Insurance Regulatory Update February 2019
This is the February 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 publication of the Government’s Brexit omnibus legislation; EIOPA’s recommendations to the insurance sector in light of Brexit; and the European Commission’s request for information from EIOPA in preparation for the review of the Solvency II Directive.
Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Bill 2019 and EIOPA recommendations
Draft legislation has been published by the Government to mitigate against the possible immediate effects of a no-deal Brexit. Part 8 of the Bill provides for a temporary run-off regime, whereby in specific circumstances, passporting insurers and intermediaries authorised in the UK and Gibraltar will be able to continue to fulfil their contractual obligations to their existing Irish customers for up to three years following the UK’s withdrawal from the EU.
The regime is available to UK or Gibraltar based insurers and intermediaries authorised under the Solvency II or Insurance Distribution Directives that have exercised their passporting rights in Ireland. To be eligible, they must cease to enter into new business in Ireland after the withdrawal date and limit their activity to exclusively administering their existing business. Undertakings that intend to avail of the regime are required to notify the Central Bank of their intention within three months of the regime coming into effect.
The Bill, which is currently at Committee Stage in Daíl Éireann, is expected to be debated in the Seanad the week commencing 11 March.
Overall this is a welcome development for affected UK insurers and intermediaries. However, certain aspects of Part 8 of the Bill could benefit from further clarification. For example, how to interpret the requirement that insurers cease “conducting new insurance contracts” where a policyholders has an option under an existing policy to have an annuity issued?
The Bill follows the publication of EIOPA’s recommendations for the insurance sector in light of the UK withdrawing from the EU on 19 February. In addition to the actions already undertaken by the Central Bank in response to Brexit (such as the creation of a third country branch framework for insurers among others) and the provision of an orderly run-off regime similar to that provided for under the terms of the Bill, EIOPA makes 7 other recommendations to national competent authorities (NCAs), to apply from 30 March in the event of hard-Brexit. Those include:
- Portfolio transfers initiated before the withdrawal date from UK insurers to EU27 insurers be permitted to be finalised; and
- Provision for change in the habitual residence or establishment of the policyholder. If a policyholder concluded an insurance contract with a UK insurance undertaking and subsequently changed its habitual residence or place of establishment to a EU27 member state, NCAs should take into account in the supervisory review that the insurance contract was concluded in the UK and that the insurer did not provide cross border services in respect of the contract.
Recommendations are also provided regarding: the application of the rules regarding lapse in authorisation under Solvency II to UK insurers; ensuring affected policyholders are informed of the consequences Brexit may have on their insurance contracts; appropriate oversight of prudential aspects of the cross border business of UK insurers; and co-operation with other NCAs post a hard-Brexit.
Of particular interest for life insurers, is that EIOPA’s recommendation that UK insurers be prevented from issuing new insurance contracts, is without prejudice to a policyholder’s right to exercise an option or right in an existing insurance contract to realise their pension benefits. Although not currently addressed in the Bill, this particular issue is likely to fall within the CBI’s supervisory remit in ensuring that affected insurers are taking active measures to run off their insurance business within the State.
NCAs are required to incorporate these recommendations into their regular supervisory or regulatory framework. The Central Bank is required to inform EIOPA within two months of the date of publication whether or not it intends to comply with these recommendations, providing reasons for any non-compliance.
Central Bank Director of Consumer Protection speaks on culture and ethics in financial services
Grainne McEvoy, the Central Bank’s Director of Consumer Protection gave a speech on 12 February to the students of the Institute of Banking’s Professional Diploma in Leading Culture Change and Ethical Behaviours in Financial Services. Noting that financial misconduct is due not only to “bad apples” within workplaces but also due to “bad barrels” (i.e. workplaces themselves), she spoke about the ways in which Central Bank is focused on encouraging firms to build “good barrels” by embedding a consumer-focused culture.
In 2016, the Central Bank introduced the tool of the Consumer Protection Risk Assessment (CPRA) to assess how firms are identifying and managing risks to consumers. McEvoy said that, so far, the CPRAs have painted a “mixed picture of the culture at financial services firms”. She noted that firms needed to improve performance management processes to assess performance as it relates to consumer protection. McEvoy stated that whilst firms have several formal and informal channels for employees to speak up about their concerns, in practice there was no evidence of consumer issues being escalated through the formal whistleblowing processes. In some cases, the role profile for the Chief Risk Office or the terms of reference of the risk committee did not reference accountability in relation to risks to consumers.
In relation to the Tracker Mortgage Examination, she noted that all five retail banks have taken steps to reinforce the consideration of the consumer interest but that all of them “still have a considerable distance to travel”.
Concluding, she stated that the Central Bank is not only concerned with compliance to the letter of the law but also with instilling “effective culture and values”.
