Insurance Regulatory Update December 2019
This is the December edition of the Arthur Cox Insurance Regulatory Update, the monthly bulletin of the Arthur Cox Insurance Group focused on recent developments in insurance regulation, law and practice.
In this issue, topics covered include: the Consumer Insurance Contracts Act 2019 being signed into law, the publication of the Central Bank’s consumer protection priorities for 2020, the publication of the Central Bank’s review of differential pricing in motor and home insurance, Insurance Europe and Insurance Ireland’s responses to EIOPA’s consultation paper on the review of Solvency II, the publication of EIOPA’s consumer trends report and the publication of EIOPA’s report on insurers asset and liability management in relation to the illiquidity of their liabilities.
The Consumer Insurance Contracts Act 2019
The Consumer Insurance Contracts Act 2019 (the Act) was signed into law by the President of Ireland on 26 December 2019. The Act, which represents a major overhaul of Irish insurance law, applies to life and non-life insurance “consumer” contracts i.e. contracts with individuals or businesses with a turnover of €3million or less. Some of the key changes to be introduced include:
Insurable interest –an insurer cannot refuse cover merely because the consumer’s name was not specified in the policy, also a claim by a consumer under an otherwise valid insurance contract cannot be rejected by the insurer because the consumer does not have an insurable interest in the subject matter of the contract.
Replacement of the utmost good faith principle –a consumer’s pre-contractual duty of disclosure is limited to responding to specific questions posed in writing by the insurer. Consumers are not required to volunteer any information beyond that. The insurer must also ensure that the questions it asks are specific, unambiguous and clearly drafted.
Proportionate remedies for misrepresentation – insurers are not permitted to avoid a contract of insurance where a consumer makes an innocent misrepresentation. The remedy available to an insurer for negligent misrepresentation must be proportionate and reflect what the insurer would have done had it been aware of the full facts.
Basis of contract clauses no longer valid – any term in a contract of insurance that seeks to convert a statement made by a consumer into a warranty will be invalid.
Right of third parties to claim against insurers – where a policyholder has died, become insolvent, cannot be found or where “for any other reason it appears to a court to be just and equitable to so order”, injured third parties intended to benefit under an insurance contract may make direct claims against an insurer.
The Act will come into operation on by order of the Minister for Finance, which is expected to be in the early half of this year.
A link to Act is available here.
Central Bank announces Consumer Protection Priorities for 2020
Derville Rowland (Director General, Financial Conduct at the Central Bank) has announced the priorities for the regulation of financial conduct in Ireland in 2020. Protecting consumers and investors is a key priority for the Central Bank and it intends to publish its Consumer Protection Outlook Report shortly, which outlines the key risks to consumers identified by the Central Bank. However, she notes that two of the key risks are a lack of a consumer-focused culture in the financial services sector and the challenges brought by technological innovations, which can lead to information asymmetries between providers and consumers.
She also notes that the Central Bank intends to publish an interim report on the issue of differential pricing in the motor and home insurance market at the end of the year. In the meantime, the Central Bank expects the boards of insurers to ensure that their pricing practices comply with the Consumer Protection Code (the CPC) and that they can stand over their underwriting strategies.
Other priorities for the Central Bank include updating the CPC in 2020, ensuring that regulated firms only employ people who are fit and proper for senior roles and appropriate product governance and design. Also, there is a focus on transaction monitoring and risk assessment to prevent money laundering and terrorist financing.
CBI issues first Motor Insurance Report of the National Claims Information Database
The Central Bank of Ireland has published the first annual Private Motor Insurance Report of the National Claims Information Database. This report delivers on a key Central Bank commitment to improve transparency and understanding of the issues affecting the functioning of the insurance market in Ireland. The report provides key statistics on the private motor insurance industry in Ireland.
The report is based on data gathered from all insurers providing private motor insurance products in Ireland, including foreign insurers. The key statistics provided in the report relate to the cost of claims, premiums levels, and how private motor insurance claims are settled, including the time it takes and legal costs associated with different channels.
Central Bank Publishes Insurance Newsletter for December 2019
Some of the key topics discussed in this edition of the Central Bank’s Insurance News Letter include:
- Reliable data in SCR calculations –accuracy and timeliness of data used in SCR calculations remains an issue for several insurers. To address these issues, the Central Bank stresses the importance of having internal controls such as peer review and sign-off data processes in place. (Re)insurers are also expected to clearly document how errors are to be recorded, addressed and escalated to the board.
- Liquidity Risk Management – following its review of liquidity risk management in the life sector earlier in 2019, the Central Bank recommends that firms clearly define the approved risk tolerance limits for liquidity risk. Firms should take into account the nature, scope and time periods of the business leading to liquidity risk exposure and stress test their liquidity risk measurements. Finally, in accordance with the EIOPA Guidelines on system of governance (Guideline 26), firms should consider the potential costs or financial losses arising from an enforced realisation of assets.
