore, insurers should maintain a “watching brief” on both EU and UK developments, with MiFID II/MiFIR the most relevant topic.

As with the capital markets review, insurers are likely to experience the consequential impact of the increasing level of attention FMIs are receiving as markets become more interconnected. They should track developments in data regulation and payments in particular.

We don't yet know how all the current regulatory initiatives will play out in detail — but the Regulatory Barometer is here to help you track new developments and stay on top of the evolving agenda. Please share your feedback with us and look out for the next issue in 2023.