COVID-19: Insurance Regulatory Update April 2020
This is a special edition of the Arthur Cox Insurance Regulatory Update that looks at the impact of COVID-19 on the insurance industry in Ireland and EU.
Minister for Finance emphasises his concerns to Insurance Ireland regarding the response of the sector to date to the COVID-19 crisis
On 27 March, the Minister for Finance requested Insurance Ireland members take a more customer focused approach when dealing with businesses and consumers during COVID-19. In response to the Minister’s concerns, Insurance Ireland released a statement on 10 April outlining the measures its members are taking in response to the crisis, which included:
- Reduction of premiums for business customers to reflect reduced level of exposure as a result of COVID-19 restrictions for Employers Liability, Public Liability and Commercial Motor.
- A 28 day grace period for payment at renewal.
- Maintaining cover for unoccupied commercial buildings/premises for a maximum 90 days.
- Supporting requests for a change of property use during the crisis for businesses impacted by COVID-19 restrictions.
- A 28 day grace period for payment at renewal.
- Waiver of cancellation fees or missed direct debit fees.
- Extension of credit facilities with relevant brokers.
- Working from home cover extensions for standard household policies.
- Volunteer driving associated with COVID-19 is to be covered on private car policies.
- Although standard business interruption policies typically do not cover pandemics such as COVID-19, where there is ambiguity surrounding a contractual term, insurers will give the benefit of the doubt to the customer.
- The Government’s advice to close a business in the context of COVID-19 will be treated as a direction to close and will be recognised as such.
Following Insurance Ireland’s clarification on the steps its members intended to take during the crisis, the Department of Finance released a statement on 17 April, which emphasised the need for insurers who have agreed to exercise forbearance to honour such commitments. The Minister also raised the concern that some insurers may have adopted “blanket” rejection of business interruption claims, cautioning that failure to pay certain claims in the context of Insurance Ireland’s clarifications was, in his view, causing reputational damage to the industry. The Minister also called on motor insurers to be pro-active and generous in their treatment of policyholders by providing premium rebates reflective of the reduction in risk arising during the pandemic.
Motor insurers commit to premium relief due to COVID-19
Five of Ireland’s leading motor insurers have committed to implementing premium relief measures, such as refunds or discounts, as part of their response to the ongoing COVID-19 crisis. These changes reflect the fact that insurers can expect a lower volume of claims on motor insurance policies due to the travel restrictions imposed to slow transmission of the virus.
As each insurer has a different mix of customers and different claims experience, the premium reliefs of each insurer will reflect its claims experience to date and will be subject to further review as the restrictions continue.
The Minister has called on insurers to provide information quickly on the scale of the reliefs.
Other motor insurers, while not signing up to the Insurance Ireland commitment, have said that they will introduce alternative means of supporting customers such as deferring premiums or suspending insurance cover.
Insurance Ireland issues statement on private health insurance during COVID-19 crisis
Following an agreement being reached between private hospitals and the HSE allowing beds in private hospitals to become public beds for the duration of the crisis, Insurance Ireland released a statement on behalf of private health insurers. Insurance Ireland welcomes this agreement and the clarity that it brings.
Private health insurers will still pay claims for their customers that fall outside the scope of the agreement. This includes private care in public hospitals, psychiatric care, maternity care and other benefits.
Insurers also commit to provide COVID-19 related support to their customers while ensuring that they can pay claims in the future. In particular, they have said that they will deal “fairly, flexibly and on a case-by-case basis” with any customers who are facing financial difficulties.
The statement is here.
Central Bank prudential flexibility measures on insurance and reinsurance firms
The Central Bank has produced a prudential regulatory flexibility measures webpage for insurance and reinsurance firms in light of the ongoing public health crisis. The measures are in response EIOPA’s request on 20 March for National Competent Authorities to exercise supervisory flexibility in relation to reporting deadlines in an effort to provide operational relief to insurers during the crisis.
On 24 March, the Central Bank wrote to insurers applying flexibility in relation to reporting deadlines while encouraging insurers who are in a position to meet their deadlines to do so. Regular supervisory reports may now be submitted up to 8 weeks after the original deadline with the exception of certain templates (such as own funds) where the deadline is extended by 2 weeks. The Central Bank has advised that it will still seek targeted information where necessary to examine the effect the crisis is having on financial services within the extended time period.
