Insurance Regulatory Update, July 2014

01-08-2014


July 2014 Arthur Cox Insurance Regulatory Update

  • New Director of Insurance Supervision at The Central Bank
  • Handbook of Prudential Requirements for Investment Intermediaries Published
  • Central Bank Publishes Guidelines on Variable Remuneration for Sales Staff
  • FLAOR Reporting Tool Now Available for All (Re)Insurers
  • Revenue Commissioners Publish Statement of Practice on Foreign Branch Double Taxation Relief
  • Central Bank Publishes Research on the Irish Reinsurance Industry
  • FCA Report on Price Comparison Websites in the General Insurance Sector
  • Insurance Europe Comments On EIOPA “Set I” Consultation Papers
  • IAIS Publishes Second Consultation on Basic Capital Requirements for Globally Systemically Important Insurers
  • EU Council Agenda for Second Half of 2014 Published

IN DOMESTIC NEWS…

New Director of Insurance Supervision at The Central Bank

On 3 July, the Central Bank announced that Sylvia Cronin had been appointed as the Director of Insurance Supervision. In this position, Ms. Cronin will oversee the general insurance, life insurance and reinsurance companies which are subject to the regulation of the Central Bank. The Central Bank noted that the upcoming Solvency II regime marks an important time for the insurance sector and highlighted Ms. Cronin’s experience in the insurance industry.

A link to the announcement is here.

Handbook of Prudential Requirements for Investment Intermediaries Published

Following on from its August 2013 consultation, on 17 July the Central Bank published a revised Handbook of Prudential Requirements for Investment Intermediaries (the Handbook). The Handbook will come into effect from 1 October 2014 and will replace the existing July 2006 Handbook of Prudential Requirements for Authorised Advisors and Restricted Intermediaries. The Handbook sets out the prudential requirements imposed on “investment intermediaries” which are additional to obligations imposed on investment intermediaries pursuant to other regulatory requirements. The requirements do not apply to investment intermediaries who hold a “primary authorisation” (as such term is defined in the Handbook, encompassing intermediaries who are subject to stricter capital or reporting requirements under a different authorisation such as MiFID firms). Breach of a requirement of the Handbook could lead to the imposition of administrative sanctions. The Handbook sets out specific rules under five headings: General Supervisory Requirements, Financial Position and Reporting Requirements, Professional Indemnity Insurance, Organisation and Management, and Books and Records.

Consistent with the consultation, the Handbook sets a new minimum regulatory capital requirement for investment intermediaries acting as product producers who must hold minimum shareholders’ funds (or a positive capital account) of €50,000. The Handbook also requires investment intermediaries to hold professional indemnity insurance of a minimum level of €1.25 million per claim and €1.85 million in aggregate per type of regulated activity (e.g. investment, insurance or debt management). Investment intermediaries must at all times maintain a positive net asset position. (Note that intangible assets including goodwill are to be excluded from the calculation of a firm’s balance sheet assets for regulatory reporting purposes. However a transitional period will apply to firms hold qualifying goodwill as of 30 September 2014 allowing for a maximum 5 year period to reduce their goodwill).

A link to the Handbook is here.

Central Bank Publishes Guidelines on Variable Remuneration for Sales Staff

On 25 July, the Central Bank published Guidelines on Variable Remuneration Arrangements for Sales Staff (the Guidelines). The Central Bank carried out a detailed themed inspection into variable remuneration arrangements across 15 firms in the banking, insurance and investment sectors. The Central Bank commented that the key findings of the inspection contained in the Guidelines were that (1) greater emphasis was placed on rewarding high sales figures as opposed to meeting customer needs in a suitable way, (2) bonus payments were paid with little emphasis on the quality of the sales to the consumer, (3) there was a limited use of penalties in discouraging poor sales practices and (4) regular, robust and independent sale quality reviews were not conducted consistently.

