FCA publishes MS14/1: final report on the market study of general insurance add-ons
On 11 March 2014, the FCA published a report which set out the provisional findings of its first market study into general insurance add-ons. The five markets studied were travel, gadget, guaranteed asset protection, home emergency and personal accident insurance. The FCA compared add-on sales with sales on a stand-alone basis for these five products. It analysed a range of information from insurers and intermediaries, including product literature and data relating to sales, pricing, profitability and claims.- 2 - Hogan Lovells On 24 July 2014, the FCA published the final report on its market study. This summarises the feedback the FCA received on its provisional findings, sets out its response to that feedback and confirms that the FCA’s findings are now final. The report also summarises feedback on the provisional remedies the FCA proposed as well as respondents’ proposals for alternative remedies and give the FCA’s high-level response on this feedback. The report also sets out the FCA’s timescales for consulting on remedies. The FCA’s now final findings are: that the add-on mechanism has a clear impact on consumer behaviour and often affects consumers’ decision-making and weakens engagement which in turn strengthens a structural point of sale advantage; and that many consumers are getting poor value not just from some add-on products but also from standalone purchases, and there is a lack of transparency and comparability about the value provided by general insurance products. The FCA says that, in confirming its findings, it also reiterates two points made in the provisional findings report. Firstly, that it recognises the value that some add-ons can provide (including the convenience they offer to consumers). Secondly, that it recognises that there are differences between the five products in the study, and between different general insurance products more widely. The FCA will apply cross-market remedies only where its findings suggest that markets may be affected more widely. The FCA says that to help it with its remedy design work it will work closely with industry and other stakeholders, including through a series of working groups which will be launched shortly. The FCA will consult on its proposed remedies later in 2014. It says that the timetable reflects the complexity of the issues at stake and its desire to take on board the feedback it has received. FCA publishes TR14/11: report on price comparison websites in the general insurance sector On 16 July 2014, the FCA published a report which summarises the findings of its thematic review which focused on the intermediation of general insurance products (private motor, home and travel) by price comparison websites (PCWs). These are the general insurance products most commonly purchased through a PCW. One of the FCA’s key areas of focus was whether consumers were likely to achieve fair outcomes when buying general insurance products through a PCW. The main findings of the review fall under the following three headings: appropriate information: PCWs did not present sufficient product information in a clear and consistent way, to ensure consumers were given appropriate information to allow them to make informed decisions, partly due to failure to comply fully with the FCA’s requirements. The report says that this is particularly important as the FCA is concerned that customers' focus on headline price and brand when using PCWs could distract from crucial product features such as policy coverage and terms; role and services provided: PCWs did not make clear their role in the distribution of the product or the nature of the service they provided and their business models were not necessarily aligned with the best interest of their customers; implementation of the 2011 guidance: in 2010, the FCA’s predecessor, the FSA, conducted a thematic review on PCWs and this resulted in guidance being issued in October 2011. The FCA’s review found that PCWs generally had taken steps to comply with the regulatory obligations in the guidance. However, in some instances, PCWs have failed to fully implement the guidance.- 3 - Hogan Lovells The FCA says that it has provided individual feedback to the PCWs involved in the review and asked them to take action on specific areas where they were not meeting its requirements. The FCA also expects all firms (PCWs and providers) to consider the findings detailed in this report and to take appropriate action, where applicable. The findings may also be relevant for PCWs operating in other financial sectors. Section 4 of the report sets out the FCA’s expectations and the actions for firms. The FCA says that PCWs should also consider the report issued by the European Insurance and Occupational Pensions Authority in January 2014 on good guidance practices on comparison websites. The FCA intends to follow up with the PCWs in the review by January 2015 to ensure that they have addressed the specific issues identified, and it will use the full range of regulatory tools available to it as appropriate. The PRA's view on recent developments in the prudential supervision of insurance: speech by Andrew Bulley On 1 July 2014, the PRA published a speech made by its Director of Life Insurance, Andrew Bulley, at the All Party Parliament Group on Insurance and Financial Services at the Houses of Parliament, London. In his speech Mr Bulley said that