In this issue, topics covered include: the Government’s draft legislation to prepare for a no-deal Brexit; the Central Bank’s updated guidance on the domestic actuarial regime under Solvency II; and the European Commission’s draft Delegated Regulation under the Insurance Distribution Directive on considering sustainability topics when advising customers.

Domestic News

Government Publishes Heads of Legislation to prepare for no-deal Brexit

The Government has published the General Scheme of the Miscellaneous Provisions (Withdrawal of the United Kingdom from the European Union on 29 March 2019) Bill 2019, which outlines various legislative changes that the government intends will take effect if the UK leaves the EU on 29 March 2019 without any deal.

Part 8 of the General Scheme provides for a temporary run-off regime whereby insurance undertakings and intermediaries operating from the UK will be able to continue to fulfil their contractual obligations to their existing Irish customers for up to three years.

The temporary run-off regime is limited and subject to a number of conditions. The relevant undertakings must be authorised in the UK or Gibraltar pursuant to Solvency II. They must be carrying on their business in Ireland pursuant to the right of establishment or the freedom to provide services. They must have ceased to enter into new insurance contracts in Ireland. Finally, they must exclusively administer their existing portfolio of insurance contracts.

Central Bank publishes updated guidance on domestic actuarial regime and related governance requirements under Solvency II

Following its consultation last year, the Central Bank has made changes to the requirements in relation to the actuarial regime affecting all Solvency II (re)insurers.

The new requirements relate to the governance of With-Profits funds in light of an expected increase in the volume of this type of business in Ireland. Each undertaking writing With Profit business will be required to produce “With-Profits Operating Principles” (“Principles”), which must be available free of charge to all existing and prospective With-Profits fund members. The document will include details of the investment strategy and business risk, including information on who bears the costs from guarantees and smoothing. The Head of Actuarial Function will be required to report to the Board of the insurer in relation to compliance with the Principles. An additional annual report on compliance with the document must be made available to With-Profits fund members within six months of the end of each financial year.

The updated guidance also makes changes to the format of the actuarial opinion on technical provisions. The new opinion includes sections for the actuary to set out the key reliances that influenced their opinion, the key limitations on their opinion, their recommendations for improvements and to note relevant post-balance sheet events.

Consultation Paper 129 for New Levy Calculation Methodology for insurers

The Central Bank has proposed a revised methodology for calculating the industry funding levy for Irish (re)insurers. The current banded approach to calculating the industry levy is determined by a (re)insurer’s PRISM rating. According to the Central Bank, this approach gives rise to a significant threshold effect if a (re)insurer moves through the bands. To eliminate this effect, the proposed methodology will consist of a minimum fixed fee component plus a variable fee component:

  • the minimum fee component will equate to 45% of the total amount of the Central Bank’s aggregate annual levy requirement from the insurance sector and will be apportioned by PRISM rating; and
  • the remaining 55% of the Central Bank’s annual levy requirement will be a variable fee component: subject to certain adjustments for captives, reinsurers and lower impact firms, (re)insurers will pay the variable fee in proportion to the aggregate sum of their Gross Written Premium (GWP) and gross Technical Provisions (TPs) (this aggregate sum will be expressed in €millions) and will be multiplied by a specified rate per million that will be published annually by the Central Bank: Firm (GWP€m + TP€m) x Rate per €m =  Variable € Fee Payable.

EEA firms passporting into Ireland will be unaffected by the proposed methodology. A scale of levies to be applied for third country branches is also in the process of being developed by the Central Bank.

The consultation period for this proposal ends on 29 March 2019, and submissions can be made in hard copy or by email to: [email protected].

Health Insurance (Amendment) Act 2018

The Health Insurance Acts 1994 to 2017 provide for a risk equalisation scheme (the “Scheme”) for the health insurance market. The Scheme allows health insurers to offer policies at the same price to all persons, regardless of their health status or age.

Under the Scheme, insurers receive risk equalisation credits to compensate for the additional cost of insuring older and less healthy members. The Revenue Commissioners fund the credits by imposing stamp duty levies on open market insurers.

The Health Insurance (Amendment) Act 2018 is a short piece of legislation comprising eight sections enacted on 24 December 2018. The main purpose of the Act is to:

  • specify the amount of risk equalisation credits to be paid in respect of age, gender and level of cover from 1 April 2019; and
  • revise the community rating stamp duty levies required to fund the risk equalisation credits in the period 1 January to 31 March 2019 and 1 April 2019 onwards.

The Act also provides for changes to the composition of the Board of VHI and gives the Minister a mandate to ensure a higher system of governance at board level. VHI will also be permitted to sell international plans directly without an intermediary (rather than acting solely as agent) and will no longer require Ministerial approval to sell the plans.

