Insurance Regulatory Update February 2020
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 Central Bank’s Regulatory Service Standards Performance Report, new regulations to increase the powers of the CBI in respect of consumer protection, EIOPA’s guidelines on outsourcing to cloud service providers and European stakeholder’s views on the 2020 Review of Solvency II.
We hope you find this Update useful. If you would like to discuss any particular topic covered, please feel free to contact a member of our team.
Central Bank publishes report on Regulatory Service Standards for July-December 2019
On 2 February 2020, the Central Bank published a report on its performance in respect of the provision of regulatory services for July to December 2019. 34 of the 35 service standards that applied during the period were either met or exceeded. The Central Bank received 2 complete applications for authorisation of insurance undertakings. Both were processed within three months of becoming complete. The Central Bank also achieved its target of returning 100% of incomplete applications (of the three it received) within two weeks of receipt.
All service standards were exceeded in H2 2019 in relation to retail intermediaries. In addition, all fitness and probity PCF service standards were met.
A link to the report is available here.
European Union (Cooperation Between National Authorities Responsible for the Enforcement of Consumer Protection Laws) (No. 2) Regulations 2020
The Minister for Finance has signed regulations increasing the powers of the Central Bank in respect of consumer protection law. The new regulations supplement an EU regulation, which is designed to strengthen cooperation between the competent authorities in member states who are responsible for the enforcement of consumer protection laws. The Irish regulations relate specifically to breaches of the following six pieces of legislation where those breaches have a cross-border dimension and impact consumers in other member states:
- the unfair and misleading commercial practices provisions of the Consumer Protection Act 2007;
- European Communities (Unfair Terms in Consumer Contracts) Regulations 1995;
- European Communities (Distance Marketing of Consumer Financial Services) Regulations 2004;
- European Communities (Consumer Credit Agreements) Regulations 2010;
- European Union (Consumer Mortgage Credit Agreements) Regulations 2016; and
- European Union (Payment Accounts) Regulations 2016.
The Central Bank is given investigative and enforcement powers (in addition to their existing statutory powers) including the power to access any documents or data relevant to an infringement of EU consumer law covered by the new regulations; powers to carry out on-site inspections; powers to seek commitments from the trader responsible for the infringement; and the power to provide information on compensation for the breach. Failing to comply with any direction of the Central Bank under its new powers will be a criminal offence punishable by a class A fine and/or a term of imprisonment not exceeding 12 months.
EIOPA Guidelines on Outsourcing to Cloud Service Providers
EIOPA has published a final report setting out its guidelines on outsourcing to cloud service providers (the Guidelines). The aim of the Guidelines is to improve transparency and reduce regulatory arbitrage regarding the supervisory expectations and processes applicable to cloud outsourcing. EIOPA’s final report also contains a feedback statement from its July 2019 consultation on the proposed Guidelines. Among the areas of the Guidelines that elicited the most responses from stakeholders, were:
- Proportionality- consequently, EIOPA has streamlined the contents of the Guidelines to focus on outsourcing of critical or important operational functions or activities to cloud outsource providers;
- Scoping- the application of the guidelines in the context of groups has been clarified as follows: (i) in respect of intra-group outsourcing and sub-outsourcing arrangements, the Guidelines should be applied in conjunction with the provisions of the EIOPA Guidelines on System of Governance; and (ii) subsidiaries belonging to a group and subject to other sectoral requirements such as investment management companies licensed under AIFMD or UCITS are excluded from the scope of the guidelines;
- Definitions- a number of unclear definitions have been removed including the concept of “material function” (focusing instead on “critical or important operational functions);
- Timelines- EIOPA has moved the date of application of the Guidelines from 1 July 2020 to 1 January 2021 and has prolonged the period for reviewing existing arrangements from 1 July 2022 to 31 December 2022; and
- Notification requirements- have been aligned with the EBA Guidelines and no longer require firms to provide a draft copy of the outsource agreement to regulators.
