Insurance Regulatory Update, May 2014


May 2014 Arthur Cox Insurance Regulatory Roundup

  • Central Bank publishes reserving requirements for non-life insurers, and non-life and life reinsurers
  • Data Protection Commissioner publishes 2013 annual report
  • Address by Central Bank’s Head of Consumer Protection to the Institute of Banking’s Certified Bank Director CPD Seminar
  • Bank of England to hold insurance executives to account
  • Omnibus II published in official journal
  • EIOPA publishes discussion paper on conflicts of interest
  • EIOPA initiates ‘comply or explain’ process on guidelines on complaints handling by insurance intermediaries
  • EIOPA introduces a new format for its financial stability report
  • Insurance Europe publishes report on ‘indirect taxation on insurance contracts in Europe’
  • Update on insurance stress tests 2014
  • Solvency II
  • IMD2


Central Bank Publishes Reserving Requirements for Non-Life Insurers, and Non-Life and Life Reinsurers

On 7 May, following its public consultation (CP73 discussed in the September 2013 Insurance Regulatory Update), the Central Bank published Reserving Requirements for Non-Life Insurers and for both Non-Life and Life Reinsurers (the Requirements).  The Requirements are legally binding and all firms within scope of the Requirements are required to give undertakings of compliance with the Requirements to the Central Bank.  Firms will be subject to more/less onerous rules depending on their impact rating under PRISM.  Firms should refer to Appendix 2 which sets out a useful table identifying all Requirements that apply to firms depending on their individual PRISM impact rating, i.e. low impact, medium low, medium high and high impact.

The purpose of the Requirements is to improve the existing regime for reserve adequacy by setting out minimum requirements which firms have to comply with in relation to reserving and which include the preparation and submission of a statement of actuarial opinion (SAO) prepared by the Signing Actuary.  The format of the SAO for each firm is set out in Appendix 1 of the Requirements. The Requirements are effective for financial years which end on or after 31 December 2014.  In the introduction to the Requirements, the Central Bank emphasises that the Board of Directors of the firm, and not the Signing Actuary, retains primary responsibility for the governance of the firm, its viability and its reserves.

The Requirements set out specific rules regarding the role of the Signing Actuary, the content of the SAO Report (which supports the SAO), the governance processes to be employed as regards claims, and the requirement for establishment of a Reserving Policy. They also provide rules in relation to the calculation of the Margin for Uncertainty and the Central Bank helpfully published Guidance on both that topic and on Best Estimate on the same day as it published the Requirements.  The role of both Internal and External Audit in the firm’s reserving process is also set out, together with the frequencies with which different firms must perform internal audit assessments (by reference to their rating as referred to above).  Lastly, the Requirements set out rules for engaging a Reviewing Actuary to conduct a peer review on the firm’s SAO and SAO Report, including the production of a Peer Review Report with a frequency determined by reference to the firm’s PRISM rating also.

As mentioned above, different requirements apply depending on a firm’s PRISM rating. For example, the Signing Actuary of a high impact firm must be a direct employee of the firm (or an employee of a group company).

Since CP73, the Central Bank has clarified a number of points regarding the scope of the Requirements. These are set out in the Feedback Statement produced by the Central Bank on CP73. These include confirmation that the Signing Actuary role will be a PCF function for Fitness and Probity purposes and an acknowledgement that, subject to certain conditions, one individual can perform the roles of the Signing Actuary and Chief Actuary simultaneously. In addition, the proposed requirement for a transparent Pricing Policy was removed (although the Central Bank recommends that it is best practice to have one in place).

Under the Requirements, high impact firms must establish a Reserving Committee comprising all relevant members of senior staff who have significant role in the reserving process. The Requirements specify the composition of the Reserving Committee and the tasks allocated to it. The Reserving Committee must meet at least quarterly.