Personal Injuries Assessment Board (Amendment) (No. 2) Bill 2018 passes committee stage

The Personal Injuries Assessment Board (Amendment) (No.2) Bill has passed committee stage and will now be voted on in Dáil Éireann before being sent to the Seanad.

The purpose of the proposed legislation is to strengthen the Personal Injuries Assessment Board (“PIAB”) to ensure greater compliance with the PIAB process and to encourage more claims to be settled through PIAB rather than through litigation. PIAB makes an independent assessment of personal injury claims, excluding medical negligence. PIAB generally makes an award that the injured party can either accept or proceed to the courts.

The present Bill was informed by the Cost of Insurance Working Group Report on the Cost of Motor Insurance (the “Working Group Report”) and the Oireachtas Committee on Finance Report on the Rising Costs of Motor Insurance (the “Committee Report”). The Working Group Report recommended that the government examine the issue of individuals involved in PIAB proceedings refusing to provide details of special damages and failing to attend medicals. The Committee Report recommended enhancing the powers of PIAB. The Bill requires PIAB to press ahead with carrying out an assessment in cases of non-attendance at medicals and refusal to provide details of special damage even if this results in the claim being inappropriately valued.

The Explanatory Memorandum of the Bill can be found here.

International News

European Commission publishes draft rules to ensure insurance distributior consider sustainability topics when advising customers

On 4 January, the European Commission published draft Delegated Regulation amending Delegated Regulation (EU) 2017/2359 as regards the integration of environmental, social and governance (ESG)  considerations and preferences into investment advice for insurance-based investment products (IBIPs) under the Insurance Distribution Directive ((EU) 2016/97) (IDD).

The draft Delegated Regulation is designed to ensure that insurance distributors take ESG issues into consideration when advising customers. It will amend the present Delegated Regulation (EU) 2017/2359, (Article 9 and 14 of which set out the elements to be taken into account by insurance distributors when assessing the suitability of IBIPs for their clients) so that intermediaries and insurers providing advice on IBIPs will be required to carry out a mandatory assessment of the ESG preferences of their actual and potential customers. These preferences will then be taken into account in the selection process of the IBIPs that are offered to these customers.

The draft text provides that the Delegated Regulation will enter into force twenty days after it is published on the Official Journal and will come into effect 12 months after it has entered into force. However, the Commission can only officially adopt these draft rules once new disclosure provisions for sustainable investments and sustainability risks, which put in place an EU-wide definition for ESG considerations, have been agreed at EU level. In its press release the Commission has commented that the publication of the draft Delegated Regulations enables insurance distributors to begin preparations for incorporating customer ESG preferences into their product suitability assessments.

Multilateral Agreement on the Practical Modalities for Exchange of Information Pursuant to The AMLD

On 10 January 2019, the European Supervisory Authorities (“ESAs”) approved a Multilateral Agreement on the methods for exchange of information between the ECB and competent authorities with supervisory responsibility under the fourth Anti-Money Laundering Directive (“AMLD4”).

AMLD4 imposes, among other things, anti-money laundering and counter-terrorism obligations on financial institutions. The Agreement creates a framework for exchanging information on these matters between the ECB and competent authorities and aims to enhance the effectiveness of supervisory practices. In particular, it contains provisions on: the type of information involved and underlying processes for exchanging it; confidentiality and data protection; circumstances in which a request for information can be refused; the means of communication and language used in exchanging information; the signing process; and dispute resolution procedures.

The Agreement is mandated by AMLD4 as part of the EU legislature’s wider efforts to enhance cooperation and information exchange between prudential and AML/CFT supervisors.

Solvency II: Economic committee MEPs concerned about preparation of SCR review

The Chair of the European Parliament’s Economic and Monetary Affairs Committee (“ECON”) published a statement on 22 January 2019 concerning proposed amendments to the Solvency II Delegated Regulation (EU) 2015/35 (the “DA”) relating to the review of the Solvency Capital Requirement standard formula under Solvency II.

The statement noted the delay in adopting the DA (originally scheduled for December 2018) and set out a number of issues and concerns that ECON expects to see addressed in the revisions to the DA, including:

(a) a reduction in the current risk margin to boost the financing of the real economy and to encourage insurers to invest in long-term projects;

(b) ECON’s concern that the criteria of a new equity class for long-term investment included in the draft DA could prevent it from working in practice;

(c) the importance of finding a short-term solution to address the shortcomings of the current functioning of the Volatility Adjustment. In particular, the Chair expressed the opinion that the component should be calculated at the end of the period if the conditions are met at any time during the reporting period itself based on a daily calculation; and

(d) ECON’s concern, in light of the delay in adopting the DA, that the application date may create difficulties for the reporting process due to the short period of time between the expected date of entry into force of the DA and the first application for reporting obligations.