- Discussion Paper (DP9) on the Use of Services Companies in the Insurance Sector – the Central Bank is seeking stakeholder’s views on how (re)insurers, who enter into arrangements with separate legal entities for the provision of extensive staffing, adequately identify, assess and mitigate against all material risks arising from these arrangements. The Discussion Paper focuses on the adequacy of: risk identification and management of the arrangement; policyholder protections; and the substance of the Irish (re)insurer. Stakeholders are reminded that the deadline for making submissions is 31 January 2020.
A link to the Insurance Newsletter December 2019 is here.
President signs Health Insurance (Amendment) Bill 2019 into law
The Health Insurance (Amendment) Act was signed into law by the President on 25 December 2019. The purpose of the Act is to amend the Health Insurance Act 1994 to:
- specify the amount of premium to be paid from the Risk Equalisation Fund in respect of certain classes of insured persons from 1 April 2020;
- specify the amount of the hospital utilisation credit applicable from 1 April 2020; and
- make a consequential amendment to the Stamp Duties Consolidation Act 1999 to provide for related matters.
A link to the Act is available here.
Central Bank to commence review of differential pricing in motor and home insurance
In late November 2019, the Central Bank issued a “Dear CEO” letter to inform firms that it intended to conduct a review of differential pricing in the motor and home insurance industries to examine the extent to which differential pricing practices are consistent with the general principles of the Central Bank’s Consumer Protection Code (the CPC) in particular, the requirements to:
- act honestly, fairly and professionally in the best interests of their customers and the integrity of the market;
- act with due skill, care and diligence in the best interests of their customers; and
- make full disclosure of all relevant material information, including all charges in a way that seeks to inform their customers.
The Dear CEO letter included the terms of reference for the review, which commences this month. It comprises of three phases:
- Market Analysis – to establish the extent to which differential pricing is in operation in Ireland in these industries and how it is being carried out;
- Quantitative Analysis and Consumer Insight – to assess the impact that differential pricing is having on various groups of consumers; and
- Conclusions and Recommendations – based on its findings from phases 1 and 2, the Central Bank may publish a consultation on proposals for reform.
In its review, the Central Bank also intends to examine how firms take account of the CPC when implementing pricing strategies as well as the extent to which boards have oversight of such practices.
The Joint Committee on Finance, Public Expenditure and Reform and Taoiseach requested The Financial Service and Pensions Ombudsman (FSPO), Ger Deering to comment on dual pricing practices in the Irish insurance industry at his address to the Committee in late November. Commenting on the practice, he noted that his office would not interfere with the commercial discretion of a financial services provider’s charging strategy if the conduct is not unreasonable, unjust, oppressive or improperly discriminatory. For charges not to be “improperly discriminatory” the same criteria should be applied consistently and fairly to consumers. Insurers should also “provide consumers with clear and accurate information” at renewal and inception stage.
A link to the FSPO’s presentation is here.
A link to the Dear CEO letter is here.
Moyagh Murdock appointed as Chief Executive of Insurance Ireland
Moyagh Murdock has been appointed as Chief Executive of Insurance Ireland and will take up her role at the end of March 2020. Moyagh is currently Chief Executive of the Road Safety Authority (RSA).
A link to the Insurance Ireland press release is available here.
Responses to EIOPA’s consultation paper on the Review Of Solvency II
In October, EIOPA launched a consultation on the opinion on the 2020 review of Solvency II. Insurance Europe has published its response (which includes feedback from Insurance Ireland). Insurance Ireland also raised some additional points in its individual response. EIOPA intends to publish the final opinion in June 2020.
While Solvency II is working well, the industry is disappointed by EIOPA’s draft proposals, which include a very high number of changes, many of which would result in increased capital requirements, operational burdens for Insurers and new powers for supervisors. Some of the key areas where the industry disagrees with EIOPA’s proposals are detailed below:
Reporting and Disclosure– While the industry welcomes comments that EIOPA have made in earlier consultations that its intention is to reduce the reporting burden, EIOPA’s proposals will increase rather than decrease the overall reporting burden.
Group Supervision– The industry also disagrees with EIOPA’s proposals for changes in the area of group supervision. The response states that most of the measures aim to improve convergence of supervisory practices and that this could be achieved through handbooks, workshops and colleges of supervisors rather than legislative changes.
Long Term Guarantee Measures (“LTG”) and Measures on Equity Risk– The industry only supports changes to the LTG measures and measures on equity risk which better reflect long-term business. However, several of the standalone options considered by EIOPA and, in particular, the overall combinations of the proposed changes would have a detrimental effect on the industry and policyholders as they do not reflect the economics of the insurance business model.
Risk Margin– EIOPA does not address the issues relating to risk management nor address its flaws. The risk margin is excessively high, especially for long-term businesses and its excessive sensitivity to interest rates is a source of artificial volatility. The response lists a number of issues that need to be addressed.
Non-Proportional Risk– The industry is disappointed that EIOPA has not proposed potential solutions to address the flaws in the current standard formula relating to non-proportional reinsurance and basis risk.