The Guidelines set out what the Central Bank considers to be “best practices by firms in meeting the needs of the consumer and aligning their variable remuneration arrangements with a positive cultural focus on needs based selling.” The best practice Guidelines address the following matters: governance; use of quality measures; inclusion of penalties and deterrents; managing performance; managing conflicts interest and risky components of incentive schemes; sales quality monitoring and controls; and client service and the standard of documentation. The Guidelines relate to all forms of variable remuneration offered and paid to staff involved in the sales process or in the making of recommendations to consumers or retail clients.

The firms falling within the scope of the Central Bank’s review are required to confirm that they have reviewed remuneration arrangements and that relevant changes have been in put in place by 1 January 2015. In 2015-2016, the Central Bank will review the implementation of the Guidelines. Finally such firms must carry out an Internal Audit review of changes implemented in their remuneration arrangements in accordance with the Guidelines by the first half of 2016, the results of which will be sent to the Central Bank.

A link to the Guidelines is here.

FLAOR Reporting Tool Now Available For All (Re)Insurers

On 4 July 2014, the Central Bank announced that a Forward Looking Assessment of Own Risk (FLAOR) online reporting tool for submitting Solvency II FLAOR reports in respect of Medium-Low and Low impact (re)insurance undertakings is now available. High and Medium-High impact (re)insurance undertakings and all groups are already required to submit the FLAOR report in an electronic readable format using the Central Bank’s online reporting system. All (re)insurers are required to submit a FLAOR report before 31 December 2014.

Reporting Guidance is available here.

Revenue Commissioners Publish Statement of Practice on Foreign Branch Double Taxation Relief

On 1 July, the Revenue Commissioners published a statement of practice on Foreign Branch Double Taxation Relief (the Statement). The Statement notes that the issue of double taxation of income may be of particular interest to corporates in the insurance industry due to “substantial differences in the timing of recognition of investment gains and acquisition expenses and differences in the valuation of policyholder liabilities between Ireland and the foreign branch territories”.

The Statement explains how some companies may not avail of double taxation relief due to the difference in timing of recognition of profits of a foreign branch computed in accordance with the Irish rules and the profits computed in accordance with the rules of the branch territory.

The Statement provides a method whereby a company which has paid a foreign tax on a foreign branch’s profits, and which would not otherwise be allowed as a tax credit solely due to the timing mismatch in profit recognition, can claim 87.5% of the tax paid as a tax credit against Irish corporation tax liability. The Statement applies to foreign tax paid for periods commencing on or after 1 January 2013.

A link to the Statement is here.

Central Bank Publishes Research on the Irish Reinsurance Industry

On 28 July, as part of its Q3 2014 Quarterly Bulletin, the Central Bank published research by economists in its Statistics Division examining the reinsurance industry in Ireland. The research, drawing from Irish data available for 2012, highlights that 19% of reinsurance companies in Europe are located in Ireland (with only Luxembourg having a greater proportion, at 53%).The research also notes the numbers employed by the Irish reinsurance industry were just over 400 in 2011. In 2012, the total balance sheet size of the Irish reinsurance industry was €55 billion. The research also looks at changes for the industry due to the growing competition from insurance-linked securities and other investment vehicles and the approaching Solvency II regulatory regime.

A link to the research is available here.

IN EUROPEAN AND INTERNATIONAL NEWS…

FCA Report on Price Comparison Websites in the General Insurance Sector

On 16 July, the FCA published a report (the Report) on a thematic review of the intermediation of general insurance products by price comparison websites (PCWs). The FCA wanted to understand the consumer’s experience of using PCWs and assess their understanding of the role of the PCW. The review focused on travel, home and motor insurance products, as these are most commonly marketed through PCWs, and was carried out using a combination of sources including consumer research, desk-based reviews and discussions with senior management of PCWs. The FCA also consulted with consumer groups and other stakeholders such as the Financial Ombudsman Service and the Competition and Markets Authority.