Guidance on transfers of personal data from Ireland to the UK in the event of a ‘no-deal’ Brexit
The Irish Data Protection Commissioner has published guidance on transfers of personal data from Ireland to the UK in the event of a ‘No-Deal’ Brexit (the Guidance).
Section A aims to assist companies in determining whether they are “an Irish company that transfers personal data to the UK”. It does this by providing a non-exhaustive list of ways in which an Irish company might be transferring data to a UK-based company. The list includes companies that: outsource HR, IT or Payroll functions to a UK-based organisation; or use UK-based marketing companies to send marketing communications to their customer database.
Section B details the type of measures that will need to be put in place by Irish companies in the event of a No Deal Brexit. If the UK becomes a third country for data protection purposes, Irish companies will need to implement specific safeguards to ensure compliance with GDPR rules. There are a number of ways that this can be done and one such way is the use of “Standard Contractual Clauses” (SCCs). SCCs consist of standard sets of clauses that the Irish Data-Controller and the UK-based recipient both sign up to. Data Subjects have certain specific rights under the SCC even though they are not parties to the contract between the Irish Data-Controller and the UK-based recipient. The Guidance provides a link to some sample SCCs.
Section C provides a brief overview of the contents of the sample SCCs.
Section D concludes with a reminder that SCCs are not an end in themselves. Parties should conduct transfers in manner that ensures their obligations under the terms of the SCCs are discharged in practice.
EIOPA publishes single programming document 2019-2020
EIOPA’s Single Programming Document sets out its strategy and future work programmes from 2019 to 2021. In particular, for 2019, EIOPA has identified sustainable finance and insurtech as being two cross-cutting themes that it considers to be of growing importance to its strategic objectives. The European Commission’s sustainable action plan will in part be implemented by EIOPA and covers prudential, consumer protection and financial stability issues. EIOPA will also assess the impact that digitalisation has on both consumers and industry to identify technology-neutral supervisory approaches, focussing on fragmentation of the value chain and impact on business models, big data and cyber risks.
EIOPA’s other strategic priorities are set out in four broad areas:
- Conduct of business regulation and supervision: developing and strengthening both the regulatory framework for the protection of consumers and a comprehensive risk-based and preventive framework for appropriate conduct of business supervision.
- Leading convergence towards high-quality prudential supervision throughout the EU, which is to be achieved with a sound, smart and robust regulatory framework that is responsive to market developments; enhancing the use and quality of supervisory information through efficient standardised exchange mechanisms, centralised quality checks and timely provision of business intelligence; and improving quality and consistency of supervision to contribute to a level playing field in the insurance and pensions market.
- Strengthening the financial stability of the insurance and occupational pensions sectors by identifying, assessing, monitoring and reporting risks to the financial stability of the EU insurance and pensions sectors and preventative policies and actions to mitigate risks to financial stability.
- Delivering its mandate effectively and efficiently by ensuring a strong corporate culture, proper governance as well as skilled and committed staff.
European Commission requests technical advice from EIOPA for Solvency II review
In advance of the review of the Solvency II Directive, scheduled for 2020, the European Commission has requested technical advice from EIOPA relating to:
- Long-term guarantee measures and measures on equity risk;
- Specific methods, assumptions and standard parameters used when calculating the Solvency Capital Requirement standard formula;
- Rules and supervisory authorities’ practices on the application of article 129 (calculation of the Minimum Capital Requirement); and
- Group Supervision.
The Commission has asked that the technical advice be delivered by 30 June 2020 and be accompanied by robust impact assessments.
European Commission responds to EIOPA’s views on proposed changes to Solvency II
The European Commission’s Directorate-General for Financial Stability, Financial Services and Capital Markets Union has responded to EIOPA’s comments on the Commission’s consultation paper on amending the Solvency II Delegated Regulation. While he acknowledges EIOPA’s concerns on the calibration of the interest rate risk module, the Commission favours revisiting this in the planned 2020 review of the Solvency II directive.
In relation to long-term equity investments, the Commission appreciates EIOPA’s ongoing work on illiquid liabilities. However, a Commission Staff Working Document, explaining the economic rationale for the calibration and criteria, as well as explaining the potential impact of such investments, will be published together with the final Delegated Act.
EIOPA had expressed concerns on amendments to the methodology for deriving risk-free interest rates. The Commission confirms that the amendments are clarifications of the procedure and do not rule out the possibility of changes to the methodology where changes in the market data necessitate them.
On 7 February, the Directorate-General for Financial Stability, Financial Services and Capital Markets Union also published a letter to EIOPA, requesting a review of the methodology for the activation of the “country component” of the volatility adjustment under Solvency II. He notes that the Committee on Economic and Monetary Affairs of the European Parliament as well as industry stakeholders have indicated that the current methodology does not work as intended.
The Directorate General notes that currently, under Solvency II, the assessment of the conditions of the activation of the country component can only be based on the most recent market data on the reference date of the valuation of technical provisions.