the two most significant events affecting the life insurance industry in the last year have been: the Budget announcement reforming the at-retirement market, which he said had had a major impact on annuities and were the biggest changes to affect the life insurance industry in many years. He said that the PRA and insurers are currently assessing the likely impact of the changes and discussed the significant potential issues; and the political agreement over Solvency II reached in November 2013: in his speech Mr Bulley discussed the two main issues, which he said were firstly, the PRA’s attitude and approach towards insurers’ investments and secondly, how Solvency II helps the PRA ensure that policyholders are appropriately protected in relation to insurers’ investment risks. Bank of England publishes paper on procyclicality and structural trends in investment allocation by insurance companies and pension funds On 31 July 2014, the Bank of England published a discussion paper on procyclicality and structural trends in investment allocation by insurance companies and pension funds (ICPFs), produced by the Procyclicality Working Group. The Bank established the working group in 2013 to examine the question of whether, and if so why, ICPFs invest procyclically. The results of this work are set out in the discussion paper. The findings are indicative rather than definitive. The aim of the discussion paper is to stimulate further research and debate in this area. The discussion paper says that ICPFs are important financial intermediaries, managing the long-term savings of individuals and providing investment to the real economy. The way in which they manage the investments that they make on behalf of individuals is critical for those individuals and for the wider economy and to act as a stabilising influence on the financial system, by buying and holding assets across the economic cycle. However, it is also possible that the combination of factors that drive the asset allocation decisions of ICPFs, market conventions, accounting rules and regulatory requirements, may lead to outcomes that are suboptimal from the perspective of financial stability (through procyclicality) and long-term investment and economic growth (through an unwillingness to bear risk).- 4 - Hogan Lovells The paper finds evidence of procyclical investment behaviour by insurance companies. UK defined benefit pension funds have behaved countercyclically in the short-term, while over the medium-term a structural “de-risking” trend (whereby pension funds have shifted investment allocations from equities to fixed income instruments) has dominated. The paper finds that a combination of factors, in particular the underlying structure of their liabilities, regulation, industry practices, and accounting and valuation methods, influence ICPF behaviour. The paper states that the views expressed in it are those of the authors and the working group, and do not necessarily represent the views of the Bank of England. Insurance Bill published On 17 July 2014, the Government announced the introduction of the Insurance Bill to Parliament. The Bill is the result of recommendations made to the Government by the Law Commission and the Scottish Law Commission following eight years of consultation with businesses and insurers. HM Treasury informally consulted on the Bill in June 2014. The text of the Bill has been published, together with explanatory notes. The reforms contained in the Insurance Bill cover three main areas: disclosure and misrepresentation in business and other non-consumer insurance contracts: the Bill amends the duty on business policyholders to disclose risk information to insurers before entering into an insurance contract, introducing a duty of “fair presentation” of the risk. It also provides the insurer with a number of proportionate remedies for breach of the duty of fair presentation; warranties: the Bill abolishes “basis of the contract” clauses, which have the effect of converting pre-contractual information supplied to insurers into warranties without further discussion. It also provides that the insurer’s liability should be suspended, rather than discharged, in the event of a breach of warranty, meaning insurance coverage is restored after a breach of warranty has been remedied. insurers’ remedies for fraudulent claims: the Bill provides the insurer with clear, robust remedies when a policyholder submits a fraudulent claim. The Bill also contains amendments to the Third Parties (Rights against Insurers) Act 2010, which, when enacted, will pave the way for the Act to be commenced. The Bill is following the procedure for uncontroversial Law Commission Bills. The procedure is intended to reduce the time that Law Commission Bills spend on the floor of the House by providing for certain stages to be carried out in Committee. On the same day the Law Commission and the Scottish Law Commission published a report (plus executive summary) “Insurance contract law: business disclosure; warranties; insurers' remedies for fraudulent claims; and late payment”. The majority of the Law Commissions’ recommendations were accepted by the Government and the Bill includes all of their recommendations apart from two provisions: the clause relating to late payment and the clause concerning warranties and other terms relevant to particular descriptions of loss. This is because the Government did not consider these provisions to be sufficiently uncontroversial for the Law Commission Bills procedure at this time. The Government has asked the Law Commissions to continue to work with stakeholders to find a workable solution on these points, to be introduced at the next legislative opportunity.