Insurance Regulatory Update - November 2017

1 | ARTHUR COX INSURANCE Group Briefing Insurance Regulatory Update November 2017 NOVEMBER 2017 – THIS MONTH’S NEWS CENTRAL BANK RELEASES CONSULTATION PAPER ON THE AUTHORISATION AND SUPERVISION OF THIRD COUNTRY INSURANCE BRANCHES CENTRAL BANK CONSULTATION PAPER ON AMENDMENT TO THE NON-LIFE RENEWAL REGULATIONS CENTRAL BANK PUBLISHES CONSULTATION PAPER ON INTERMEDIARIES’ INDUCEMENTS CENTRAL BANK PUBLISHES INFORMATION NOTE ON MAJOR CHANGES TO INTERNAL MODELS COMMENCEMENT OF FINANCIAL SERVICES AND PENSIONS OMBUDSMAN ACT 2017 CRIMINAL JUSTICE (CORRUPTION OFFENCES) BILL 2017 CENTRAL BANK’S DEPUTY GOVERNOR SETS OUT PRIORITIES FOR 2018 CENTRAL BANK SOLVENCY II REPORTING WORK SHOP CENTRAL BANK’S DEPUTY GOVERNOR DELIVERS SPEECH TO INSURANCE IRELAND ON INNOVATION AND INSURANCE EUROPEAN PARLIAMENT’S COMMITTEE ON ECONOMIC AND MONETARY AFFAIRS (ECON) SEEKS TO POSTPONE APPLICATION DATE OF IDD KEY CONTACTS If you require advice or further information, please contactElizabeth Bothwell, Jennifer McCarthy,oryour usual Arthur Coxcontact. ELIZABETH BOTHWELL PARTNER +353 1 920 1670 elizabeth.bothwell@arthurcox.com JENNIFER MCCARTHY PARTNER +353 1 920 1167 jennifer.mccarthy@arthurcox.com This document contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate. EUROPEAN SUPERVISORY AUTHORITIES (ESA) ISSUES UPDATED Q&As ON PRIIPs KID EFTA COURT CONSIDERS COMPATIBILITY OF RIGHT TO CHOOSE LAWYERS UNDER LEGAL EXPENSE INSURANCE CONTRACTS WITH FREEDOMS SET OUT IN SOLVENCY II PROVISIONAL APPLICATION DATE OF EU AND US BILATERAL AGREEMENT ON INSURANCE AND REINSURANCE EIOPA CONSULTS ON SECOND SET OF ADVICE FOR THE REVIEW OF THE SOLVENCY CAPITAL REQUITEMENTS EIOPA IDENTIFIES A SEARCH-FOR-YIELD TREND IN INSURERS’ INVESTMENT BEHAVIOUR EIOPA PUBLISHES PAPER ON COMMON SUPERVISORY CULTURE EIOPA SPEECH ON REGULATORY AND SUPERVISORY PRIORITIES FOR 2018 GFIA PUBLISHES ITS ANNUAL REPORT FOR 2016-2017 IN DOMESTIC NEWS… CENTRAL BANK RELEASES CONSULTATION PAPER ON THE AUTHORISATION AND SUPERVISION OF THIRD COUNTRY INSURANCE BRANCHES On 13 November, the Central Bank released Consultation Paper 115 to highlight its position and expectations on the authorisation and supervision of 2 | ARTHUR COX INSURANCE third-country insurance branches. The consultation paper is divided into four parts: policy, a regulatory handbook, actuarial concerns and guidance on completing and submitting applications for authorisation. On policy, the Central Bank expects third-country branches to follow the Fitness and Probity Regime, the Minimum Competency Code and the Consumer Protection Code 2012. In addition, all third country branches will fall within the same supervisory regime as other authorised insurance firms and will be subject to the PRISM framework. The Central Bank warned that some applications for third country branches may be deemed inappropriate for certain business models due to their nature, scale and complexity. The Central Bank also emphasised the need for senior individuals who are responsible for both the management of the branch and the business pursued in the State, to operate out of and be resident in Ireland. The regulatory handbook for thirdcountry branches incorporates EIOPA’s guidelines and will be imposed as a condition of authorisation upon all third-country insurance branches. On actuarial concerns, the consultation paper outlines the specific domestic requirements regarding the actuarial function and related governance arrangements that currently applies to all (re)insurance undertakings subject to Solvency II. It also proposes to impose the Domestic Actuarial Regime on third-country branches. The guidance on completing and submitting applications for authorisation provides a steer in relation to the information requirements of the Central Bank in assessing an application for the establishment of a third-country branch within the State. The initial consultation process will remain open until 5 February 2018. The Central Bank’s consultation paper is here. CENTRAL BANK CONSULTATION PAPER ON AMENDMENT TO THE NON-LIFE RENEWAL REGULATIONS On 9 November, the Central Bank released a consultation paper seeking feedback from interested stakeholders on two proposed amendments to the Non-life Insurance (Provision of Information) (Renewal of Policy Insurance) Regulations 2017 (the Renewal Regulations). The consultation paper forms part of the Central Bank’s work with the Department of Finance’s Cost of Insurance Working Group (CIWG) and seeks to implement two recommendations contained in the CIWG’s January 2017,Action Plan. The proposed amendments to the Renewal Regulations are: 1. The extension of the current renewal notification period from 15 working days to 20 working days to facilitate customers in comparing