Insurers with upcoming deadlines for risk mitigation programme submissions who are in a position to do so to meet those deadlines are advised to do so or, if they are not in such a position, to engage directly with their supervisors for further options.
Insurance Ireland publishes brochure on key priorities of the Irish insurance industry in Europe
Insurance Ireland have published a brochure reflecting its support for further integration of the European insurance market and outlines six main areas of focus for its involvement in future initiatives to strengthen the European insurance industry:
- Reviewing the existing regulatory framework with a view to eliminating unnecessary regulatory burdens on insurers.
- Strengthening integration, innovation and sustainability in the context of the review of Solvency II.
- Reviewing retail financial services regulations with a view to encouraging supervisory convergence, consistent application of proportionality and providing clear and comprehensible information to consumers.
- Engagement on issues around sustainability and the “Green New Deal”.
- Enhancing the EU data strategy and engaging in the development of regulatory frameworks for new technologies.
- Commitment to social sustainability and diversity and inclusion throughout the European Insurance Market.
Insurance Ireland also include a commitment to work with customers in reducing the impact of the COVID-19 crisis.
The Insurance Ireland press release can be found here.
EIOPA urges (re)insurers and intermediaries to continue to take actions to mitigate the impact of Coronavirus/COVID-19
In light of the current level of uncertainty regarding the magnitude and duration of the COVID-19 crisis and its impact on financial markets and the economy, EIOPA has published two separate statements in the past month calling on firms to implement measures aimed at mitigating the impact of the crisis on consumers and policyholders.
EIOPA has released a statement calling on insurers and intermediaries to implement the following measures to assist consumers during the pandemic:
- Provide clear and timely information to consumers on contractual rights including making consumers aware of the scope of their cover and of any applicable exclusions;
- Treat consumers fairly and be explicit in all communications, which should be carefully balanced and avoid vague terms open to misinterpretation;
- Inform consumers about contingency measures taken such as the movement of services to online channels, temporary automatic extension of cover for the duration of the emergency situation and arrangements to deal with consumer queries including as FAQs and helplines;
- Continue applying product oversight and governance requirements and, where necessary, carry out a product review to access how much products fit the target market’s needs and objectives in light of the current pandemic; and
- Consider the interests of consumers and exercise flexibility in how they are treated, where reasonable and practicable –the current situation may call for flexibility in terms of processes and timeframes for making claims.
Notwithstanding the above, EIOPA has also stated that as a general principle, imposing retroactive coverage of claims not envisaged within contracts could create material solvency risks and ultimately threaten policyholder protections and market stability.
Dividends and Remuneration
EIOPA has also urged (re)insurers to temporarily suspend all discretionary dividend distributions and share buy backs aimed at remunerating shareholders. (Re)insurers should also review their existing remuneration policies and rewards practices to ensure that they reflect prudent capital planning and are consistent with, and reflective of, the current economic situation. In line with this, variable remuneration should be set at a prudent level and considered for postponement.
The statement coincides with the release of EIOPA’s opinion on the supervision of remuneration principles in the insurance and reinsurance sector, on 7 April, which sets out certain benchmarks for what may be considered excessive levels of variable remuneration (please see below for further commentary on this). In line with EIOPA’s recommendations, the Central Bank and the PRA have written to insurers encouraging them to pause dividends given the uncertainties associated with COVID-19.
The European Council of Ministers has welcomed EIOPA’s recommendations and has urged insurers to “take timely and comprehensive measures to preserve their capital position, including the temporary suspension of all discretionary distributions”.
FCA seeks legal clarity on business interruption insurance alongside package of measures to help consumers and small businesses
The UK Financial Conduct Authority (FCA) has announced that it will seek clarity from the courts regarding the contractual uncertainty that exists for many businesses making business interruption claims as a result of COVID-19.
The FCA intends to bring key relevant cases to court which represent the most frequently used policy wordings that are generating uncertainty. This will be done on an agreed and urgent basis with the insurers concerned. Individual policyholders will also not be prevented from pursuing their claims through the courts or the Financial Ombudsman, as appropriate.
