Insurance Regulatory Update January 2021
This issue includes: Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Act 2020; Government Reforms to Insurance Sector; High Court considers jurisdiction of the FSPO; EIOPA supervisory practices for breaches of SCR; and EIOPA report on administrative sanctions imposed under the IDD.
Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Act 2020
On 10 December, the Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Act 2020 was enacted. The Act deals with certain matters consequent on the UK leaving the post-Brexit transition period on 31 December 2020. On that date, UK and Gibraltar based insurers and intermediaries lost their passporting rights to the EEA as the UK exited the Solvency II and Insurance Distribution Directive frameworks. Part 10 of the Act provides for a 15 year temporary run-off regime (“TRR”) for UK and Gibraltar based insurers and intermediaries. Eligible insurers and intermediaries have three months from 1 January 2021 to notify the Central Bank that Regulation 13 A of the European Union (Insurance and Reinsurance) Regulations 2015 or Regulation 3 A of the European Union (Insurance Distribution) Regulations 2018, as appropriate, applies to their business. The Central Bank has published a dedicated TRR page on its website. The Central Bank insurer notification form, which can be downloaded here is to be emailed to firstname.lastname@example.org. Part 10 of the Act was commenced by the Minister for Finance on 31 December 2020.
Government Action Plan to Reform Insurance Sector
On 8 December, the Irish government published an action plan on reform of the insurance sector in Ireland. The plan follows on from commitments in the Programme for Government to improve the insurance environment, in particular to alleviate the struggle of some businesses to obtain insurance cover. The plan includes 66 separate actions, aimed at bringing insurance costs down, increasing competition, and preventing insurance fraud. The implementation of the action plan will be overseen by a Sub-Group on Insurance Reform within the Cabinet Committee on Economic Recovery and Investment.
In an attempt to bring insurance costs down, the action plan includes a commitment to replace the present Book of Quantum used in personal injury cases. The Judicial Council will be asked to draft Personal Injuries Guidelines to replace the Book of Quantum. Judges will be expected to award compensation based on the new guidelines and will have to explain any decision to depart from them. There will also be reforms aimed at tackling insurance fraud. This will include placing perjury on a statutory footing, making it easier to prosecute.
Reforms aimed at increasing competition will include a new civil enforcement regime for the Competition and Consumer Protection Commission (“CCPC”), based on the transformation of the ECN+ Directive which provides for enhanced powers for national competition authorities.
Insurance Ireland has welcomed the publication of the action plan, particularly the plans for a new set of personal injury guidelines and the commitment to increased competition. Insurance Ireland also commits to cooperating with the government and the Central Bank on the ongoing review of dual pricing practices in the Irish insurance market.
Central Bank expresses concern arising from thematic inspection on Fitness And Probity Regime
The Central Bank’s focus on Fitness and Probity continues. It has published a second Dear CEO letter, sent to industry on 17 November 2020, following a thematic inspection of compliance by regulated firms from the banking and insurance sectors with their obligations under the fitness and probity regime. This letter follows a previous Dear CEO letter on fitness and probity compliance in April 2019 and firms are advised to consider this letter in conjunction with that of April 2019.
The inspection identified a range of compliance problems. In particular, the letter notes the lack of due diligence around appointing people to the boards of regulated entities and to other controlled functions, and the “inappropriate” practice of the CEO screening potential board applicants. The letter also says that where firms are outsourcing controlled functions, many are not taking the steps necessary to confirm that persons performing controlled functions within the service provider are fit and proper. In addition, some firms have taken a passive approach to engagement with the Central Bank and are not notifying the Bank in a timely manner of fitness and probity concerns.
Finally, the letter describes as “wholly unacceptable” the fact that certain firms did not perform a “gap analysis” of their policies and procedures following the letter of April 2019.
Central Bank publishes interim report of differential pricing review
In December, the Central Bank updated the public on its review of dual pricing in the Irish motor and home insurance markets by publishing an interim report on differential pricing. The progress report encompasses the Central Bank’s observations from the first phase of its review and commencement of second phase, involving extensive market analysis and consumer research, which is still ongoing.