policies, when purchasing motor, health, property, fire and general liability insurance; and 2. A requirement that insurers provide a further breakdown of premium cost, setting out the element of the cost related to mandatory motor insurance (third party), in addition to the non-mandatory element (e.g., comprehensive), at both the renewal notice stage and when a person first obtains a quote for a policy. The consultation period is open until 9 February 2018 and the Central Bank intends to introduce the amending legislation by Q2 of 2018. Submissions received by the Central Bank as part of the consultation will be made publicly available on its website. The Central Bank’s consultation paper is here. CENTRAL BANK PUBLISHES CONSULTATION PAPER ON INTERMEDIARIES’ INDUCEMENTS The Central Bank has published the results of consumer research conducted in April this year regarding consumers’ understanding of how intermediaries are remunerated. The research consisted of 506 face-to-face quantitative consumer surveys and revealed that while most consumers are influenced by whether an intermediary is described as being ‘independent’, few consumers understand how such intermediaries are remunerated. In light of the results of this research, the Central Bank has released Consultation Paper CP 116 on Intermediary Inducements, which proposes to make a number of amendments to the Consumer Protection Code 2012 (CPC). The amendments proposed to the CPC aim to eliminate inducements that give rise to conflicts of interest, including those that specify criteria for inducements to be considered acceptable. A new proposed definition of “independence” meaning that the intermediary conducts all their regulated activity on a fair market analysis basis and does not accept any remuneration other than a minor non-monetary benefit from the product producer and measures to enhance transparency in relation to intermediary compensation are also proposed. The submission deadline is 22 March 2018. The outcome of the CP will form the basis of technical advice to the Minister for Finance on exercising its national discretions under the IDD. The Central Bank’s research is here and Consultation Paper CP 116 is here. CENTRAL BANK PUBLISHES INFORMATION NOTE ON MAJOR CHANGES TO INTERNAL MODELS On 16 November, the Central Bank released a Solvency II information note 10, setting out the Central Bank's expectations in respect of firms applying for approval for a major change to their approved internal models (which could INSURANCE REGULATORY UPDATE also include an accumulation of minor changes). According to the information note, the Central Bank expects (re)insurers to engage as early as possible with their usual supervisory contact about planned changes and developments to their internal models, which should include any model changes that may arise from expected future changes in the firm's risk profile. When providing notice of a model change application, the Bank expects firms to provide: a) A summary of their planned model change(s); b) The reason for the change(s); c) The potential impact (both qualitative and quantitative); d) The impact the approval would have, if granted, on the accumulation of minor changes; and e) The intended timescale for implementation. The Central Bank does not expect firms to submit more than one application per year, which may contain several individual major changes information and include any extension of scope to the internal model. Applicants may take advantage of an informal pre-application period, during which the Central Bank will provide feedback on their proposed changes. The length of any preapplication period will be subject to discussion with the Central Bank and will reflect the extent of the review that is considered necessary. The Central Bank’s Solvency II information note is here. COMMENCEMENT OF FINANCIAL SERVICES AND PENSIONS OMBUDSMAN ACT 2017 On 20 November, a commencement order in respect of the Financial Services and Pensions Ombudsman Act 2017 (the Act) was published confirming that it will come into effect on 1 January 2018. The purpose of the Act was to amalgamate the offices of the 3 | ARTHUR COX INSURANCE managers, employees or agents who commit a corruption offence for the benefit of the corporation. The Bill does not distinguish between public and private sector for the purposes of this offence; A new offence for a public official to use confidential information acquired in the course of their duties to obtain an advantage; A new prohibition on giving gifts, consideration or advantage to a third party, where the giver knows or ought to know that it will be used to facilitate the commission of a corruption offence; and Custodial sentences of up to 10 years, as well as unlimited fines