He also has requested EIOPA, in advance of the 2020 review of Solvency II, to explore if there are possibilities to improve the functioning and efficiency of the country component of the volatility adjustment that would be in line with the current legal framework.
EIOPA welcomes agreement on a Pan-European Personal Pension Product
EIOPA has welcomed the agreement reached by the European Parliament and the Members States on the proposal for a Pan-European Personal Pension Product (PEPP).
The proposal was informed by advice that was published by EIOPA in 2016. In that advice, EIOPA expressed the opinion that products of this nature would promote market efficiency by matching consumers’ need to save for retirement with providers’ long-term investment opportunities.
The new regulation will allow EU citizens to subscribe to a PEPP on a voluntary basis wherever they live in the EU. The PEPPs will be offered by a broad range of providers across the EU and will complement existing public and private pension schemes.
According to the European Commission, the new rules will provide savers with more choice when saving for retirement, which should help to address the pensions’ gap in the EU. A broad range of providers will be able to sell the product anywhere in the EU under a common set of rules with one single registration. Consumers will benefit from EU-wide portability, transparency of the costs of the PEPP and the ability to switch providers (with caps on switching costs).
The next step is for the European Parliament and the Council to formally adopt the new regulation, at which point it can enter into force.
EIOPA establishes framework for identifying conduct risks
On 20 February, EIOPA published a framework for assessing conduct risks designed to provide national competent authorities with a common means to identify the causes and drivers of conduct risk at all stages of the insurance product life cycle and assess how they can cause consumer detriment.
The framework addresses:
Business model and management risks arising from how insurers structure, drive and manage their business and from relationships with other entities in the value chain.
Manufacturing risks arising from how products are manufactured by insurers before being marketed and how target markets are selected.
Delivery risks arising from how products are brought to the market and from the interaction between customers and insurers or intermediaries at the point of sale.
Product management risks, such as after-sales risks, relating to how products are managed and how insurers or intermediaries interact with and service customers until all obligations under the contract have ceased.
In its press release, EIOPA notes that the framework is not intended to prescribe national supervisory processes, but should lead to a more systematic monitoring of conduct risk among national competent authorities and will contribute to the effective implementation of its Conduct of Business Supervision Strategy.
Final report following joint consultation paper concerning amendments to the PRIIPs KIDs
The ESAs have published a Final Report following the consultation paper (CP) launched on 8 November 2018 on amendments to the PRIIPs Delegated Regulation ((EU) 2017/653)
concerning the Key Information Document (KID) for packaged retail and insurance-based investment products (PRIIPs). The Final Report summarises the responses received and sets out the envisaged next steps.
The proposed amendments include, among other things: providing information as to past performance (where available); strengthening the narrative explanations within KIDs; and incorporating requirements currently in the UCITS Regulation into the PRIIPs Delegated Regulation.
The feedback to the CP indicated that respondents did not support the proposed amendments. Some of the general points made were that: the potential benefits were limited and did not address the fundamental issues involved; any benefits would not outweigh the expected implementation and compliance costs; and there was insufficient time during the shortened public consultation to fully analyse the proposals and their implications.
Based on this feedback and political developments since the publication of the CP, the ESAs have decided not to propose substantive amendments to the PRIIPs Delegated Regulation.
Instead, the ESAs intend to provide input to a review of the PRIIPs Delegated Regulation during 2019. The Final Report sets out how the ESAs plan to conduct this work, which will be informed by the CP. However, the ESAs are of the view that the issues discussed in the CP concerning performance scenarios and the expectations they may provide to retail investors requires an immediate supervisory response.
Separately, Insurance Ireland and EFAMA have written to the Commission and EIOPA requesting that current rules allowing the use of UCITS Key Investor Information Documents (KIIDs) for multi-option products under the PRIIPs Delegated Regulation be extended. The PRIIPs Delegated Regulation currently allows insurers and asset managers to produce a generic PRIIPs KID for the overall product and to ‘pass through’ the existing UCITS KIIDs to provide information for each of the underlying funds. However, this derogation is due to expire in December 2019. The letter welcomes the ESAs’ indication in the Final Report that they intend to address the issue but urges that swift legislative action be taken to provide the industry with certainty that UCITS KIIDs can be used until 1 January 2022.
Implementing regulation on the calculation of technical provisions and basic own funds
The recently published Implementing Regulation 2019/228 lays down technical information for insurers and reinsurers to use when calculating technical provisions and basic own funds for reporting with reference dates from 31 December 2018 until 30 March 2019 in accordance with Solvency II.
Annex I deals with the relevant risk-free rate term structures. Annex II concerns the fundamental spreads for the calculating of the matching adjustment and Annex III lays out the volatility adjustments for each relevant national market.
The Implementing Regulation came into force on 8 February and shall apply from 31 December 2018.