- 5 - Hogan Lovells FCA publishes its annual report 2013/14 On 10 July 2014, the FCA published its annual report 2013/14, which covers its first year in operation and sets out how it has delivered against its statutory objectives and highlights its key achievements. The annual report was discussed at the FCA’s first annual public meeting, held on 17 July 2014. A related webpage gives direct links to each chapter of the report, plus the three appendices, which contain the skilled persons’ reports, enforcement activity and the annual diversity report. The FCA has also published its Enforcement Annual Performance Account 2013/14 and its Antimoney laundering annual report 2013/14. Part VII transfers between UK and Gibraltar On 17 July 2014, the Government of Gibraltar announced that it has received written confirmation from HM Treasury that Part VII transfers can take place between the UK and Gibraltar insurers, subject to court and regulatory approval. Lloyd’s update on FATCA On 22 July 2014, the Society of Lloyd's updated the page on its website relating to the Foreign Account Tax Compliance Act (known as FATCA) to give the information that it has reached agreement with the US Internal Revenue Service (IRS) that the provision of a single Form W-81MY will be sufficient for FATCA purposes to cover payments of insurance premium made by brokers etc to any and all Lloyd’s syndicates and syndicate-level trust fund assets. Details of the agreement are given in a Lloyd's market bulletin (Y4806) and a set of Lloyd's FATCA frequently asked questions. It has been agreed with the IRS that Lloyd’s will continue to act as a qualified intermediary and will assume primary withholding and reporting responsibility with respect to insurance premiums paid by brokers etc to Lloyd’s syndicates. Lloyd’s says that it should be noted that may not be able to assist managing agents to recover US tax withheld should the procedures in market bulletin Y4806 not be followed Chartered Insurance Institute publish guidance on whistleblowing On 8 July 2014, the Chartered Insurance Institute (CII) published a guide on whistleblowing as part of its ongoing ethical guidance series. The CII says that the aim of the guide is to help raise awareness at a time when the FCA is expected to outline what is required of regulated firms on whistleblowing procedures in the next few months and the Department of Business, Innovation and Skills is reviewing the need for better guidance for individuals. The guide provides CII members with information about how to report concerns. It explains whistleblowing and the law and regulations connected with it, as well as what to weigh up when preparing to blow the whistle. It seeks to give reassurance about the importance of upholding ethical standards of behaviour, giving a voice to these concerns and from whom to seek advice. The main guide is supported by two others: a guidance paper on how to manage a whistleblower containing a six point plan for CII members approached by someone with a whistleblowing concern; and a guidance paper for CII members who have responsibility for running or overseeing their firm’s whistleblowing arrangements. This explains what is meant by whistleblowing, how to design and implement effective whistleblowing arrangements and provides a checklist for assessing the effectiveness of arrangements.- 6 - Hogan Lovells INTERNATIONAL EIOPA publishes updated materials for the insurance stress test On 9 July 2014, the European Insurance and Occupational Pensions Authority (EIOPA) published the following updated versions of materials relating to its 2014 insurance stress test, all dated 9 July 2014: an updated version of the reporting template for the 2014 stress test (version 8) and an updated version of the automatic updater tool for completed templates (version 8); the ninth set of questions and answers (Q&As) on the 2014 stress test. On 10 July 2014, EIOPA published the eighth set of Q&As on the technical specifications for the Solvency II preparatory phase, also dated 9 July 2014. IAIS publishes second consultation paper on basic capital requirements for G-SIIs On 9 July 2014, the International Association of Insurance Supervisors (IAIS) published a second consultation paper, together with a cover note, on its basic capital requirements (BCR) for global systemically important insurers (G-SIIs). In its first consultation paper, published in December 2013, the IAIS sought feedback on design options for the development of the BCR. In this second consultation paper, the IAIS is seeking input on a specific proposal to facilitate the final design and calibration of the BCR before it is delivered to the G20 summit in November 2014. The development of the BCR is the first step of the IAIS’ project to develop group-wide global capital standards. The second step is the development of higher loss absorbency (HLA) requirements to apply to G-SIIs, due to be completed by the end of 2015. The HLA will build on the BCR and address additional capital requirements for G-SIIs reflecting their systemic importance in the international financial system. The third step is the development of a risk based group-wide global insurance capital standard (ICS), due to