The Guidelines generally apply the outsourcing requirements contained in the Solvency II Directive and the EIOPA Guidelines on System of Governance to cloud outsourcing arrangements. However, firms outsourcing to cloud providers must also:
- Risk assess any outsource of critical or important functions or activities to the cloud and where such outsource involves a change to its risk profile and reflect this in the firm’s ORSA; and
- Update existing written outsourcing policies to take account of cloud outsourcing specificities.
Within two months of their publication, NCAs must confirm if they comply or intend to comply with the guidelines. In the event that a competent authority does not or does not intend to comply, it is required to inform EIOPA of the reason for non-compliance.
Views from Europe – 2020 Review of Solvency 11: Opportunities and Challenges
On 29 January, a number of key stakeholders attended a conference organised by the European Commission to discuss the 2020 Review of Solvency II. Speakers at the conference included Andreas Brandstetter (president of Insurance Europe), Valdis Dombrovskis (European Commission Executive Vice President) and Gabriel Bernardino (Chairman of EIOPA). While the focus of each speech is slightly different, a number of themes were common to all three speeches:
Proportionality- each speaker notes that improvements are needed to increase the effectiveness of proportionality under Solvency II and in particular, the practical application of the principle;
Reporting Burdens- reducing Solvency II reporting requirements; and
Long Term Business- Changes are needed to incentivise long term business investment. In particular, and unsurprisingly, the treatment of long term guarantees.
In addition to these issues, EIOPA states that problems have arisen due to a “fragmented landscape of national frameworks”. Both the European Commission and EIOPA state that an EU wide resolution regime for the insurance sector and EU rules on insurance guarantee schemes are needed. However, Insurance Europe notes that any improvements should be limited to the areas listed above rather than revolutionising a framework, which is “good but not perfect”.
A link to the Insurance Europe press release about Andreas Brandstetter’s speech is available here, a link to Valdis Dombrovskis speech is available here and a link to Gabriel Bernardino’s speech is available here.
Trade Associations critical of the European Supervisory Authorities approach to “fixing” PRIIPS KID
Insurance Europe and a number of other financial trade associations have raised serious concerns with the European Commission regarding the ESAs review of the regulatory technical standards (“RTS”) implementing the Packaged Retail And Insurance-Based Investment Products (“PRIIPS”) Regulation. The ESAs current approach to amending the PRIIPS key information document (“KID”) is “fundamentally flawed and will not meet the PRIIPs Regulation’s aim of providing information to consumers that is fair, clear and not misleading”.
Insurance Europe maintains that while the Commission is required to complete an official review of the PRIIPs frameworks under article 33 of the Regulation, it is not appropriate to review the RTS at the same time when there is no legal requirement to do so. The letter sets out the trade associations’ concerns in 3 key areas:
Consumer testing– any changes made to the PRIIPs KID should improve consumer understanding and the only way to achieve this is through consumer testing. The new proposals should be tested as part of the complete information that would be provided to consumers and not in isolation.
Constant changes– the PRIIPs framework has already been subject to a series of changes since its implementation two years ago. This creates significant compliance burdens for companies but is also detrimental to consumer understanding.
Ensuring information provided to consumers is meaningful– a balance must be struck between the PRIIPs objectives of providing comparability and meaningful product information.
European Commission publishes final report on Consumer Testing of KID Under PRIIPS Framework
(Linked to the article above criticising the ESAs approach to “fixing” the KID)
The European Commission has published its final report of a consumer study on the effectiveness of presented information to retail investors within the PRIIPS framework. The consumer test covered three types of products; funds, structured products and insurance-based investment products. The test comprised of 7,684 consumers. The following 4 versions of KID were examined: current KID version; probabilistic approach KID version; past performance KID version; and illustrative scenario KID version.
