Hogan Lovells Corporate Insurance Newsletter January 2016 UK • PRA publishes PS1/16: Engagement between external auditors and supervisors and commencing the PRA’s disciplinary powers over external auditors and actuaries • PRA reminder of grandfathering deadline for SIMR • PRA questions and answers on application of the SIMR • Consumer wordings guidance updated by the Lloyd's Market Association • Insurance Fraud Taskforce final report • ABI and BIBA launch industry code of good practice to help vulnerable customers INTERNATIONAL • PRIIPs Regulation: Joint Committee of the ESAs consultation on KIDs - errata published • IDD: EIOPA online survey in preparation for European Commission call for advice on delegated acts • IAIS launches thematic self-assessment and peer review on macroprudential surveillance and reinsurance SOLVENCY II • PRA publishes letter on internal model approval process • Third group of Implementing Regulations published in the Official Journal • EIOPA updates coding for relevant risk-free interest rate term structures • EIOPA opinion on the application of a combination of methods to the group solvency calculation UK PRA publishes PS1/16: Engagement between external auditors and supervisors and commencing the PRA’s disciplinary powers over external auditors and actuaries On 21 January 2016, the Prudential Regulation Authority (PRA) published a policy statement, PS1/16, which contains the feedback received to its February 2015 consultation paper, CP8/15: "Engagement between external auditors and supervisors and commencing the PRA’s disciplinary powers over external auditors and actuaries". The policy statement includes links (see below) to the final rules on auditor reports to the PRA, a supervisory statement relating to the requirement to provide written auditor reports to the PRA, a new - 2 - Hogan Lovells statement of policy on the imposition and amount of financial penalties on auditors and actuaries of PRA-authorised persons, and an amendment to the PRA’s statement of policy on statutory notices and the allocation of decision making which relates to the exercise of disciplinary powers over auditors and actuaries. The policy statement includes links to the following documents: • PRA Rulebook: Non-authorised persons: Written Reports by Auditors to the PRA Instrument 2016, PRA 2016/1; • supervisory statement (SS) SS1/16: Written reports by external auditors to the PRA; • an updated statement of policy: The PRA's approach to enforcement: statutory statements of policy and procedure. PRA reminder of grandfathering deadline for SIMR On 27 January 2016, the PRA updated its strengthening accountability webpage to remind firms that there is less than two weeks to go until the grandfathering deadline of 8 February 2016 for the senior managers regime (SMR) and senior insurance managers regime (SIMR). Firms are therefore reminded to submit their Form K grandfathering notifications. The PRA says that experience to date has shown that some firms are having to resubmit their applications where they have not allocated the prescribed responsibilities and/or mandatory functions. It says that firms should check their notification thoroughly before submitting. The PRA will start contacting firms in the week commencing 1 February 2016 to check on progress. It says that it is important that the PRA and the Financial Conduct Authority understand any issues that may be affecting a firm's ability to make a submission. PRA questions and answers on application of the SIMR On 22 December 2015, the PRA published a document containing answers to questions received from industry participants on the application of the new senior insurance managers regime (SIMR) to Solvency II insurers since the publication, on 13 August 2015, of its final rules on the SIMR. The PRA says that this is not a comprehensive list and the responses do not supersede the need for firms to be aware of the PRA’s requirements and expectations, and any other legislative or regulatory requirements. Dual-regulated firms are reminded that they will also need to refer to the Financial Conduct Authority's policy. The PRA encourages firms to raise any queries about its policy with their usual supervisory contact. Consumer wordings guidance updated by the Lloyd's Market Association On 14 January 2016, the Lloyd's Market Association (LMA) announced that version 2.0 of its consumer wordings guidance has been published. Version 2.0 contains a document revision/change history page to identify the amendments/updates. The guidance is intended to assist managing agents with the practicalities of drafting new consumer products and/or adapting existing commercial wordings to produce consumer versions. The guidance has been updated to reflect: • guidance on the effects of the Consumer Rights Act 2015 (which came into effect on 1 October 2015); • an update to the Statutory Status Disclosure; • an update on the jurisdictional reach of the Financial Conduct Authority; • clarification regarding cooling off periods; • the Lloyd’s updated Consumer Complaints Procedures. - 3 - Hogan Lovells Insurance Fraud Taskforce final report On 18 January 2016, the Insurance Fraud Taskforce published its final report following its year-long review into insurance fraud. Members of the taskforce include representatives from the Association of British Insurers, the British Insurance Brokers' Association and the Financial Ombudsman Service. In the report the taskforce explores relevant issues including the scale and impact, regulators and legal frameworks and what has already been done to tackle fraud, before making a range of targeted recommendations. The recommendations aim to tackle fraudulent activity ranging from organised