be completed by the end of 2016, and to be applied to internationally active insurance groups (IAIGs) from 2019 after refinement and final calibration in 2017 and 2018. The development of the ICS will be informed by the work on the BCR. The BCR is the foundation for HLA, together with which it forms a consolidated group-wide capital requirement. A primary goal of the BCR is to introduce a common measure for capital assessment to be used as a comparable foundation for the calculation of HLA. When finalised, the ICS will replace the BCR in its role as the foundation for HLA. The key principle is that G-SIIs should be required by their group-wide supervisors to hold higher levels of regulatory capital than would be the case if they were not designated as G-SIIs. The consultation paper asks for comments on a specific BCR proposal that has been based on an illustrative calibration level. The actual calibration level will be initially determined after further analysis in July and August 2014 of information collected from field testing volunteers. Because of the interlinkage of BCR and HLA, the actual calibration may be further modified depending on the HLA requirements. From 2019, G-SIIs will be required to hold capital in excess of the BCR plus HLA. From 2019, HLA will commence to apply to G-SIIs, HLA will initially be based on BCR as a foundation, but later will be based on ICS as a foundation. The exact timing of the transition of the foundation from BCR to ICS will depend upon the adoption date of the ICS by the IAIS and upon the time required for jurisdictions to develop and implement the necessary legislative frameworks for implementation of the ICS. The scheduled ICS adoption date is October 2018. Calibration of HLA may need to be revised once the ICS has been adopted. Comments are requested by 8 August 2014.- 7 - Hogan Lovells ESAs reminder and ESMA statement on investing in contingent convertible instruments On 31 July 2014, the Joint Committee of the European Supervisory Authorities (ESAs) (the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority (ESMA)) published a statement on the placement of financial instruments with depositors, retail investors and policyholders (self-placement). The statement reminds banks and insurance companies across the EU on the consumer protection requirements that apply to certain financial instruments they issue. As part of their mandates, the ESAs have analysed the practices employed by some financial institutions to comply with the new EU capital rules and requirements. These practices include financial institutions selling to their own client base financial instruments that they themselves have issued and that are eligible to comply with the above requirements. This practice may breach a number of rules governing the conduct of these institutions. In particular, the Joint Committee notes that the loss bearing features of many self-placement products expose consumers to significant risks that do not exist for most other financial instruments, such as the risk of having to share losses. Furthermore, these products often lack fully harmonised structures, trigger points and loss absorption, making it difficult for consumers to compare them with other financial products and to fully comprehend what they are buying. The Joint Committee reminds financial institutions across the EU about their responsibility to comply with rules governing conflicts of interest, remuneration, provision of advice and suitability and appropriateness of products. ESMA has also published a separate additional statement on potential risks associated with contingent convertible instruments (CoCos), a specific category of instruments issued by financial institutions to comply with their prudential requirements. ESMA says that CoCo structures are highly complex and are non-homogenous in terms of trigger levels, necessary capital buffer levels and loss absorption mechanisms. While they can play an important role in inhibiting risk transfer from debt holders to taxpayers, it is unclear as to whether consumers fully understand the potential risks and are capable of correctly factoring these into their decisions. As investing in CoCos requires a sophisticated level of financial literacy and a high risk appetite, these may not be appropriate for retail investors and ESMA recommends that investors take into account the relevant risks before investing. SOLVENCY II PRA update on implementation On 25 July 2014, the PRA published an update to provide further clarity on progress towards the implementation of Solvency II on 1 January 2016. The update contains information on: availability of group own funds; operation of limits at a group level; deferred tax; the matching adjustment; pension schemes. The update also gives the information that the PRA will publish a consultation paper on transposing Solvency II into the PRA Rulebook in early August 2014.