for conviction on indictment of the main corruption offences. The Criminal Justice (Corruption Offences) Bill 2017 and explanatory memorandum are here. CENTRAL BANK’S DEPUTY GOVERNOR SETS OUT PRIORITIES FOR 2018 On 10 November, Deputy Governor of the Central Bank, Ed Sibley gave a speech to the Association of Compliance Officers of Ireland’s annual conference. The speech covered the restructuring of the Central Bank into two distinct pillars (prudential regulation and financial conduct), the Central Bank’s approach to prudential regulation, the role of compliance and risk management, recent supervisory experience and the Central Bank’s priorities for prudential regulation for 2018. Recent supervisory experience has highlighted the following issues relating to governance arrangement: overreliance on group policies and lack of understanding and ownership at the Irish board level of risks and compliance obligations that are particular to the Irish entity; board effectiveness in overseeing the activities and risks of the firm including compliance with the Corporate Governance Codes; issues Financial Services Ombudsman and Pensions Ombudsman and to consolidate and update existing legislation. Under the Act the Financial Services and Pensions Ombudsman (FSPO) will have the power to: a) Continue a case following the death of a complainant (s 46); b) Issue preliminary determinations to indicate the potential final decision (s 56(6)), and; c) Inform the relevant authorities in instances where there is a persistent pattern of complaints or facts (s18 (5)), and; d) Direct the payment of compensation of up to €250,000 or €26,000 per annum, where the complaint relates to an annuity (s 60 (5)). Findings of the FSPO will be legally binding and may be appealed to the High Court. The Financial Services and Pensions Ombudsman Act 2017 (Commencement Order) 2017 is here. The text of the Act is here. CRIMINAL JUSTICE (CORRUPTION OFFENCES) BILL 2017 On 2 November, as part of the Government’s White Collar Crime Package, the Criminal Justice (Corruption Offences) Bill 2017 was published. If enacted, the Bill will repeal and replace the existing legislative regime under the Prevention of Corruption Acts 1889 to 2010. Key proposals are: A new offence of ‘trading in influence’, to criminalise bribing a person who may exert an improper influence over the decision-making of a public or foreign official; A new strict liability offence imposing liability on a corporation for the actions of directors, I INSURANCE REGULATORY UPDATE with boards’ annual assessments of their own performance and effectiveness; lack of evidence of appropriate oversight of key issues; inadequate reporting to the board; and inadequacies in risk appetite frameworks. Issues identified in relation to the compliance function include: failure to identify compliance obligations; incomplete compliance mandates (e.g. PCF holders only exercising supervision over the PCF role rather than effectively acting in the role); immature compliance functions and a lack of awareness at board and management level of compliance obligations; poor compliance monitoring plans; and inadequacies in reporting to the board and/or audit and risk committees. Although not finalised, the Central Bank’s prudential regulation priorities for 2018 will likely include the following: Brexit; information technology; and outsourcing. The Central Bank has noted that much more work needs to be done to prepare for the plausible scenario of a hard Brexit. There are material IT risk issues being identified in too many firms and the Central Bank now has a dedicated IT risk inspection team that will cover all sectors in 2018. Significant investment is needed in information technology to make sure that data and analytics are accurate, timely and verifiable. Outsourcing will continue to be a supervisory priority and the Central Bank will be undertaking firm-specific, sector-specific and cross-sector reviews of outsourcing and assessing the effectiveness of the management of outsourcing. On 30 November, these priorities were reiterated in a speech by Gerry Cross, Director of Policy and Risk at the Central Bank, in a speech to the Institute of Bankers in Ireland’s Certified Bank Director Annual Seminar. The Deputy Governor and the Director of Policy and Risk’s speeches are here and here. 4 | ARTHUR COX INSURANCE CENTRAL BANK SOLVENCY II REPORTING WORK SHOP On 22 November, the Central Bank of Ireland hosted a solvency II reporting workshop, which addressed the following topics: overview of Pillar III reporting, completion of template s.04.01 activity by country, Solvency II QRT data validation, compilation of ECB insurance statistical returns, and reporting changes for year-end 2017. As well as providing an