Insurance Regulatory Update, June 2014


June 2014 Arthur Cox Insurance Regulatory Update

  • Central Bank Publishes Discussion Paper on Risk Appetite
  • Central Bank Publishes Solvency II Newsletter
  • Central Bank Publishes Findings of Review of Life Assurance Firms’ Annual Statements
  • Central Bank Publishes Macro-Financial Review
  • Central Bank Publishes Intermediary Times
  • EIOPA Consults on Solvency II Guidelines
  • Insurance Europe Publishes Annual Report For 2013-2014
  • EIOPA Publishes Risk Dashboard
  • EIOPA Publishes Report On Feedback From National Competent Authorities Regarding PPI
  • Solvency II Q&A
  • Regulation on European Long-Term Investment Funds
  • IMD1


Central Bank Publishes Discussion Paper on Risk Appetite

On 20 June, the Central Bank published a discussion paper on the importance of an effective risk appetite framework. The discussion paper aims to generate discussion and debate with firms on risk appetite generally and its importance within organisations, and is open for comment until 1 September 2014.

The paper focuses on a number of questions on risk appetite statements to prompt discussion but the Central Bank will welcome feedback on risk appetite generally (i.e. not limited to the particular questions posed). The discussion paper provides an overview of the importance of risk appetite and a risk culture within firms, and sets out some characteristics of an effective risk appetite statement. The Central Bank comments that, unlike certain other international supervisors, it does not currently define what is meant by risk appetite. The Central Bank indicated that it considered the Financial Stability Board (FSB) definition of risk appetite as suitable for the majority of institutions. The FSB definition is “The aggregate level and types of risk an organisation is willing to assume within its risk capacity to achieve its strategic objectives and business plan”. The discussion paper also seeks feedback on how organisations use risk limits and risk tolerances, and how organisations cater for the early warning of potential risk appetite breaches.

A link to the discussion paper is here.

Central Bank Publishes Solvency II Newsletter

On 30 May, the Central Bank published the 13th edition of ‘Solvency II Matters’, its Solvency II Newsletter. The Newsletter covers Solvency II developments at a European and domestic level since February 2014, many of which have been reported in previous editions of the Insurance Regulatory Update.

The Newsletter summarises developments at Levels 1 to 3 of the Solvency II regime including the recent publication of the Omnibus II Directive (a Level 1 measure, as it amends Solvency II), the consultation on the ITS for Solvency II (which covers the processes for approving the Matching Adjustment, Ancillary Own Funds, Undertaking Specific Parameters, Internal Models and Special Purpose Vehicles) (Level 2) and the consultation on the first set of Solvency II Guidelines (Level 3) which the Central Bank listed as being expected in June 2014 and which was then launched on 2 June 2014 (see further below). The Newsletter provides updates on timing and process for both the EIOPA Stress Test 2014 and the FLAOR reporting using the Central Bank’s on-line reporting system. The Central Bank has confirmed that, for life undertakings, the FLAOR report can include a cross-reference to a previously submitted Financial Condition Report rather than duplicate information. The Newsletter also notes that the Central Bank will be conducting surveys in 2014 and 2015 aimed at assessing the progress towards compliance with the Central Bank’s guidance on preparing for Solvency II (published in November 2013), starting in Q3 2014. The Newsletter also helpfully sets out indicative dates for the implementation process for Solvency II.

A link to the Newsletter is here.

Central Bank Publishes Findings of Review of Life Assurance firms’ Annual Statements

On 28 May, the Central Bank published details of the outcome of its review of life assurance firms’ compliance with the requirements under the Consumer Protection Code 2012 (CPC) to provide consumers with annual benefits statements in respect of investment products. Firms must provide consumers with an annual statement in respect of the previous 12 months which addresses eight prescribed items, including the opening and closing balance or value. The focus of this review was annual statements produced by life assurance companies for personal pension products only.

The Central Bank reviewed ten life assurance firms. While the majority of firms were compliant with the CPC requirement, the Central Bank identified a number of firms that did not produce statements in the required new format for pension policies. Some firms have been instructed to make every effort to contact policyholders whose statements were not issued due to the life assurance company not holding a valid address for the policy holder. As part of the review, consumer focus groups identified further information that could be included in the annual statement, including details of the projected retirement income expressed as a monetary value and information on the investment funds including the risk and type of fund. While the Central Bank does not propose to update the CPC at this time to take account of these points, it has encouraged firms to improve their customer communications in light of the feedback from consumer focus groups.

A link to the press release is here.

Central Bank Publishes Macro-Financial Review

On 12 June, the Central Bank published its first Macro-Financial Review of 2014 (the Review). The Review summarises the current state of the macro-financial environment in Ireland by reference to data available as at 30 May 2014. As part of the review of the financial sector, the Central Bank notes that the Irish insurance sector has “remained resilient to the continued weak macro-economic conditions and prolonged low interest rate environment”, which is consistent with the wider European experience as reported by Insurance Europe.

