DOMESTIC NEWS - APRIL 2018 UPDATE
CENTRAL BANK PUBLISHES GUIDANCE ON THE APPROVAL AND SUPERVISION OF SPVs UNDER SOLVENCY II
This guidance, published on 17 April, clarifies that special purpose vehicles (SPVs) (as defined in the European Union (Insurance and Reinsurance) Regulations 2015) proposing to (i) assume risks from a (re)insurer through reinsurance contracts or (ii) assume insurance risks through similar arrangements are required to seek prior authorisation from the Central Bank. SPVs that have been authorised prior to the adoption of Solvency II are not subject to the requirements of Solvency II. However, if such SPVs commence any new activity after 1 January 2016, Central Bank approval is required. The Central Bank also provides guidance on the:
Mandatory contract conditions under Solvency II including the requirement to be fully funded at all times, effective risk transference and the subordination the SPV’s debt obligations to those obligations owed to its cedants;
System of governance in Solvency II SPVs including fitness and probity, outsourcing and the requirement for investors to meet the definition of 'Professional Client' under MIFID II;
Application process and general requirements for approving Solvency II SPVs; and
General supervisory reporting requirements for SPVs under Solvency II.
A checklist for authorisation and a sample annual director’s certificate of compliance are also contained in the annex to the Central Bank’s guidance.
The Central Bank’s guidance is here.
CENTRAL BANK PUBLISHES FEEDBACK ON THEMED INSPECTION OF SOLVENCY II REGULATORY REPORTING
On 16 April, the Insurance Directorate issued a Dear CEO letter outlining the results of its themed inspection of Solvency II regulatory reporting. While many firms are still embedding their regulatory reporting processes and controls, the level of resubmissions remains unacceptably high. Appended to the letter is list of good and poor practices observed by the Central Bank. Key findings from the themed inspection include:
Some firms do not have a Supervisory Reporting policy in place;
In some instances, Boards are signing-off on returns to the Central Bank without being presented with the full suite of QRTs;
There has been minimal oversight or involvement by Risk, Compliance and Internal Audit function in some firms, in the QRT/NST regulatory reporting process. Regulatory reporting risks, including data quality should also be included on the risk register or form part of the internal audit function; and
Some firms demonstrate a lack of documentation of the end-to-end regulatory reporting process, including key controls and failure to record regulatory reporting errors consistently, thereby increasing the likelihood that errors are repeated.
The Central Bank’s Dear CEO letter is here.
RESPONSES TO CENTRAL BANK (NATIONAL CLAIMS INFORMATION DATABASE) BILL 2017 CONSULTATION
On the 13 April, the Department of Finance published the responses of key industry stakeholders including Insurance Ireland, ISME, Self-Insured Taskforce and CSNA to the Central Bank’s consultation paper. A number of issues were highlighted by Insurance Ireland, who support the establishment of a National Claims Information Database. Insurance Ireland believes that the database should collect information on motor claims data, in particular on compensation and relevant costs but does not support extending the scope of the database to include non-claims data as, in their view, to do so could dilute the key objective of identifying claims trends in the industry.
Insurance Ireland also have concerns regarding the proposed funding model and argue that the funding should be derived from current levies paid to the Central Bank. ISME and the Self-Insured Taskforce also question whether the Central Bank is the most appropriate entity to control the project and CSNA suggest that the Personal Injuries Assessment Board may be a more appropriate controller. SME and the Self-Insured Taskforce also believe that the database should look beyond motor insurance to all claims affecting the insurance industry, adopting a more holistic approach than that recommended by Insurance Ireland.
The proposed bill was previously discussed in the February bulletin update, which is here.
The published responses are here.
Insurance Ireland’s response is here.
INSURANCE IRELAND PUBLISHES ITS ANNUAL REPORT FOR 2017
Insurance Ireland published its annual report on 5 April, covering the previous year's major events, partnerships and general updates from the various council chairs in the industry. Frank Mee, the President of Insurance Ireland notes in his review, the significant work carried out across insurance sectors in 2017, including customer oriented campaigns in health insurance, advocating for the cost of claims reforms domestically and representing its members in Europe on matters such as BEPs and PRIIPs. Mr Mee stresses that there are major policy and regulatory changes on the agenda for 2018, such as the introduction of GDPR, and the Solvency II and ESAs reviews and notes the value Insurance Ireland brings to members by providing a unified representative voice on these issues.
Kevin Thompson, the CEO of Insurance Ireland, highlights various areas of importance for the industry in the past year ranging from the uncertain repercussions of Brexit on insurers to the cost of the Central Bank of Ireland levy, and the decision of the Supreme Court on Setanta in May. Mr Thompson follows the words of Mr Mee by emphasising Insurance Ireland’s aim to provide its members and their members’ customers with a platform to have their voices heard and to support the industry's growth and development in the years ahead.
Insurance Ireland’s report may be found here.