overview of the Solvency II reporting regime, the workshop focused on providing clarification around the reporting requirements relating to several reporting templates including: s04.01, s.05.01, s.05.02 s.12.02, s.17.02, s19.01 and S20.01. The Central Bank’s slides to the workshop are here. CENTRAL BANK’S DEPUTY GOVERNOR DELIVERS SPEECH TO INSURANCE IRELAND ON INNOVATION AND INSURANCE On 29 November, Ed Sibley, Deputy Governor of the Central Bank delivered a speech to Insurance Ireland, which focused on InsurTech and innovation. He stated that InsurTech not only raises question in relation to what is insured, but how it will be insured, and how the different channels, providers and products combined with changing customer demands will impact on existing insurance firms. He specifically referenced motor insurance as an example of an industry in transformation with the use of innovative technologies like telematics and data analysis to improve the understanding of drivers’ behaviours. However, Mr. Sibley cautioned that as the volume of data increases, firms must invest in a proper data governance framework and that the Central Bank has a role from both a conduct and prudential perspective in considering how this data is used, in both the interests of the firm and its shareholders, and its customers. The Deputy Governor’s speech is here. IN EUROPEAN AND INTERNATIONAL NEWS… EUROPEAN PARLIAMENT’S COMMITTEE ON ECONOMIC AND MONETARY AFFAIRS (ECON) SEEKS TO POSTPONE APPLICATION DATE OF IDD On 16 November, ECON published a letter it sent to the European Commission concerning the European Parliament’s recommendation, made on 25 October, that the application of the Insurance Distribution Directive (IDD) be postponed until 1 October 2018. The letter states that a legislative proposal from the European Commission to defer the application of the IDD is required swiftly in order to enhance legal certainty regarding the applicable provisions of the Delegated Regulations supplementing the IDD. In supporting this request, ECON references the fact that both Delegated Regulations were only officially adopted on 21 September 2017. The Commission have not yet replied to the request. ECON’s letter is here. EUROPEAN SUPERVISORY AUTHORITIES (ESA) ISSUES UPDATED Q&As ON PRIIPs KID The ESA, which comprises of EIOPA, ESMA and the EBA issued an updated version of its Q&A on the Key Information Document (KID) requirements for packaged retail investment products and insurance based investment products (PRIIPs) on 20 November. This follows the original publication of the KID Q&A in July 2017, which was updated again in August 2017. This current update includes new Q&A’s on the provision of the KID in certain situations, performance scenarios, multi-option products, market risk assessment, and derivatives. The Q&A’s are designed to promote regulatory convergence regarding the interpretation of the KID requirements. The ESA’s Q&A document is here. INSURANCE REGULATORY UPDATE INSURANCE INSURANCE REGULATORY UPDATE EFTA COURT CONSIDERS COMPATIBILITY OF RIGHT TO CHOOSE LAWYERS UNDER LEGAL EXPENSE INSURANCE CONTRACTS WITH FREEDOMS SET OUT IN SOLVENCY II The European Free Trade Association Court held that legal expense contacts for insurance must not restrict the right of the insured to freely choose a lawyer in any inquiry or proceeding as required by Article 201(1)(a) of the Solvency II Directive. The Court was asked to examine a legal expense contract, which contained a clause releasing the insurance company from its obligations if the insured person mandated a lawyer without the prior consent of the insurance company, at a point in time when the insured person would be entitled to make a claim under the legal expense insurance contract. The insured person had engaged a lawyer without the consent of the insurance company, which resulted in their claim being rejected. The Court found that the insured persons right of free choice of lawyer under the Solvency II Directive has “general application and is obligatory in nature” and that the terms and conditions of the legal expense contact in question were incompatible with that right. The European Free Trade Association Court’s judgement is here. PROVISIONAL APPLICATION DATE OF EU AND US BILATERAL AGREEMENT ON INSURANCE AND REINSURANCE On 7 November, a notice confirming the provisional application date of the bilateral agreement between the EU and the US on prudential measures regarding insurance and reinsurance was published in the Official Journal. In compliance with Article 10(2)(a) of the agreement, the provisional application date is 7 November 2017. According to a joint statement released by the EU and US, the agreement was signed on 22 September. Under Article 10, the agreement will not