Firms that do not carry out any third party business or motor, financial guarantee or liability business may apply to the Central Bank for a derogation from the Requirements (or any part thereof) on an annual basis.

A link to the Requirements is here.

Data Protection Commissioner Publishes 2013 Annual Report

On 12 May, the Data Protection Commissioner (the DPC) published his office’s Annual Report for 2013. The report summarises the activities engaged in by the DPC’s office during the course of 2013, including complaints opened, investigations and audits undertaken, policy issues and European and international responsibilities. Overall, the DPC opened 910 complaints for investigation in 2013, 56.8% (517) of which concerned access requests. The report notes that this figure is the highest number ever received by the DPC’s office in this category. While this may be attributed to the fact that the public are now more aware of their rights of access, the report also highlights that the increased number of complaints may be indicative of difficulties being faced by data subjects when trying to exercise their rights of access to information.

Notably for the insurance industry, in June 2013, the DPC approved a Code of Practice for the Insurance Sector (the Code). The Code applies to all personal data held by or on behalf of insurance companies established in the State. The DPC believes that the Code will enhance the knowledge and understanding of data protection requirements within the insurance sector. The DPC’s office worked closely with Insurance Ireland when drafting the Code.

A link to the Annual Report is here.

Address by Central Bank’s Head of Consumer Protection to the Institute of Banking’s Certified Bank Director CPD Seminar

On 6 May, Colm Kincaid, Head of Consumer Protection of the Central Bank, addressed the Institute of Banking’s Certified Bank Director CPD Seminar, speaking on consumer protection from a regulator’s perspective. Mr. Kincaid outlined the Central Bank’s consumer protection framework which focuses on, among other areas, monitoring and enforcing compliance with consumer protection rules and promoting a consumer-focussed approach to the provision of financial services.

In relation to insurance, Mr. Kincaid stated that, at a European level, the consumer protection initiative of the Regulation on Key Information Documents for Packaged Retail and Insurance-Based Products, commonly known as the PRIPS KID Regulation, has been identified as a priority and that the Central Bank would continue to support it at European and domestic levels. He also referred to the Central Bank’s contribution to the Joint Position of the European Supervisory Authorities on Product Oversight and Governance Processes. He noted the Central Bank would soon publish the findings of their recent review of sales incentives in banks, insurance undertakings and investment firms, and stated that these findings would include guidelines for institutions in the area of sales incentives, and the Central Bank’s review of industry practices across the sector.

A link to the speech is here.


Bank of England to Hold Insurance Executives to Account

On 22 May, Mark Carney, Governor of the Bank of England, in an article published in The Times, suggested an increased focus by the Bank of England on the regulation of the insurance sector in the UK in light of the challenges facing insurers in adjusting to the post-crisis landscape and regulatory reforms.

Mr Carney stressed the role of prudential management and board accountability in relation to insurance companies. He stated that “alongside reforms that Parliament has asked us to make to hold senior bankers to account, we will create a similar regime for senior managers in the insurance industry. Integrity, honesty and skill are not optional, whether you run an insurance company, global investment bank or building society.” No details were provided of the types of sanctions that senior managers could face. Mr. Carney also remarked that the Bank of England’s role was not to regulate to prevent failure but “to make sure that failing insurers don’t harm their policyholders, cost the taxpayer money or make insurance harder to obtain.” In response, the Association of British Insurers said: “Mark Carney rightly recognises the important role of the industry in the economy and its strengths, such as innovative approach, strong capital buffers as well as its resilience to the previous economic crisis. Insurers are subject to stringent ‘twin peaks’ regulation from the Prudential Regulation Authority and the Financial Conduct Authority, so the industry expects to be held to account.”

A link to the article is here.