Proportionality– The industry supports EIOPA’s efforts to improve proportionality but notes that the proposals suggested by EIOPA are not enough to ensure effective and efficient application of proportionality.
Insurance Ireland raised additional concerns in its own response.
Insurance Guarantee Schemes (“IGS”) – Insurance Ireland notes that it participated in EIOPA’s consultation on IGC previously. It notes that elements such as funding mechanisms and contributions, limits and excess of the scope of IGS are crucial. IGS need to be accompanied by efficient and effective resolution mechanisms, particularly for life insurance.
Freedom of Services (“FOS”) and Freedom of Establishment (“FOE”) – Unlike Insurance Europe who welcome EIOPA’s recommendations around FOS and FOE, Insurance Ireland strongly believes that the proposals are insufficient. Insurance Ireland suggests a review of the underlying governance on the system of cross boarder supervision.
EIOPA Publishes Report on Consumer Trends
EIOPA has published its 2019 Consumer Trends Report outlining major developments in the insurance and pensions sectors affecting European consumers. Regulatory changes that came into force in 2018 such as the Insurance Distribution Directive and the Packaged Retail and Insurance-Based Investment Products Regulation have improved transparency and increased consumer protections. However, the report identifies areas where risks for consumers remain high, particularly conduct issues which have been prevalent in relation to unit-linked insurance, credit life/credit protection products and add-on insurance products. Claims management in motor insurance also remains an area of concern.
According to EIOPA, accident and health insurance products continue to be ‘good value-for-money’. The medical expense line of business has the highest claims ratio and the lowest commission rates for non-life insurance products.
Insurers can expect an increased focus on product oversight and governance to ensure that products are adequately designed and targeted, which should ensure good consumer outcomes. EIOPA will also launch a comprehensive thematic review on mortgage life and other credit protection insurance sold through banks to gather evidence on areas of consumer detriment.
EIOPA publishes report on insurers’ asset and liability management in relation to the illiquidity of their liabilities
This report has been published in response to a request for information from the European Commission as part of the 2020 review of the Solvency II Directive, especially in relation to the availability of long-term guarantees in insurance products.
The report supplements information provided in EIOPA’s annual reports on long-term guarantee measures and provides information on insurance liabilities, the asset management of insurers, long-term guarantee measures, including matching adjustment, volatility adjustment and actual yield and dynamic volatility adjustment, and the market valuation of insurance liabilities.
EIOPA will use the information contained in the report when drafting its opinion on the 2020 review of Solvency II.
EIOPA publishes second annual European Insurance Overview
EIOPA has published its second annual overview of the European insurance sector based on information from annual reports under Solvency II for the year ending December 2018. The report is fact driven and does not contain any analysis of the statistics presented. It provides data for both the life and non-life sector, broken down by business line and premium income. It also provides data on solvency, capitalisation and investments.
The majority of EEA countries saw an increase in both the life and the non-life market. Luxembourg and the UK have the highest proportion of life gross written premium (“GWP”) per capita. The Netherlands and the UK have the highest non-life GWP as a percentage of their GDP.
For the majority of countries, a median Solvency Capital Requirement ratio of over 200% and for all countries, a median Minimum Capital Requirement of over 200% was observed. Market risk is the most dominant risk accounting for between 25% and 80% of the basic solvency capital requirement for all countries.
In relation to investments, EEA investments were predominantly attributed to government and corporate bonds (60%). Financial and insurance activities, public administration defence and compulsory social security were the most prevalent sectors for investments.
EIOPA publishes financial stability report
The December 2019 Financial Stability Report for (re)insurance and occupational pensions sectors in the EEA include:
- emerging cyber and climate change related risks;
- interconnectedness with banks and home-bias in investments which could lead to potential spill-overs of risks from other sectors; and
- the continuing low yield environment, which has intensified over the last 6 months and remains the key challenge for European insurers and pension funds.
The report also includes an article on climate risk assessment of the sovereign bond portfolio of European insurers and a second, which focuses on the impact of variation margining on EU insurers’ liquidity.
EIOPA publishes annual report on the use of capital add-ons under Solvency II
EIOPA has published its annual report on the use of capital add-ons by national competent authorities (NCAs) under Solvency II. The capital add-on is a tool to ensure that the regulatory capital requirements to which an undertaking or group is subject, accurately reflects the risk profile of that undertaking or group. This additional capital requirement is used as a measure of last resort when other supervisory measures are inadequate to address deviations in the risk profile or in governance standards. The report is based on analysis of data assembled over the course of 2018.
During 2018, 21 solo undertakings (out of 2819) including 10 non-life undertakings, 8 life undertakings, 2 reinsurers and 1 composite undertaking had capital add-ons set by their NCAs. Although the number of times a capital add-on is used by an NCA is extremely low, it is still twice more than the previous year. Also, the majority of NCAs do not have formal policies in place. The 8 NCAs that imposed capital add-ons in 2018 have disclosed this data on their websites. In all but five cases, the capital add-on increased the Solvency Capital Requirement by more than 10% but the percentage added varied from 0-1% to 80%.