enter into force until 60 months from the date on which it was signed. However, Article 10 (2) provides that between 7 November 2017 and entry into force the both parties will provisionally apply Article 4 of the agreement (Group supervision). The official notice is here. EIOPA CONSULTS ON SECOND SET OF ADVICE FOR THE REVIEW OF THE SOLVENCY CAPITAL REQUITEMENTS On 6 November, EIOPA published a consultation paper on a second set of advice for the review of the Solvency Capital Requirement (SCR) under Solvency II. The first set of advice was submitted to the European Commission in October 2017 and reported on in the October 2017 edition of the Arthur Cox Insurance Regulatory update. The stated aim of the consultation paper is to ensure a proportionate and technically robust, risk-sensitive and consistent supervisory regime and propose possible simplifications where possible. EIOPA is seeking feedback from stakeholders in relation to the lossabsorbing capacity of deferred taxes calculation, the calculation of non-life and life underwriting risks, catastrophe risks, unrated debt and unlisted equity and other topics such as cost of capital in the calculation of the risk margin. Comments must be submitted by 5 January 2018. EIOPA is to submit the second set of advice to the European Commission by the end of February 2018. A link to the consultation paper and related documents is here. EIOPA IDENTIFIES A SEARCH-FOR-YIELD TREND IN INSURERS’ INVESTMENT BEHAVIOUR On 16 November, EIOPA published the results of a survey analysing the investment behaviour of European insurers over the past 5 years. The survey revealed investment trends among insurers towards more fixed income securities and illiquid investments, such as non-listed equities and loans. EIOPA believes that these trends are indicative of ‘search-for-yield investment behaviour’ among insurers, which EIOPA attributes to the low interest rate environment. The survey, which was the result of 87 submissions from large insurance groups across 16 member states, also shows an increase in investment by large insurance groups in non-traditional asset classes such as infrastructure, mortgages, loans and real estate. Commenting on the results of the survey, EIOPA Chairman, Gabriel Bernadino stated that while the exposure of insures to more illiquid investments and non-traditional asset classes increases diversification it also “demands new risk management capabilities from insurers and closer supervisory attention”. However, the Chairman also noted that to date the impact of Solvency II, as analysed by EIOPA, demonstrates an increase in long-term investments and a stable equity allocations that are in line with its supervisory expectations. EIOPA’s Investment Behaviour Report is available here. EIOPA PUBLISHES PAPER ON COMMON SUPERVISORY CULTURE On 22 November, EIOPA issued a paper titled “A Common Supervisory Culture – Key characteristics of high-quality and effective supervisions”. The paper aims to define a common supervisory culture for the purpose of establishing a European approach towards risk-based supervision. The paper is to be read in conjunction with the broader framework of Solvency II. The paper discusses the definition and issues with supervisory culture, main objective of supervision, principles and key characteristics of high-quality and effective supervision, governance of the supervisory review process and the tools required by national competent authorities. A link to the paper is here. EIOPA SPEECH ON REGULATORY AND SUPERVISORY PRIORITIES FOR 2018 On 22 November, the EIOPA Chair, Gabriel Bernardino, gave a speech at EIOPA’s seventh annual conference. In the speech Mr Bernardino identified 5 | ARTHUR COX INSURANCE INSURANCE REGULATORY UPDATE EIOPA’s four main priorities for 2018 as: maintaining sound regulation in an evolving landscape; supervisory convergence and the building up of a common European supervisory culture; reinforcing consumer protection in a digital age; and preserving stability in an uncertain world. A link to the speech is here. GFIA PUBLISHES ITS ANNUAL REPORT FOR 2016-2017 On 3 November, the Global Federation of Insurance Associations (GFIA), of which Insurance Ireland is a member, published its annual report. The report provides an overview of GFIA’s activities over the past 12 months. The report includes commentary on a range of issues facing the insurance industry including the development of the International Association of Insurance Supervisors’ (IAIS) Insurance Core Principles, global risk-based capital standards and the ComFrame revisions, as well as, discussions on accessibility and inclusiveness in the industry, natural catastrophe losses, cyber risks and technological innovation. The GFIA report is here. 6 | ARTHUR COX