The FCA has also issued further guidance to insurers with the aim of providing temporary support to customers impacted by the coronavirus. Insurers are asked to ensure that their products continue to offer value to policyholders and to work with policyholders who may be unable to meet premium payments because of the impact of COVID-19.
EIOPA opinion on the supervision of remuneration principles in the insurance and reinsurance sector
On 7 April, EIOPA published its Opinion (dated 31 January 2020) on the supervision of remuneration principles in the insurance sector. The Opinion follows EIOPA’s consultation on the draft version of the Opinion published in July 2019 and the publication of EIOPA’s feedback statement on the comments it received during the consultation period.
The Solvency II Commission Delegated Regulation (2015/35/EU) sets out detailed requirements that (re)insurers are required to follow in respect of their remuneration policies and compensation practices. The Opinion aims to enhance supervisory convergence in the application of these requirements by providing National Competent Authorities (NCAs) with clearer guidance on how to challenge the application of certain remuneration practices.
EIOPA emphasises that the benchmarks included in the Opinion are indicative only, to be used for the purposes of engaging in supervisory dialogue, and do not represent hard targets for the practical implementation of the Solvency II remuneration principles. NCAs are not precluded from adopting stricter practices or from adopting a more proportionate and flexible approach in respect of “low risk” firms.
Scope of the Opinion
The Opinion relates to remuneration practices for staff whose annual variable remuneration exceeds €50,000 and represents more than 1/3 of the staff member’s total annual remuneration and who fall within one of the below categories: (i) members of the (re)insurer’s administrative, management and supervisory body; (ii) executive directors; (iii) key function holders as defined in EIOPA’s Guidelines on System of Governance; and (iv) staff whose professional activities have a material impact on the undertaking’s risk profile.
Balance between fixed and variable remuneration
Staff should not be overly dependent on the variable component of their remuneration. EIOPA recommends that a variable to fixed remuneration ratio in excess of 1:1 (i.e. where variable remuneration exceeds fixed income) as being an appropriate trigger threshold for NCAs to engage in a supervisory review of a firm’s remuneration practices.
A substantial portion of the variable remuneration has to be deferred for not less than three years
EIOPA considers that a deferral of 40% of the variable remuneration to be a substantial portion. When the deferral is lower than 40%, NCAs are recommended to engage with (re)insurers to better understand the specifics of the situation. The Opinion also states that where the balance between fixed and variable remuneration exceeds a 1:1 ratio, the deferral rate should be higher than 40%.
Financial and non-financial performance criteria
Financial (quantitative) and non-financial (qualitative) performance criteria should be appropriately balanced such that where a (re)insurer’s criteria is 80% financial and 20% non-financial, NCAs may conclude that the performance assessment criteria is not appropriately balanced.
Performance Measurement of variable remuneration to allow for a downwards adjustment
(Re)insurers’ remuneration policies should contain clearly defined “malus” clawback provisions and should provide for a downwards adjustment where the firm has not reached its objectives or where it is at risk of breaching its SCR.
The opinion identifies certain termination payments that should be subject to the variable remuneration limits, which should be structured in a way that rewards performance (and not failure) over the relevant period.
EIOPA will start monitoring the application of the opinion by NSAs in two years’ time.
EIOPA update on other measures affected by COVID-19
EIOPA has announced the following measures to limit the information requests from insurers and National Competent Authorities (NCAs) and provide operational relief to the insurance industry during the COVID-19 global pandemic.
Data requests to financial institutions to start in Q1-Q2
- The information request aimed at insurers in relation to EIOPA’s Long Term Guarantee review will not be carried out. The information request aimed at NCAs will be postponed from Q2 probably to Q3 2020.
- Climate risk sensitivity analysis 2020 – the data request for the top-down element and qualitative survey of groups will be cancelled. The report will be performed with the available information.
- Data collection for assessing the impact of ultra-low yields on insurers to complement Solvency II data planned for Q1/Q2 will be launched at a later date and will incorporate COVID-19 reflection, if necessary.