Although the results of this consumer test suggest that the final investment decision is not affected by the KID version, the results show that the design of the KID can play an important role in aiding consumers’ understanding of the features of retail investment products and in contributing to better informed financial decision making.
EIOPA welcomes comments on Technical Standards for Supervisory Reporting and Cooperation for the Pan-European Personal Pension Product (“PEPP”)
EIOPA has launched a public consultation on proposals implementing technical standards for supervisory reporting and cooperation for PEPP. The proposals specify the annual supervisory reporting requirements on PEPP and formalise the notifications required under the PEPP Regulation to ensure cooperation between competent authorities and EIOPA.
EIOPA has sought input from the insurance and pensions supervisory community, other European Supervisory Authorities and has engaged with stakeholder groups. The consultation will remain open until 20 May 2020.
A link to the EIOPA press release is available here.
EIOPA publishes Supervisory Statement on the Impact of the Ultra-Low/Negative Interest Rate Environment
EIOPA has released a statement addressed to the supervisory community and (re)insurers, which provides a number of recommendations regarding how national supervisors should address the systemic risks associated with the ultra-low/negative interest rate environment. This environment impacts both the asset and liability side of a (re)insurer’s balance sheet, affecting both its profitability and solvency position. EIOPA is also concerned that this in turn may cause some (re)insures to engage in “search for yield” behaviour, resulting in a scenario where a (re)insurer’s investment risk exceeds its risk bearing capacity.
In the short term, EIOPA recommends that national supervisory authorities (NSAs) carry out the following actions:
- intensify the monitoring and supervision of insurers identified as facing greater exposure to the low interest rate environment (e.g. through the inclusion of low interest rate scenarios in the ORSA analysis);
- engage in a dialogue with (re)insurers to explore the actions they should take to improve their financial resilience (e.g. EIOPA expects firms with smaller buffers to exercise restraint when distributing dividends, it also expects firms to decrease the guarantee levels offered on new contracts);
- pay special attention on pre-emptive recovery and resolution planning to reduce the likelihood and impact of insurance failures (e.g. by requesting firms to prepare pre-emptive recovery plans before they breach their SCR); and
- broaden the analysis of the low interest rate environment and also consider the potential build-up of systemic risk (e.g. by identifying potentially risky behaviour).
EIOPA also recommends that NSAs identify whether there are any deficiencies in their current supervisory powers, which would preclude them from dealing effectively with the systemic risk caused the low interest rate environment. In the medium to long term it recommends that where such deficiencies are identified that these missing powers be requested from the relevant national authorities.
A link to EIOPA’s press release is here.
EIOPA to hold roundtable discussion on mortgage life and other credit protection insurance sold through banks
EIOPA is launching an EU-wide thematic review on mortgage life and other credit protection insurance sold through retail banks. EIOPA states that while mortgage life and other credit protection insurance can be beneficial for consumers, NCAs have reported issues related to these types of insurance products that have lead (and may lead to further) consumer detriment.
On 5 March 2020, EIOPA will hold a roundtable with external stakeholders (e.g. consumer representatives and NCAs) that will take place at EIOPA premises. The aim is to consult and collect input from external stakeholders on:
- issues and risks with these types of insurance products;
- business models used to manufacture and distribute these products and underlying conduct risks;
- potential benefits for consumers, insurers and banks;
- market practices that could lead to consumer detriment; and
- recent developments and trends.
EIOPA consults on review of technical implementation means for the package of Solvency II Supervisory Reporting and Public Disclosure
EIOPA is consulting on this area as a result of a call for advice from the European Commission on Solvency II in February 2019. The call for advice covered a wide range of topics including supervisory reporting and public disclosure. EIOPA has decided to include the technical implementation means in the Solvency II 2020 review to ensure that it covers the entire reporting process. EIOPA hopes to improve the effectiveness and efficiency of the reporting and disclosure framework and in doing so reduce the costs associated with the processes. The deadline for submission of feedback is Monday 20 April 2020.