or premeditated crime to opportunistic fraud, with the overall objective of ultimately reducing costs for consumers. ABI and BIBA launch industry code of good practice to help vulnerable customers On 11 January 2016, the Association of British Insurers (ABI) and the British Insurance Brokers’ Association (BIBA) announced the launch of a joint code of good practice to help insurers and insurance brokers recognise and help potentially vulnerable customers, who may need extra support when renewing motor and home insurance policies. The code is voluntary and concerns interactions between insurers or brokers and potentially vulnerable motor and household customers only, in respect of products sold and/or services offered in the UK. Under the code participating insurers and brokers will: • ensure staff are adequately trained to recognise and understand potentially vulnerable customers at renewal and be able to offer flexible options to help address needs (where necessary); • periodically review legacy policies to, where possible, identify vulnerable customers to ensure they are aware of any more suitable alternative products now available; • ask potentially vulnerable customers at renewal if their current policy and renewal terms meet their needs, and make clear the importance of reviewing their cover; • consider if additional communication, for example a telephone call, is needed to help vulnerable customers through the renewal process; • ensure that the customer’s options, and how they can exercise them, are always clearly set out. The code comes into effect from January 2016 from which point insurers and brokers will have 12 months to prepare for its commitments. The ABI and BIBA will produce a report one year from its publication to assess its influence and impact. INTERNATIONAL PRIIPs Regulation: Joint Committee of the ESAs consultation on KIDs - errata published On 11 November 2015, the Joint Committee of the European Supervisory Authorities (ESAs) published a consultation paper on draft regulatory technical standards (RTS) which the Joint Committee is mandated to develop under Article 8 (5) of the Regulation on key information documents (KIDs) for packaged retail and insurance-based investment products (PRIIPs) (PRIIPs Regulation). On 5 January 2016, the Joint Committee said that errors had been found in two formulas on page 37 (paragraphs 27 and 28 of Annex II (market risk measure)) of the consultation paper and an errata has been published. Comments on the consultation paper are requested by 29 January 2016. The RTS and accompanying impact assessment will be submitted for endorsement by the European Commission by 31 March 2016. Feedback on the consultation will also be published at this time. - 4 - Hogan Lovells IDD: EIOPA online survey in preparation for European Commission call for advice on delegated acts On 5 January 2016, the European Insurance and Occupational Pensions Authority (EIOPA) published a webpage containing details of an online survey in preparation for a call for advice from the European Commission under the Insurance Distribution Directive (IDD). EIOPA expects that the IDD will be published in the Official Journal of the European Union in January/February 2016. The IDD aims to strengthen the protection of customers and to harmonise the national provisions concerning the distribution of insurance products. The IDD text empowers the European Commission to adopt delegated acts to specify various regulatory requirements of the IDD, in particular the legislative requirements with regard to product oversight and governance arrangements (Article 25, IDD), the management of conflicts of interest (Articles 27 and 28, IDD), inducements (Article 29, IDD) as well as the assessment of suitability and appropriateness and reporting to customers (Article 30, IDD). It is expected that the Commission will seek EIOPA’s technical advice to develop recommendations on how these requirements should be specified. EIOPA therefore considers it important to initiate this work as soon as possible, due to the novelty of many issues and possible implications for existing business models and market structures. For this reason, EIOPA wishes to involve market participants and stakeholders at an early stage seeking their input for the thorough development of policy recommendations, which will be consulted on at a later stage. The deadline for completion of the survey is 22 January 2016. IAIS launches thematic self-assessment and peer review on macroprudential surveillance and reinsurance On 6 January 2016, the International Association of Insurance Supervisors (IAIS) announced the launch of a self-assessment and peer review (SAPR) of the insurance core principles (ICPs) on macroprudential surveillance and reinsurance (ICPs 13 and 24). The IAIS has also published a survey that has been sent to authorities inviting them to participate in the SAPR. The survey contains questions relating to ICPs 13 and 24. The deadline for submission is 3 February 2016. SOLVENCY II PRA publishes letter on internal model approval process On 15 January 2016, the PRA published the text of a letter sent to relevant firms by Sam Woods, the PRA's Executive Director of Insurance, providing insights into the 2015 internal model approval process and the solvency capital requirement (SCR) under the Solvency II Directive. The letter focuses on the use by the PRA of a "quantitative framework" as one tool to assist with decision-making, because this has been the subject of some debate with firms. In addition, for the benefit of firms and market participants Mr Woods set out how the PRA views the SCR under Solvency II, whether it results from the use of an internal model or the standard