Currently open consultations/requests to the market
The comments deadline for the currently open consultations are extended as follows:
- Review of technical implementation means for the package on Solvency II Supervisory Reporting and Public Disclosure, by six weeks from 20 April to 1 June 2020;
- Consultation on PEPP ITSs, by four weeks from 20 May to 17 June 2020;
- Consultation on Discussion Paper on IBOR transitions, by nine weeks from 30 April to 30 June 2020; and
- Market and Credit Risk Comparative Study, by 5 weeks from 31 May to 3 July.
Public consultations in the process of Board of Supervisor approval (including discussion notes) to the market
- Discussion Note on value-chain/Insurtech, publication for comments is to be delayed and the date of its release date is yet to be determined.
- Similarly, the release date for the second discussion paper on methodological principles of insurance stress testing, publication for public comments will be delayed.
EIOPA publishes report on costs and past performance of insurance based investment products and personal pension products
EIOPA has published its second report on the costs and past performance of insurance based investment products (IBIPs) and personal pension products (PPPs). The report analyses costs for 2018 and past performance for the years 2014 to 2018. It follows on from the 2019 report, which covered the period from 2013 to 2017. These reports respond to the European Commission’s request for information on costs and past performance of retail investment products.
The report reveals that performance in 2018 was the lowest for preceding five year period. There were “highly negative” average net returns for unit-linked insurance products (-7%), hybrid insurance products (-2%) and PPPs that are similar to unit-linked products insurance products (-6%). In contrast, profit participation insurance products had a higher net return over the five year period although they also performed relatively poorly in 2018.
In relation to costs, profit participation products have lower overall costs than unit-linked products but the gap between them is narrowing. Transaction costs form the majority of costs for both types of product. Entry costs are higher for profit participation products but exit costs are minor for both unit-linked and profit participation products.
EIOPA’s press release is available here.
EIOPA publishes weekly information for relevant risk free interest rate term structures and symmetric adjustment to equity risk with reference to 14 April 2020
Due to the coronavirus pandemic, EIOPA will conduct weekly extraordinary calculations to monitor the evolution of the relevant risk-free interest rate term structures and the symmetric adjustment to equity risk. This is with a view to supporting (re)insurers in monitoring their solvency and fiscal position as they navigate the evolving global crisis. The information will be made available each Friday on a dedicated area of the EIOPA website called “Extraordinary weekly updates”.
The EIOPA press release is available here.
Insurance Europe responds to consultation on review of GDPR and calls for the European Commission to scrutinise impact on innovation
In response to the European Commission’s consultation on the evaluation and review of the GDPR, Insurance Europe has cautioned that any amendment to its text at this stage would be counterproductive and premature. In the two years since the GDPR implementation, the insurance industry, like many other sectors, has invested significant resources to ensure compliance. To reopen the text of the Regulation in 2020 would undermine those efforts to fully comply with the Regulation. Instead, the Insurance Europe recommends that the European Commission focus on identifying areas where the GDPR may have failed to meet its objectives and consider the development of further or different guidance, together with the European Data Protection Board, where relevant.
Insurance Europe also calls on the European Commission to consider the impact of the GDPR on innovation in the insurance industry and address any obstacles to the use of technologies such as artificial intelligence, big data and the internet of things, which the Regulation may have unintentionally created.
European Commission launches consultation on a renewed sustainable finance action plan – Irish insurers emphasise their commitment to a more sustainable Europe
The Commission identified three key areas where significant improvement is required to facilitate the transition to a more sustainable EU economy. These are:
- Establishing an enabling framework with the requisite tools and structures needed to shift corporate focus away from short-term goals to long-term sustainable development.
- Seeking opportunities to have a positive impact on sustainability for citizens, financial institutions and corporates through the use of the enabling framework and other tools.
- Integrating and managing climate change risks as part of the financial system through the promotion of “green financing”.
The insurance industry is essential in the drive towards a more sustainable economy due to its position as the biggest group of institutional investors and its role in mitigating risk. Stakeholders interested in contributing to Insurance Ireland’s response to the consultation are encouraged to contact Natalie Dillon at (firstname.lastname@example.org).
The Insurance Ireland article is available here.