- 8 - Hogan Lovells EIOPA updates Q&As on submission of information to NCAs On 8 July 2014, EIOPA updated the questions and answers (Q&As) on its guidelines on submission of information to national competent authorities (NCAs) relating to the Solvency II Directive, by adding questions 83 to 85. Solvency II corrigendum published in the Official Journal On 25 July 2014, a corrigendum to the text of the Solvency II Directive was published in the Official Journal of the European Union. The corrigendum relates to the correlation table set out in Annex VII to Solvency II. The Council of the European Union had published the corrigendum on 1 July 2014, stating that there were "obvious" errors in 23 of the different language versions of Solvency II, including the English language version. EIOPA update on Solvency II reporting format On 31 July 2014, EIOPA published an update on its Solvency II reporting webpage on the data point model (DPM) and XBRL taxonomy design. The webpage contains a link to a zip file containing the updated XBRL taxonomy (version 1.5.2). Information about how this has been updated is provided in the release notes and the taxonomy framework architecture documentation. EIOPA has also published a zip file containing a test instance release package, which contains a set of test cases. The webpage above contains a link to download the software needed to access the package. The package allows firms to conduct a practical check of the different elements of the XBRL taxonomy. EIOPA strongly recommends that firms and software vendors base their work only on the most recent versions of the DPM and XBRL taxonomy. The previous versions published by EIOPA are considered as outdated. EIOPA says that further major releases of the preparatory Solvency II DPM and XBRL taxonomy are not foreseen, unless outstanding issues are detected. Hotfixes will be released to solve potential minor issues. EIOPA says that the principles, rules and design approaches used in the current publication are still under consideration and subject to further changes. In November 2014, it will consult on implementing technical standards related to the Solvency II DPM and XBRL taxonomy reflecting supervisory templates. EIOPA publishes paper on underlying assumptions for Solvency II capital requirement calculations On 31 July 2014, EIOPA published a paper on the underlying assumptions in the standard formula for the solvency capital requirement (SCR) calculations under the Solvency II Directive. The paper aims to support supervisors and undertakings in their application of EIOPA's Solvency II preparatory guidelines on the forward looking assessments of own risks (FLAOR). It should be read in conjunction with the guidelines on the FLAOR and, from 2016 onwards, with the guidelines on the own risk and solvency assessment (ORSA). EIOPA says that the assessment of the significance with which the risk profile of an insurance or reinsurance undertaking or group deviates from the assumptions underlying the SCR calculation, is an important process which undertakings and groups are required to perform starting from 2015. It should ensure that the undertaking or group understands the assumptions underlying its SCR calculation and- 9 - Hogan Lovells considers whether the relevant assumptions are appropriate for the undertaking or group. To do so, the undertaking or group will have to compare those assumptions with its risk profile. The purpose of the assessment is not to review the appropriateness or calibration of the standard formula. The standard formula for the SCR aims to capture the material quantifiable risks that most undertakings are exposed to. However, it might not cover all material risks a specific undertaking is exposed to. For this reason, in some cases, the standard formula might not reflect the risk profile of a specific undertaking and, consequently, the level of own funds it needs. The paper covers all risk modules of the standard formula, addressing the assumptions related to the risks covered by the respective modules, as well as the assumptions for the correlation between the modules. It does not address why some risks are not explicitly formulated in the standard formula. However, this does not mean that these risks do not need to be considered for the purposes of the assessment of the significance of the deviation. The paper is divided between the assumptions themselves, which are set out in boxes at the start of the chapters, and background information. The text in the boxes is information about the assumptions underlying the standard formula that EIOPA would expect the administrative, management or supervisory body of the undertaking to be aware of in order to perform its role in the FLAOR/ORSA process. The background information is intended to assist persons performing the assessment of the significance of the deviation. In line with the general approach that the assessment of the significance of the deviation itself is left to the undertaking or group, the paper does not seek to prescribe explicitly the circumstances under which it would be appropriate for a undertaking or group to consider possible deviations of its risk profile from the assumptions on which the SCR standard formula calculation is based, or what exactly the undertaking or group should take into account in the assessment. The legal status of the document is similar to the technical specifications issued by EIOPA in April 2014. The paper reflects the content of the Solvency II and Omnibus II Directives as well as the available draft of the (level 2) delegated acts. EIOPA informally consulted on a draft of the paper with stakeholders in spring 2014 and revised the draft following the comments received. The paper may be further amended as supervisory authorities and undertakings and groups gain experience with the use of the standard formula and the way undertakings and groups assess the significance of the deviation of the risk profile from the assumptions underlying the standard formula.