The second phase of the Central Bank’s review involved analysis of more than 2,000 documents submitted by 11 firms as well as 33 targeted inspections to obtain a detailed understanding of firms’ pricing practices. To date, the Central Bank’s market analysis shows:
- The majority of firms use some form of differential pricing;
- A number of pricing practices were identified that led to customers with similar risk and cost of service paying different premiums for reasons other than risk and cost of service;
- Dual pricing is evident in the motor and home markets, where, in general, renewing customers are paying significantly more than the expected cost of the policy, while new business customers are paying marginally less than the expected cost of the policy;
- Customers less sensitive to price may subsidise those who are more price sensitive, giving the insurer a greater chance of securing those customers’ business;
- On average, the longer a customer remains with their insurer, the higher the amount they pay in excess of what is required to cover the expected cost of the policy; and
- Firms have not considered how pricing practices may impact certain groups of customers differently.
Key findings from the Central Bank’s consumer research shows:
- Consumers are aware of the legal requirements associated with motor insurance and do not see it as a discretionary purchase, which is seen in largely negative terms and gives rise to a lack of trust or interest;
- The complexity of insurance means that consumers have limited knowledge of how it works, which engenders inertia among consumers who feel it is better and easier to stay with their current insurance provider than to switch;
- There is a high level of consumer inertia in relation to home insurance products compared to motor insurance products as many consumers do not review their home insurance on an annual basis;
- There is a clear preference among consumers to stay within their existing insurance providers as many consumers reported comparing prices with other insurers largely to negotiate better prices with their existing provider.
While the Central Bank’s research and analysis continues it expects firms to observe its supervisory expectations outlined in its Dear CEO letter issued on 8 September 2020. The Central Bank’s findings from phases 1 and 2 of the review will inform the Central Bank’s report/and or consultation on proposals for reform at stage 3.
Central Bank Insurance Newsletter
The Central Bank’s December edition of the insurance newsletter covered the Individual Accountability Framework (“IAF”) and Senior Executive Accountability Regime (“SEAR”), contract uncertainty in the context of Covid-19, and LIBOR transaction risk.
In relation to the IAF, the Central Bank intends to consult with the industry stakeholders regarding its 4-part roll out, which comprises: (i) SEAR; (ii) clear and enforceable conduct standards that apply to staff in all regulated firms, with additional standards for senior management; (iii) enhancement of the fitness and probity framework, comprising of a certification regime to strengthen the onus on firms to proactively assess individuals’ taking up certain senior positions; and (iv) an enhanced enforcement process to allow the Central Bank to hold individuals to account for their misconduct under the administrative sanctions procedure. This article also sets out the four key elements of the SEAR: creation of Senior Executive Functions (“SEFs”) to include board members; inherent responsibilities for SEFs; a documented statement of responsibilities for SEFs; and responsibility maps documenting key management and governance arrangements.
In relation to contractual uncertainty, the Central Bank expects insurers to reflect on lessons learnt from the current pandemic by addressing ambiguity around the extent of coverage under a policy and the increasing risks being considered uninsurable and excluded from insurance policies. In particular, the Central Bank’s expectation is for insurers to consider the need for review and potential amendment of policy wording, including definitions of risks covered, to ensure clarity for policyholders. The Central Bank advises that such a review should be undertaken within the context of established Product Oversight and Governance frameworks, which include monitoring and regular review of products brought to market.
A transition away from LIBOR has been mandated by the Financial Stability Board and forms part of wider, ongoing reform of global benchmarks. Earlier in 2020, the International Association of Insurance Supervisors highlighted the regulatory issues associated with the benchmark from an insurance perspective. The transition away from LIBOR will affect the value of derivative instruments and technical provisions, where future cash flows are discounted using rates based on LIBOR. It may also necessitate changes to the structure of certain products and assets, financial contracts, financial accounting, risk management processes and IT systems of insurers.