The FCA review highlighted three main concerns. Firstly, it found a lack of consistency amongst PCWs insofar as they do not always give appropriate information to consumers to enable them to make informed decisions about insurance products. The Report suggests that PCWs give consumers appropriate product information beyond price which should address matters such as any add-on products and include details about level of cover, key features, exclusions, limitations  and other relevant information that the consumer may require to make an informed decision. Secondly, the role of the PCW in terms of distribution, service and its business model was not appropriately communicated to enable consumers to make informed choices e.g. some PCWs failed to identify themselves as a general insurance intermediary when explaining the service they provide.

Also, in certain cases where a PCW is owned by an insurer, the potential conflict of interest that this could involve was not brought to the attention of consumers. Further, the Report specifically noted a lack of clarity amongst PCWs in explaining to consumers how their data would be used. Finally, the Report indicated that PCWs had not fully implemented the 2011 Guidance produced by the FSA on the selling of general insurance policies through PCWs.

The FCA expects all firms to commit to taking specific actions arising out of the review (set out at page 18 of the Report). The FCA will follow up with on PCWs by January 2015 to ensure that they have addressed these issues.

A link to the Report is here.

Insurance Europe Comments in EIOPA “Set I” Consultation Papers

Insurance Europe has recently published position papers which set out its comments on each of the component parts of EIOPA’s consultation on Set 1 of the Solvency II implementing technical standards. That consultation was launched at the start of April this year and reported in our April insurance bulletin. Insurance Europe has published its responses to each of the consultation papers in template format by reference to each article and Annex number of the relevant consultation paper. It has provided comments in respect of all six areas of Set 1 (i.e. procedures for the approval of ancillary own funds, internal models, undertaking specific parameters, special purpose vehicles, the matching adjustment and the joint decision process for group internal models). Insurance Europe has also published comments on EIOPA’s consultation regarding the proposed guidelines for the operational functioning of colleges of supervisors.

Links to the relevant documents are provided here:

  • Comments on Procedures for the approval of Ancillary Own Funds is here
  • Comments on Procedures for the approval of Internal Models – approval process is here
  • Comments on Joint decision process for group internal models is here
  • Comments on Procedures for the approval of the Matching Adjustment is here
  • Comments on Procedures for the approval of Special Purpose Vehicles is here
  • Comments on Procedures for the approval of USP – approval process is here
  • Comments on GL Functioning of Colleges is here

IAIS Publishes Second Consultation on Basic Capital Requirements for Globally Systemically Important Insurers

On 9 July, the IAIS published a public consultation in respect of the development of global Basic Capital Requirements for Global Systemically Important Insurers (G-SIIs). This is the second public consultation on the Basic Capital Requirements (BCR) and is focused on its design and calibration. IAIS intends to submit a final BCR proposal to the G20 summit in November 2014. The IAIS is interested in comments regarding the specific proposed formula for calculating the BCR, which is the first of three steps to develop group-wide global capital standards for G-SIIs and is the foundation of the second step, which involves the development of Higher Loss Absorbency (HLA) requirements. Jointly the BCR and the HLA requirements will form a consolidated group-wide capital requirement. The document addresses the BCR design in detail and contains a useful expected timeline for key milestones in the process including confidential reporting on the BCR (due to commence in January 2015) and the completion of the HLA proposal (to be finalised by December 2015). It has been reported that Insurance Europe has expressed its concern that the timeframe that the IAIS has to test the measures (i.e. in advance of final proposals in November 2014) is very tight and that Insurance Europe has emphasised that it is vital these measures are adequately tested to avoid unintended consequences.

Comments on the consultation paper are invited before 8 August 2014.

The link to the consultation is here.

EU Council Agenda for Second Half of 2014 Published

On 2 July 2014, the EU Council issued its provisional agenda for the second part of 2014. Of particular relevance, the Council indicated that it will discuss the proposed revised Insurance Mediation Directive on 7 November 2014.

The link to the EU Council Agenda is here. 

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