The Review noted that the domestic life market stabilised in 2013 with a market increase of 7% (although still 45% below its peak value) and was mainly driven by the changing pension landscape. However, the retail market was noted as still being very price sensitive (particularly in protection products) and lapse rates are stabilising but remain well above the established long-term norms.

The Review highlighted that the weak economic climate and low interest rates continue to impact upon non-life insurers’ underwriting profits and investment income. It also highlighted that the reductions in underwriting profits and investment returns that non-life insurers are experiencing may put pressure on firms to release reserves. However, firms should be aware that the Central Bank remains focused on the adequacy of reserves as part of the supervisory engagement.

According to the Review, reinsurers continue to face operating challenges such as low interest rates, price/rate reductions, excess capacity, greater retention rates by primary insurers in an effort to reduce costs, and diminishing reserve releases.

The Review notes the ‘“international focus on renewed supervisory frameworks across the financial sector”. Nine global insurance groups (seven of which have subsidiaries in Ireland) have been designated as ‘Global Systemic Important Insurers’ by the IAIS and therefore will face tougher supervision and capital standards.

A link to the Review is here.

Central Bank Publishes Intermediary Times

On 29 May, the Central Bank published the May edition of its ‘Intermediary Times’. It provided an overview of the findings to date of the Central Bank’s themed review on professional indemnity insurance (PII) and noted that the review is ongoing and that (re)insurance intermediaries authorised under the European Communities (Insurance Mediation) Regulations 2005 are required to hold PII or a comparable guarantee. The Central Bank highlighted that this requirement to hold PII or a comparable guarantee was identified as an enforcement priority for 2014. The Central Bank also reminded intermediaries that it published revised minimum levels of PII effective from August 2013.

This edition also reminded firms of the advertising requirements of the CPC and highlighted a number of common problems identified following its desk-based review of the retail intermediary sector. Some problems include: failure to ensure Terms of Business are up to date, firms claiming to have a greater number of appointments than they actually hold, and firms’ use of incorrect regulatory disclosure statements. The Central Bank reminded firms of the advertising requirements of the CPC and in particular provisions 4.1 (the ‘plain English’ requirement) and 9.2 (regarding the design, presentation and content of an advertisement).

A link to the Intermediary Times is here.


EIOPA Consults on Solvency II Guidelines

On 2 June, EIOPA launched a public consultation on Set 1 of its Solvency II Guidelines (the Guidelines). The Guidelines have been developed on the basis of the Solvency II Directive (as amended by Omnibus II) and the current set of the European Commission’s (non-public) Delegated Acts, which contain the draft implementing measures for the Solvency II regime. It is expected that the Commission will publish the text of the implementing measures later this year.

The Guidelines will be non-binding and will be addressed to national competent authorities (NCAs) or financial institutions with the aim of ensuring that the Solvency II regime is implemented as consistently as possible across Member States. NCAs will have two months from the date the final Guidelines are published to confirm compliance with them or provide reasons for non-compliance.

Set 1 includes five Consultation Papers covering different aspects of the Guidelines: (i) Pillar 1 (technical provisions, own funds, the standard formula solvency capital requirement and group solvency); (ii) the use of internal models; (iii) Pillar 2 (including own risks and solvency assessment and governance); (iv) the supervisory review process; and (v) equivalence. For the purposes of the consultation, the relevant draft implementing measures are annexed to the Guidelines, although they are not subject to the consultation itself. EIOPA has also published a sixth separate Consultation Paper on the Impact Assessment of the Guidelines.

EIOPA has also published a separate Cover Note to accompany the Set 1 consultation which helpfully provides a summary of the key features of the Guidelines. The Cover Note also explains the interaction between the Guidelines and the paper referred to as the Annex to the Consultation which sets out the text of the relevant draft implementing measures. While there are separate Consultation Papers for each topic, some topics have relevance to a number of Consultation Papers e.g. the draft Guidelines on internal models should be read alongside the draft Guidelines on the valuation of technical provisions.

Comments on all Consultation Papers are to be submitted by stakeholders before 29 August 2014 using the template document provided on EIOPA’s website. Following the consultation, EIOPA will consider if further changes need to be made to the Guidelines (considering also the text of the implementing measures when published). The final Guidelines will be adopted by the Board of Supervisors of EIOPA and published on its website.

A link to the public consultation on Set 1 of the Solvency II Guidelines is here.

Insurance Europe Publishes Annual Report for 2013-2014

On 11 June, Insurance Europe published its Annual Report for 2013-2014. The Annual Report summarises developments in a large number of areas affecting the insurance industry in the previous 12 months. These include prudential regulation, investment issues, new global capital standards, the role of insurers in retirement savings, taxation, European insurance contract law, changes in financial reporting and anti-money laundering. It also discusses recent developments in consumer information and distribution: namely IMD2 (which is with the EU Council for consideration), MiFID II (which was published in the Official Journal on 12 June 2014) and the Regulation on Packaged Retail and Insurance–Based Investment Products (which is with the EU Council for consideration). On each theme discussed, Insurance Europe provides its view. For example, when discussing the proposed EU-wide single insurance contract law regime, Insurance Europe states that in practical terms, the lack of a single regime poses only minor difficulties to insurers in terms of cross-border trade. The European Commission intends to publish a consultation at the end of 2014 on this issue, to which Insurance Europe will reply.