Omnibus II Published in Official Journal

On 22 May, the Omnibus II Directive (2014/51/EU) was published in the Official Journal of the European Union and excluding Articles 2(25), (43) and (82) came into force on the following day, 23 May 2014. The remaining Articles will apply from 31 March 2015. Omnibus II amends and complements the Solvency II Directive. Omnibus II also enhances the role of EIOPA, which can, after a transitional period of two years, propose updates to technical aspects of delegated acts adopted by the Commission by way of regulatory technical standards. It is expected that Solvency II will come into effect on 1 January 2016.

EIOPA Publishes Discussion Paper on Conflicts of Interest

On 22 May, EIOPA published a discussion paper on “Conflicts of Interest in Direct and Intermediated Sales of Insurance-based Investment Products (PRIIPS)” (the Discussion Paper). The Discussion Paper is intended to facilitate a public consultation and follows the European Commission’s mandate to EIOPA for technical advice concerning amendments relating to conflicts of interest which MiFID II (when it comes into force) will make to the Insurance Mediation Directive (reported on in last month’s edition of the Insurance Regulatory Update).

The Discussion Paper explains what conflicts of interest are, why they matter, and outlines the current situation relating to conflicts of interest across the EU. The Discussion Paper then focuses on (i) the criteria for identifying types of conflict of interest related to insurance distribution activities, and (ii) the steps to be taken to identify, prevent, manage and disclose those conflicts of interest. The Discussion Paper sets out questions for participants to answer relating to these two issues. In both of these cases, EIOPA is to use the measures already developed at EU level under the mandate given by the existing MiFID Directive as a starting point. Two specific issues relating to insurance distribution activities are also to be taken into account, namely, questions on proportionality and on the handling of third party payments (‘inducements’). Finally, the Discussion Paper poses questions designed to assess the impact of possible changes to the regulation of conflicts of interest. Comments on the Discussion Paper must be submitted to EIOPA by 22 July 2014.

A link to the Discussion Paper is here.

EIOPA Initiates ‘Comply or Explain’ Process on Guidelines on Complaints-Handling By Insurance Intermediaries

On 16 May, EIOPA announced that it has initiated the ‘comply or explain’ process as regards compliance with its Guidelines on Complaints-Handling by Insurance Intermediaries (the Guidelines). Under the Guidelines, Member States must ensure that procedures are set up to allow customers and other interested parties to register complaints about insurance and reinsurance intermediaries. The Guidelines cover such requirements as: ensuring the right institution deals with the complaint; the complaints management policy and function; internal follow-up of complaints-handling; provision of information; and procedures for responding to complaints.

Competent authorities must confirm to EIOPA whether they intend to comply with the Guidelines, and must submit their reasons for non-compliance, within two months of 16 May 2014. EIOPA intends to publish the fact that a competent authority does not comply or does not intend to comply, and may decide (on a case-by-case basis) to publish the reasons for non-compliance with the Guidelines.

A link to the announcement is here.

EIOPA Introduces a new format for its Financial Stability Report

On 14 May, EIOPA published its Financial Stability Report for May 2014 (the Report) in a new format. This new format divides the Report into two sections: Part I includes the usual analysis and assessment of risks but now also incorporates new analysis methodologies; and Part II focuses on thematic articles, the aim of which is to provide a deeper analysis of specific issues and broader policy discussions. The Report discusses such issues as the European insurance and global reinsurance environments, and globally systemically important insurers. The Report notes that, while the economic outlook is positive, the keys risks for insurance companies and occupational pension funds include a vulnerable macroeconomic climate, and low yield environment.

A link to the report is here.

A link to the press release is here.

Insurance Europe publishes Report on ‘Indirect Taxation on Insurance Contracts in Europe’

On 30 April, Insurance Europe published a report on ‘Indirect Taxation on Insurance Contracts in Europe’. The report provides a guide to the fiscal and parafiscal taxes on premiums in each of the Insurance Europe member countries. Helpfully, a table is provided for each country setting out the risks covered by specific fiscal or parafiscal taxation. The report outlines general rules applicable to all insurance companies in each jurisdiction, and special rules applicable depending on the method of establishment of the insurance company.