The Central Bank expects insurers to have commenced planning for this transition by: identifying risks related to the LIBOR transition; assessment of exposures; and development of transition plans, which clearly specify actions to mitigate identified risks. The Central Bank plans to engage with insurers on the LIBOR transition during 2021.
High Court considers jurisdiction of the financial services and pensions ombudsman
The High Court has examined the scope of the Financial Services and Pensions Ombudsman’s (“FSPO”) jurisdiction in the recent judgment of Mr Justice Simons in Utmost PanEurope DAC v FSPO.
The case arose from a claim based on an inability to work due to a disability. The disability was caused by fibromyalgia and rheumatoid arthritis. The complainant’s income protection policy covered rheumatoid arthritis but not fibromyalgia and the insurer denied coverage on the basis that fibromyalgia was the dominant cause for the complainant not being able to work. The FSPO said that this was unreasonable and directed the insurer to admit the claim.
In overturning the FSPO’s decision, Mr Justice Simons noted that the FSPO has a hybrid jurisdiction covering both legal and contractual issues and non-contractual issues of fairness. The High Court will consider its experience and knowledge to be greater than the FSPO in relation to issues arising from legal and contractual issues but will adopt greater deference to the FSPO where the dispute relates to non-contractual conduct issues.
In this case, the FSPO had placed too much emphasis on issues of reasonableness and had ignored the plain terms of the contract which allowed the insurer to verify the validity of claims. The FSPO had also failed to measure the conduct of the insurer against Consumer Protection Code requirements. In addition, the FSPO’s decision related to the propriety of verifying the claim, it did not establish a breach of contract or establish that the claim should be paid and it was therefore unacceptable to direct the insurer to admit the claim.
For more analysis of the case, please see the detailed Arthur Cox briefing available here.
The Health Insurance (Amendment) Bill 2020
On 9 December, the Government passed the Health Insurance (Amendment) Bill 2020, which amends 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 person from 1 April 2021 and to increase the Hospitalisation Utilisation Credit from €100 to €125 for in-patient services on overnight accommodation. The Bill, once enacted and commenced will also amend the stamp duty levels payable on health insurance contracts under section 125A of the Stamp Duties Consolidation Act 1999 for contracts entered into or renewed on or after 1 April 2020 and on or before 31 March 2021.
EIOPA consults on supervisory practices in the event of breaches of solvency capital requirement
In late November, EIOPA published a consultation paper on supervisory practices and expectations in case of breach of the Solvency Capital Requirement (“SCR”). The paper sets out that while the “supervisory ladder” for intervention by regulators is necessarily flexible to take account of different insurers, a minimum convergent approach is required throughout the EU where certain triggers such as a breach of the SCR are reached for a level of consistency in the protection afforded to policyholders.
Between 2016 and 2019, only a small number of SCR breaches occurred in Europe with just 12 insurers, representing 0.5% of all EU (re)insurers having a breach for two consecutive years. However, EIOPA is concerned that the impact of the Covid-19 pandemic will result in a higher number of insurers breaching their SCRs. The purpose of EIOPA’s supervisory statement is to promote supervisory convergence by ensuring consistency in how recovery plans are prepared, assessed and approved.
The supervisory statement provides that the date of non-compliance with the SCR should be the date on which an insurer observes, through ongoing monitoring that it is not complying with its SCR. The two month period within which a recovery plan must be submitted to the supervisory authority begins on this date. In the event that the insurer does not inform the supervisory authority and the supervisory authority finds out about the breach by some other means, the date of observation of the breach and the deadline for submitting a recovery plan can be decided by the supervisory authority.
A recovery plan may not be needed where the insurer takes adequate steps to restore compliance within the two month period for submission of the plan.
The statement includes specific assumptions that must be made in relation to recovery plans prepared in the context of the Covid-19 pandemic. Insurers must assess the impact of potential further waves of the virus (and accompanying restrictions) on their businesses.
Supervisory authorities are encouraged to avail of cooperation platforms and colleges of supervisors to encourage convergent approaches throughout the EU.