The Annual Report also summarises the performance of the insurance industry in 2013, noting that insurers are showing resilience amid low economic growth. An adverse economic environment continued to influence the European economy in 2013. In the insurance sector, however, total premiums grew on average by 2.8% and are valued at an estimated €1.111bn. This growth was driven largely by an increase in the life insurance market, while the value of non-life insurance remained largely unchanged. 

A link to the Annual Report is here.

EIOPA Publishes Risk Dashboard

In June, EIOPA published its risk dashboard for the first quarter of 2014. The risk dashboard gives an overview of the overall situation in Europe, rather than by country. While EIOPA notes that the risk environment remains largely unchanged since the last EIOPA risk dashboard, it highlights that market risk is still a concern, and that liquidity and funding risks are still present.

A link to the risk dashboard is here.

EIOPA Publishes Report on Feedback from National Competent Authorities Regarding PPI

On 25 June, EIOPA published a report summarising feedback from NCAs regarding EIOPA’s opinion (the Opinion) on Payment Protection Insurance (PPI) published in June 2013 (the Report). The Opinion raised issues relating to consumer protection for PPI products and analysed national practices in this area. Following publication of the Opinion, EIOPA had requested feedback on any market investigations, regulatory and/or supervisory actions being taken by NCAs. The Report notes that the majority of NCAs are taking action in this regard and summarises the steps taken by NCAs to date.

The Report indicates that Ireland’s reported supervisory action was the Central Bank’s review of PPI sold by credit institutions (the PPI Review) that had begun before the publication of the Opinion. The PPI Review has now been completed and a summary report was issued by the Central Bank in March 2014. EIOPA noted the finding that 22% of the PPI sales included in the PPI Review had not been sold in compliance with the CPC (or compliance could not be demonstrated) resulting in the refund of €67.4 million to approximately 77,000 policyholders. The Central Bank is currently collating information regarding the sale of PPI-type products by credit unions.

The Report concludes that while the Opinion triggered actions in many Member States, most developments are still in their infancy therefore their effects cannot yet be fully analysed. The focus of these developments is predominantly in the areas of information provision, cross-selling/common issues and selling practices in general. However, EIOPA intends to continue to monitor the PPI market into the future.

A link to the Report is here.


Solvency II Q&A

During June, EIOPA updated its Questions and Answers on the Submission of Information to NCAs. Answers include those in relation to the quantitative reporting template for the preparatory phase, the timeline for reporting annual quantitative information to the NCAs and the ‘Country of Custody’.

A link to the Questions and Answers is here.

Regulation on European Long-Term Investment Funds

On 26 May, the EU Council Presidency published a compromise proposal for the proposed regulation on European Long-Term Investment Funds (ELTIFs). The purpose of the proposed regulation is to establish uniform rules throughout the EU in respect of ELTIFs. The proposed regulation notes that “on the demand side, ELTIFs can provide a steady demand income stream for pension administrators, insurance companies and other entities that face regular and recurrent liabilities”. The EU Council indicated that it is important to establish the categories of assets in which ELTIFs can invest and specifically indicated that ELTIFs should be able to invest in SMEs who are “listed on regulated markets or on multilateral trading facilities”. Furthermore, it noted that solid transparency requirements should be established to assist investors’ decisions. The EU Council indicated that the European Securities and Markets Authority should play a key role in ensuring that the rules for ELTIFs are applied in a consistent manner throughout the EU.

A link to the Compromise Proposal is here.

Following the above compromise proposal, a proposed general approach, dated 20 June 2014, on the ELTIF regulation was published by the EU Council in an annex to a note from its General Secretariat to its Permanent Representatives Committee. The note summarised the state of play on the ELTIF regulation and noted that the EU Council Presidency recommends that its Permanent Representatives Committee agree the general approach (which it did on 25 June 2014) and invited the incoming Italian Presidency of the EU Council to begin negotiations with the European Parliament with a view to reaching agreement at first reading.

A link to the note is here.


The European Commission has published a formal request to EIOPA for technical advice on possible delegated acts in relation to Directive 2002/92/EC on Insurance Mediation (IMD1) as amended by MiFID II with a view to preparing a possible delegated act concerning the conflicts of interest provisions in insurance distribution activities as set out in MiFID II which amends IMD1. EIOPA has been asked to define steps that insurance undertakings or insurance intermediaries, when carrying out insurance distribution activities, might reasonably be expected to take to (1) identify, (2) prevent, (3) manage and (4) disclose conflicts of interests. EIOPA has also been asked to advise on the establishment of appropriate criteria for determining the types of conflict of interest whose existence may damage interests of customers or potential customers of insurance intermediaries or insurance undertakings.

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