EIOPA call for evidence on the integration of sustainability risks in prudential assessments under Solvency II

EIOPA have published a survey with an aim at collecting market data to assess how sustainability risks affect (re)insurers’ decisions to invest. Sustainability risks include environmental, social and governance risks. In particular, the research will be used to analyse whether the Solvency II framework presents any incentives or disincentives to sustainable investment. This follows a call by the Commission on 28 August 2018 for EIOPA to produce an opinion on sustainability issues concerning Solvency II.

The public consultation period will end on 8 March 2019.

EIOPA call for improvements to the assessment of the propriety of board members and qualifying shareholders of insurance companies

EIOPA has published the results of a peer review examining how national competent authorities (“NCAs”) assess the propriety of administrative, management or supervisory body (“AMSB”) members and qualifying shareholders of insurance companies in accordance with the requirements in Solvency II that insurance companies be run by people of integrity and of good repute.

During the reference period of 1 January 2016 to 15 May 2017, NCAs assessed 8,031 AMSB member applications and 131 changes to qualifying shareholders. EIOPA notes a lack of harmonisation in relation to propriety assessments across the EEA that could lead to a different outcome in different jurisdictions regarding the same candidate.

The review found that a number of national legislative and regulatory frameworks are not aligned with the Solvency II framework and that NCAs are applying different standards and scope to their assessment. Additionally, very few NCAs are performing sufficient ongoing assessment of insurers in this area. It also notes that cross-border cases of propriety assessment involving two or more NCAs take a long time to complete.

EIOPA has identified best practices within NCAs that encourage a common supervisory culture throughout the EEA; such as the Central Bank’s database capturing historical information on candidates, flagging candidates who have previously been refused permission or who require in-depth assessment. EIOPA also identify the Italian NCA, IVASS’s framework that supporting ongoing verification of the propriety of qualifying shareholders on a continuous basis. IVASS’s system requires qualifying shareholders to notify them of any material changes to information previously provided. In addition, IVASS collaborates with other authorities including the courts and the Financial Intelligence Units in Italy to gather any adverse information.

European Supervisory Authorities publish report on regulatory sandboxes and innovation hubs

The ESAs have collectively published a report on regulatory sandboxes and innovation hubs.

National regulators across the EU have adopted a number of initiatives to facilitate financial innovation (known as ‘innovation facilitators’) in recent years, including the establishment of ‘innovation hubs’ and ‘regulatory sandboxes’.

Innovation hubs provide a point of contact for firms to raise enquiries with financial regulators on FinTech-related issues, while regulatory sandboxes are schemes to enable firms to test innovative financial products, services, or business models (according to a specific plan agreed with their local regulator).

The report includes a cross-sectoral comparative analysis of the innovation facilitators established to date as part of the European Commission’s March 2018 FinTech Action Plan. In particular, the analysis looks at the: (i) objectives, legal basis and scope of innovation facilitators; (ii) process followed by innovation facilitators in dealing with firms; and (iii) interaction between national regulators and other authorities (both inside and outside the EU).

The report also sets out ‘best practices’ for national regulators. The best practices aim to ensure a level playing field by encouraging convergence in the design and operation of innovation facilitators across the EU. The report identified 19 principles, ranging from general to specific. For example, the report advises that national regulators disseminate learnings, both internally and, where appropriate, to the market generally.

Finally, the report suggests options for consideration in the context of future EU-level work on innovation facilitators.  For example, the report suggests the development of joint ESA guidance on cooperation and coordination between innovation facilitators.

EIOPA analyses costs and past performance of insurance and pension products

EIOPA has published its first report on costs and past performance of insurance and pension products.

The report relates to the period between 2013 and 2017 and contains aggregate data on the costs of insurance-based investment products and for some similar personal pension products. It is based on data derived from Key Information Documents. It shows variations in cost is across the EU based on the type of product, premium, risk category and jurisdiction.

Due to the differences between products, there are significant challenges with comparing performance, for example, in view of the values of guarantees, the impact of smoothing mechanisms and terminal bonuses of profit participation products, and the impact of risk and volatility. EIOPA have requested additional data from insurance undertakings as insufficient data is available from market providers.

The analysis was a pilot exercise and EIOPA will further develop definitions of costs and common methods for calculation of past performance to ensure that market coverage will be expanded in future analyses.