EUROPEAN AND INTERNATIONAL NEWS - APRIL 2018 UPDATE
EIOPA DEFINES ITS SUPERVISORY CONVERGENCE PRIORITIES
In 2018-2019 EIOPA has identified its top three priority areas:
Implementation of the common supervisory culture and new supervisory tools: EIOPA intends to develop common benchmarks for the supervision of internal models, work on a common basis for the supervisory assessment of conduct risks throughout a product’s life cycle, perform a thematic review on travel insurance and define good practices for the supervision of intra-group transactions and risks concentrations;
Risks to the internal market and the level playing field that may lead to supervisory arbitrage: Assessing internal models and analysing the consistency of calculation of technical provisions for particular business lines will also be a focus (e.g. decennial liability insurance); and
Supervision of emerging risks: EIOPA proposes to develop guidance in good practices on supervision of IT security and governance and seeks to explore efficient ways to perform a cyber-attack penetration tests on insurers' cybersecurity systems. EIOPA also intends to carry out a thematic review of the insurance industry's use of big data as part of its efforts to promote supervisory consistency.
EIOPA's supervisory convergence plan is here.
EIOPA PUBLISHES STRATEGY ON CONDUCT OF BUSINESS SUPERVISION
On 24 April, EIOPA published its strategy for conduct of business supervision, which has been updated to take into account the impact of regulatory developments including the Insurance Distribution Directive (IDD), the regulation on key information documents for packaged retail and insurance-based investment products, the Solvency II Directive and Brexit. In light of these developments the strategy focuses attention on:
Promoting supervisory convergence in practical conduct of business supervision, including the supervision of the IDD by launching country conduct visits and facilitating further exchanges among national competent authorities on practical conduct supervision; and
Enhancing conduct risk assessment through the development of a common supervisory tool box and culture that takes into account the specifics of conduct supervision. EIOPA intends to achieve this through an enhanced program of practical exchanges with national competent authorities, which will include bespoke workshops to address topics such as the use of data in identifying potential consumer detriment and experiences with supervision of intermediaries. EIOPA also intends to commence work on conduct specific aspects of its Supervisory Handbook and to improve market monitoring to identify any product intervention issues and to assist in mapping conduct risk throughout the product life cycle.
EIOPA’s strategy for conduct of business supervision is here.
ECON PUBLISHES DRAFT REPORT ON RELATIONSHIP BETWEEN THE EU AND THIRD COUNTRIES CONCERNING FINANCIAL SERVICES REGULATION AND SUPERVISION
The European Parliament’s Committee on Economic and Monetary Affairs (ECON) has published a draft report containing a motion for a European Parliament resolution calling on the Commission to adopt a legislative act establishing a clear legal framework for determining and granting ‘equivalence’. In proposing such legislative reform, ECON emphasises that a key objective of equivalence is to promote regulatory convergence but in its view, the current EU process for granting equivalence lacks certainty and transparency. It therefore calls on the Commission to conduct an in-depth review of all equivalence decisions to evaluate the strengths and weaknesses of the current equivalence regime. The draft report also proposes that legislative provision be made for equivalence decisions to be reviewed at least once every three years by the relevant European Supervisory Authority and for such reviews to be made public.
The European Parliament is expected to vote on the resolution in September 2018.
ECON’s draft report is here.
EUROPEAN COMMISSION PUBLISH REPORTS ON GROUP SUPERVISION AND THE TRANSITIONAL PERIOD FOR OCCUPATIONAL RETIREMENT PROVISONS OPERATED BY LIFE INSURERS UNDER SOLVENCY II
In accordance with Solvency II, the European Commission is required to report to the European Parliament on two aspects of the Solvency II Directive – an assessment of the group supervision provisions in accordance with Article 242 and an assessment of the transitional period for occupational retirement provision business operated by life insurance undertakings.
This report covers both assessments, albeit they are not related. The report explains the general issues that have been encountered regarding Group Supervision since the introduction of Solvency II, including the difficulties in defining the group for supervision purposes (particularly with third country groups operating in several EEA countries simultaneously, the concept of “dominant influence” etc). Also, the difficulties of group supervision in respect of third country insurance undertakings is addressed in the report. The report concludes that the college of supervisors concept is functioning well, with the main are of potential diversions being those regarding the exercise of judgement e.g. the supervision of technical provisions calculated by insurance undertakings. The difficulties of balancing sub-group supervision where it is required with the overlap in the group reporting to supervisors that creates is also discussed.
However the Commission report that an urgent group supervision issue is that EIOPA’s limited role in the assessment and approval of cross border internal models hampers its work in assessing and promoting convergence. In response, the Commission has already submitted a legislative proposal to expand EIOPA’s powers in this regard in October 2017. The Commission reports that the balance of work required with regard to group supervision to address the issues discussed above can be undertaken in the context of the Solvency II general evaluation in 2020. In terms of the transitional period for IORPs, the Commission may take a decision nearer to the end of 2022 to extend that if needed.
The Commission’s Report is here.