If compliance with the SCR is not restored, the statement says that supervisory authorities should consider additional measures, maintaining policyholder interests as a priority, including directing the insurer to cease writing new business and, ultimately, the withdrawal of authorisation.
The deadline for submission of feedback to the consultation is 17 February 2021.
The EIOPA’s press release is here.
EIOPA publishes first annual report on administrative sanctions taken under the Insurance Distribution Directive (“IDD”)
EIOPA has published its first annual report on sanctions imposed by National Competent Authorities (“NCAs”) under the IDD for the period 1 October 2018 until year end 2019.
Overall, eight Member States imposed a total of 1,923 sanctions during the review period. The aggregated value of pecuniary sanctions imposed was €945,710. Withdrawal of an intermediary’s registration accounted for approximately 50% of sanctions and pecuniary sanctions made up around 40% of sanctions imposed under the IDD.
Approximately 75% of sanctions were for breaches of the professional and organisational requirements under Article 10 of the IDD (including qualification and continuous professional development requirements), while roughly 20% of sanctions related to breaches of the registration requirements under Article 3. However, due to differences in national law, certain types of breaches of the IDD attract different types of sanctions in different Member States.
EIOPA publishes insurance protection gap dashboard and discussion paper on non-life underwriting and pricing in light of climate change
On 10 December, EIOPA published a discussion paper on non-life underwriting and pricing in the light of climate change.
The discussion paper expands on EIOPA’s September 2019 opinion on sustainability within Solvency II. That opinion supported the argument that because non-life insurance contracts have a short duration of typically 12 months, and therefore non-life insurers are able to adjust prices to emerging risks annually, it was not necessary for non-life insurers to include climate change related risks in their pricing methodology.
However, there are commercial and societal, limits to non-life insurance pricing. Due to climate change, climate and catastrophe related losses are expected to grow. To reflect increasing climate-related risk, the premium would therefore also have to increase. Over the medium to long term, there is a risk of the insurance coverage becoming unaffordable for the policyholder, as well as the industry crowding itself out of certain risks. EIOPA’s concern is that this would further widen the protection insurance gap, which currently stands at 65% of the total losses caused by extreme weather and climate-related events across the EU.
To address this protection gap, EIOPA believes that the insurance sector has the chance to play a key role by not only transferring and pooling the risk, but also by contributing to climate change mitigation and adaptation. As a result, it introduced the concept of “impact underwriting” in its opinion.
The discussion paper considers the topic of pricing in the underwriting process and the consequences of short-term non-life contracts and annual re-pricing in the context of climate change. It also identifies how the insurance sector could address the protection gap issues in the context of climate change, and contribute to climate change mitigation and adaptation.
Interested parties are invited to provide comments by 26 February 2021. EIOPA will consider the feedback received and expects to publish its final report in spring 2021, together with a feedback statement.
A link to EIOPA’s press release is here.
Furthermore, EIOPA has launched its first insurance protection gap dashboard on a pilot basis. As only 35% of the total losses caused by extreme weather and climate-related events across Europe are insured, the dashboard aims to identify and monitor the risks related to the insurance protection gap for natural catastrophes in Europe.
The dashboard should help to: increase awareness of protection gap issues for all stakeholders; promote a science-based approach to protection gap management and decision making; identify at-risk regions and identify the underlying protection gap risk drivers and potential synergies between national policies to improve protection against natural catastrophes across boarders at EU level. A further aim of the dashboards is to develop pro-active prevention measures based on a granular assessment of risk drivers.
EIOPA invites stakeholders to provide views on the methodology and data used in the dashboard by 31 March 2021.
A link to EIOPA’s press release is here.
EIOPA publishes peer review on decision on the collaboration of insurance supervisory authorities
EIOPA has published a peer review in relation to its 2017 decision on the collaboration of insurance regulators. The peer review concerns aspects of the decision regarding cross-border activities, data storage and portfolio transfer. The review uncovered a number of divergent practices among regulators in different countries which may have a negative impact on the level playing field for EEA (re)insurers.