formula. The annex to the letter provides additional detail on how: • the PRA has used quantitative analyses as part of model approval; • the PRA has developed its quantitative framework for model assessment; and • model reviews have benefitted from the use of the quantitative framework. - 5 - Hogan Lovells In addition the annex includes a technical appendix where the PRA provides an expanded overview (supplementing a letter sent in March 2015) of the development and use of its quantitative indicators for longevity risk, credit risk and dependency structures within the quantitative framework. The letter says it should be noted that while the general philosophy set out in the letter has been applied to the PRA’s use of quantitative metrics across all model reviews, the focus of the annex and the detailed commentary within it is on life issues. Third group of Implementing Regulations published in the Official Journal On 31 December 2015, the following Commission Implementing Regulations laying down implementing technical standards (ITS) required under the Solvency II Directive were published in the Official Journal of the European Union: • Commission Implementing Regulation (EU) 2015/2450 of 2 December 2015 laying down ITS with regard to the templates for the submission of information to the supervisory authorities. Please note that this Implementing Regulation is 1223 pages long. It entered into force on 1 January 2016; • Commission Implementing Regulation (EU) 2015/2451 of 2 December 2015 laying down ITS with regard to the templates and structure of the disclosure of specific information by supervisory authorities. This enters into force on the twentieth day following that of its publication on the Official Journal; • Commission Implementing Regulation (EU) 2015/2452 of 2 December 2015 laying down ITS with regard to the procedures, formats and templates of the solvency and financial condition report. This enters into force on the twentieth day following that of its publication on the Official Journal. EIOPA updates coding for relevant risk-free interest rate term structures On 22 December 2015, EIOPA announced that it has published an updated version (zip file) of the coding used to produce the relevant risk-free interest rate (RFR) term structures to be applied by (re)insurance undertakings in the calculation of their technical provisions under the Solvency II Directive. An updated set of frequently asked questions explaining the changes has also been published. The first monthly RFR term structures under Solvency II are due to be published on 8 January 2016. Between October and December 2015, the external reviewer PricewaterhouseCoopers assessed the accuracy and replicability of EIOPA’s RFR model and the robustness of the RFR calculation process, including under stressed conditions. A report on this review has been published. EIOPA opinion on the application of a combination of methods to the group solvency calculation On 27 January 2016, EIOPA published an opinion on the application of a combination of methods to the group solvency calculation under Solvency II. According to Solvency II, the group solvency calculation can be carried out on the basis of a consolidation method (Article 320), a deduction and aggregation method (Article 233) or a combination of both methods, subject to the group supervisor’s approval. The opinion is of relevance for insurance groups that use the combination of methods, in particular those comprising undertakings situated in third countries whose solvency regimes are considered equivalent to Solvency II. The opinion aims to clarify certain issues related to the application of the combination of methods, such as the determination of the basis for tier limits used in the assessment of the own funds’ eligibility - 6 - Hogan Lovells or certain aspects to be taken into account by the group supervisor when deciding on the use of a combination of methods. When the combination of methods leads to unintended consequences, for example in the case where groups organise their funding through a central holding company, and if specific solutions need to be applied, EIOPA recommends certain conditions to be satisfied to ensure that the prudential concerns are duly addressed and that no group is placed in an advantageous position as compared to others. EIOPA will monitor the development of the issues addressed in the opinion. Hogan Lovells has offices in: Alicante Amsterdam Baltimore Beijing Brussels Budapest* Caracas Colorado Springs Denver Dubai Dusseldorf Frankfurt Hamburg Hanoi Ho Chi Minh City Hong Kong Houston Jakarta* Jeddah* Johannesburg London Los Angeles Luxembourg Madrid Mexico City Miami Milan Moscow Munich New York Northern Virginia Paris Perth Philadelphia Prague Rio de Janeiro Riyadh* Rome San Francisco São Paulo Shanghai Silicon Valley Singapore Sydney Tokyo Ulaanbaatar Warsaw Washington DC Zagreb* "Hogan Lovells" or the "firm" is an international legal practice that includes Hogan Lovells International LLP, Hogan Lovells US LLP and their affiliated businesses. The word "partner" is used to describe a partner or member of Hogan Lovells International LLP, Hogan Lovells US LLP or any of their affiliated entities or any employee or consultant with equivalent standing. Certain individuals, who are designated as partners, but who are not members of Hogan Lovells International LLP, do not hold qualifications equivalent to members. For more information about Hogan Lovells, the partners and their qualifications, see www.hoganlovells.com. Where case studies are included, results achieved do not guarantee similar outcomes for other clients. Attorney Advertising. ©Hogan Lovells 2016. All rights reserved. *Associated offices