EIOPA PUBLISHES REPORT ON OVERSIGHT ACTIVITIES IN 2017
EIOPA has published its 2017 oversight activities report, which describes the activities of EIOPA during the previous year and outlines its priorities for 2018. In particular, the report highlights the effect of EIOPA’s co-operation platforms in addressing cross-border issues. Such co-operation platforms are designed to facilitate productive engagement with national supervisors and to strengthen their supervisory capacity. In addition, a wide range of tools such as balance sheet reviews, peer reviews, consistency projects on internal models have been used by EIOPA during the course of 2017 to enhance the supervisory capacity of national supervisors.
Improving supervisory practices in the authorisation process and supporting national supervisors in their review of business models to detect those models that may pose material prudential or conduct risk are key priorities for EIOPA in 2018.
EIOPA’s 2017 oversight activities report is here.
DRAFT DELEGATED REGULATION AMENDING SECURITISATION CALCULATION UNDER SOLVENCY II
On 17 April, the European Commission published a draft Delegated Regulation (Ares (2018) 2037113), which amends Solvency II Delegated Regulation (EU) 2015/35 as regards the calculation of regulatory capital requirements for simple, transparent and standardised (STS) securitisation.
The Council and the EU Parliament adopted Regulation (EU) 2017/2402 (the STS Regulation) in December 2017 as part of the capital markets union’s plan to amend the Capital Requirements Regulation to enable institutional investors including (re)insurers to benefit from lower regulatory capital requirements for investment in STS securitisation exposures. The STS Regulation will apply from 1 January 2019 and necessitates the following amendments to the Solvency II Delegated Regulation (EU) 2015/35: the inclusion of certain definitions regarding securitisation for consistency with the STS Regulation; the abolition of provisions on due diligence and risk retention; the abolition of a new calibration for STS securitisation; and transitional provisions for current investments in securitisation.
The Commission is accepting feedback on the draft Delegated Regulation until 15 May.
Details of how to submit feedback and the European Commission’s draft Delegated Regulation are here.
JOINT COMMITTEE OF ESAs ENTER INTO A MULTILATERAL MEMORANDUM OF UNDERSTANDING WITH THE EFTA SURVEILLANCE AUTHORITY
On 27 April, the Joint Committee of the European Supervisory Authorities (ESAs) published a multilateral memorandum of understanding (MoU) (dated 26 March 2018) on co-operation, information exchange and consultation with the EFTA Surveillance Authority (EFTA SA).
The MoU establishes practical arrangements between the ESAs and the EFTA SA on product: intervention; breach of EEA laws; action in emergency situations; mediation; and the adoption of specific opinions effective within EEA-EFTA states.
The EFTA SA has the power to adopt decisions and formal opinions addressed to competent authorities, financial market participants and financial institutions in the EEA-EFTA states under the amended EEA agreement of 30 September 2016 (EEA Agreement).
The EEA Agreement guarantees equal rights and obligations within the internal market for individuals and operators in the EEA. The EFTA SA monitors compliance with the EEA Agreement in Iceland, Lichtenstein and Norway, enabling those member states to participate in the EU internal market. The EFTA SA's role in the EEA-EFTA states mirrors the role of the ESAs in the EU member states.
The MoU is here.
EIOPA PUBLISHES RISK DASHBOARD
On 27 April, EIOPA published its quarterly risk dashboard summarising the main risks and vulnerabilities in the insurance sector based on fourth-quarter 2017 data. Overall, the risk exposure remained stable. Continued low interest rates are still major concern for insurers. Credit risk and market risk are at a medium level. Solvency positions continue to be strong for both groups and individual firms. The continuing impact of natural catastrophes keeps insurance risks at a medium level. Market perceptions are mixed, with insurers’ stock prices outperforming the market however, there has also been a deterioration of the external rating outlook for some insurance groups.
A link to the risk dashboard is here.
INSURANCE EUROPE RAISES CONCERN OVER THE COMMISSION’S COLLECTIVE REDRESS PROPOSAL FAILING TO FOLLOW ITS OWN REOMMENDATIONS AGAINST POTENTIAL ABUSE
Insurance Europe released a press release on the Commission’s proposal to repeal the 2009 Injunctions Directive and create a mechanism for consumers to take collective legal actions against organisations, such as insurers. Insurance Europe welcomed the Commission's intention to strengthen EU consumer law but identifies areas where there has been a compromise of certain principles from the Commission’s recommendations on the matter in 2013, (e.g. the provision for litigation costs to be borne by unsuccessful applicants).
Due to the broad scope of the proposal, Insurance Europe stress the need to ensure the maintenance of safeguards. Insurance Europe warns that the Commission must not underestimate the potential for abuse by third party funders with no connection to the outcome of the proceedings who may take advantage of the class action as a means of investment. This abuse could result in increased costs of operations for businesses both at a consumer and insurer level and Insurance Europe urges the Commission to take more time to consider alternative mechanisms in different jurisdictions and the effectiveness of their safeguards against the identified potential abuses.
The Insurance Europe press release is here.