Among the problems identified were differences in the implementation of the 2017 decision including a failure by some regulators to have appropriate internal guidelines/handbooks in place and, externally, a failure to inform (re)insurers of the information to be provided to the regulator in order for the regulator to fulfil its duties in relation to collaboration with other regulators. There was also supervisory divergence in cases where authorisations were granted where previous authorisations had been sought in other member states and where the (re)insurers intended to mainly or exclusively carry on business in other member states. Differences were also found in respect of the freedom of establishment/freedom to provide services notification process.
The peer review outlines a number of recommendations aimed at increasing supervisory convergence and consistency. A number of regulators were directed to put internal guidelines/handbooks on supervisory collaboration in place together with making (re)insurers under their supervision aware through external circulars, guidelines, or notification templates. Regulators were also asked to cooperate with each other in terms of finding out why authorisation applications were rejected in other member states before granting authorisation to the same entities. There were additional recommendations to ensure consistency in the notification process in relation to freedom of establishment/freedom to provide services. A number of regulators were also instructed to improve their data storage systems so that information could be provided to other regulators in a timely manner.
The peer review is available here.
EIOPA publishes annual report on long-term guarantees (“LTG”) measures and measures on equity risk
EIOPA’s annual report on long-term guarantees measures and measures on equity risk notes that 631 (re)insurers, representing 79% of the overall technical provisions in the EEA market, are using the volatility adjustment. The second most used measure is the transitional measure on technical provisions, which is used by 136 (re)insurers. The matching adjustment is used by just 14 (re)insurers representing 2% of the overall amount of technical provisions in the EEA. The transitional on the risk-free interest rates is used by 8 (re)insurers with a negligible market share in technical provisions. Finally the duration-based equity risk sub-module is only used by one undertaking.
The long-term guarantees measures were introduced to Solvency II to ensure an appropriate treatment of insurance products that include long-term guarantees.
The measures on equity risk are designed to ensure an appropriate measure of equity risk in setting the capital requirement for insurance and reinsurance undertakings in relation to the risks arising from changes in the level of equity prices and include the application of a symmetric adjustment mechanism to the equity risk charge and the duration-based equity risk sub-module.
Removing these measures would result in a decrease to the amount of eligible own funds available to cover the Solvency Capital Requirement by €76 billion and increase the Solvency Capital Requirement by €40 billion. National supervisory authorities report that they are confident that undertakings will be able to reduce their dependency on the transitional measures, to ultimately achieve no dependency by 1 January 2032.
In addition, the report notes that throughout the EEA, availability of products containing long-term guarantees is either stable or decreasing and national supervisory authorities have noticed a decrease in the size and duration of such guarantees.
Consultation on EIOPA advice regarding article 8 of the taxonomy regulation
The main objective of the Taxonomy Regulation is to set out relevant criteria for determining whether an economic activity qualifies as environmentally sustainable. The European Commission has called for advice from the European Supervisory Authorities (the “ESAs”) in developing common definitions and methodologies in respect of disclosure requirements required by article 8 of the Taxonomy Regulation. In response to this request, EIOPA has launched a public consultation on the ratios and methodologies used to build them, disclosure of which is mandatory for (re)insurers falling within the scope of the Non-Financial Reporting Directive. The consultation forms part of EIOPA’s wider sustainability agenda, which aims to incorporate ESG and risk assessment in the regulatory and supervisory framework. Sustainable growth can be fostered by improving data availability and the disclosure of relevant metrics by reporting entities, and so EIOPA’s survey consists of 13 questions to assess whether the current ratios are relevant and appropriate to depict (re)insurance activities in the Taxonomy Regulation. If EIOPA determines that the ratios are not appropriate, they may need to be ‘translated’ to the most comparable key performance indicator for (re)insurance businesses. EIOPA suggests requiring two key performance indicators on sustainability that depict the extent to which:
- the (re)insurer carries out taxonomy-relevant activities – in relation to non-life gross premiums written; and
- the (re)insurer helps funding taxonomy-related activities – in relation to total assets.
The public consultation is open to feedback and comments until next week – 12 January 2021.