The report notes that whatever law applies to contracts, insurance contracts are subject to indirect taxes and parafiscal charges on insurance premiums in the country in which the risk is situated. Each European country is free to determine the person responsible for collecting taxes, and may require a designated tax representative of the insurance undertaking to become established in their territory, or to submit a detailed list of contracts taken out by way of freedom of services.

A link to the report is here.


Update on Insurance Stress Tests 2014

In last month’s edition of the Insurance Regulatory Update, we noted the launch of a Europe-wide stress test for the insurance sector. There have been a number of developments since the launch of this exercise: the first set of Questions and Answers has been published (including topics such as the reporting template and risk free curves), the stress test specifications have been updated (in track changes mode), the reporting template has been updated, the automatic updating tool provided, and the tool for the generation of risk-free curves and related presentation have been updated. EIOPA’s objective in carrying out this exercise is to test the resilience of insurers regarding market risk under a combination of historical and hypothetical scenarios. Insurance risk will also be tested and, as a follow-up to its Opinion on Supervisory Response to a Prolonged Low Interest Rate Environment, EIOPA will also include a low yield element in the exercise.

A link to the Insurance Stress Test page on EIOPA’s website is here.

Solvency II

On 27 May, EIOPA published presentation slides on the first set of Guidelines for Solvency II. The presentation focuses on the following areas of Solvency II: Pillar 1 (technical provisions, own funds, solvency capital requirements, and valuation); Internal Models; Governance and Own Risk and Solvency Assessment; Equivalence; and Supervisory Review Process.

The slides were presented to a meeting of the Insurance and Reinsurance Stakeholder Group on 29 April and the presentation sets out a timetable indicating the development of the Solvency II Guidelines by EIOPA. A consultation is scheduled to take place between June 2014 and the end of August 2014, with the final draft prepared by November 2014 and translation to take place between December 2014 and the beginning of February 2015. EIOPA aims to commence its ‘comply-or-explain’ process by the end of February/March 2015, with the final Guidelines available for the start of the approval process on 1 April 2015.

A link to the presentation is here.

During May, EIOPA updated its Questions and Answers template on the Guidelines for preparation for Solvency II. Answers have been provided to questions raised in relation to the Submission of Information to National Competent Authorities, including answers which relate to the ‘Country of Custody’, the quantitative reporting template for the preparatory phase, and the reporting of solvency capital requirements for market risks during the preparatory phase.

A link to the Questions and Answers is here.

On 21 May, EIOPA published the first set of Questions and Answers on detailed technical specifications for Solvency II preparatory phase. These Questions and Answers have been submitted to national competent authorities by participants. Broadly speaking, each of the 11 queries relate to the solvency calculation requirement, or the methodology for calculation of the best estimate.

A link to the Questions and Answers is here.


On 14 May, the Presidency of the EU Council published a compromise text dated 13 May for the recast insurance mediation directive (IMD2). Notable amendments suggested by the Presidency to the text proposed by the European Commission include (i) professional management of claims and loss adjusters are excluded from scope; (ii) the provision of information on a contract of (re)insurance in response to criteria selected by the customer via an aggregator or price comparison website is included in the scope of insurance mediation; (iii) the concept of ‘insurance-based investment product’ is included (consistent with changes MiFID II will make to the Insurance Mediation Directive); (iv) Member States may prohibit fees, commissions or monetary benefits being payable to insurers or intermediaries by any third party in relation to distribution of insurance-based investment products; and (v) bundling practices are permitted while tying practices are not, insurers or intermediaries are obliged to assess the suitability of the overall bundled package before recommending it to a customer explaining, in particular, how risks may be different when bundled.

Negotiations on the text of IMD2 between the EU Council, the European Parliament and the European Commission are expected to resume later this year and it is possible that other compromise texts could result from those negotiations.

A link to the compromise text of IMD2 is here.

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