Insurance Regulatory Update, July 2019
This is the July 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 Judicial Council Act 2019, a new levy calculation methodology for insurers, feedback on the Consumer Contracts Bill 2017, the supervision of insurance groups under Solvency II, cloud outsourcing and national insurance guarantee schemes.
Feedback Statement – Consultation on new Levy Calculation Methodology for insurers
The Central Bank’s Consultation Paper on a New Levy Calculation Methodology for Insurers proposed an alternative levy calculation methodology for (re)insurers to the existing PRISM based levy calculation.
Industry approves of the Central Bank’s aim to achieve cost stabilisation; the objective of the proposed methodology to rectify ‘cliff edge’ levy structures which can be a deterrent to growth; and the distinction between unit-linked and other business models within the pricing proposal. However, industry has reservations regarding the timing of the change in view of the Central Bank’s ongoing review of PRISM impact frameworks and the potential for this work to lead to further changes to levy methodologies.
Industry proposed retention of the current methodology pending completion of the PRISM impact framework review so that its outcome can be considered in the context of changes to levy methodologies. The Central Bank has concluded that (re)insurers will remain on PRISM impact-derived levies in the next levy cycle and will move to new methodologies as alternatives are developed.
The feedback is available here.
Cost Of Insurance: Judicial Council Act 2019
The Judicial Council Act 2019 was signed into law on 23 July 2019. The Act has yet to be commenced.
The Act provides for the establishment of the Judicial Council, comprised of judges, and a Personal Injuries Guidelines Committee. The Committee’s sole function will be to develop and periodically review guidelines for assessing general damages for various types of personal injuries, which will effectively supersede the Book of Quantum.
The measures should address the high levels of damages awarded in Ireland in comparison with other jurisdictions. The changes represent one of the key recommendations of the Cost of Insurance Working Group, which was established to investigate the high cost of insurance in Ireland and propose reforms.
Separately, the Working Group published its ninth progress update on 19 July 2019. The update noted that 31 of the Working Group’s 33 recommendations on motor insurance have been implemented or are “ongoing” and that the reforms have helped to reduce the cost of motor insurance by 24.5% from its peak. 13 of the 14 recommendations on employer/public liability insurance due by Q2 2019 have been completed or are ongoing, although the cost of insurance remains an issue for small businesses and voluntary groups.
Consumer Contracts Bill 2017 Feedback Statement
The Department of Finance has published feedback from its consultation on the Consumer Contracts Bill. The insurance industry is critical of the Bill, citing inconsistencies and vague provisions. The Bill would also replace long-standing principles of insurance, which could result in increased costs for insurers and therefore increases in premium. Additionally, the duplication of existing regulations in the Bill would result in increased compliance costs for the consumer. Generally, there is support for the Bill from representative groups as it remedies the imbalance between insurers and the insured. It is also believed that the Bill will improve the insurance industry’s relations with customers. Legislative protection for consumers of insurance contracts is overdue. The Bill addresses some of the main areas of concern, including non-disclosure, misrepresentation and warranties. However, they feel that the Bill could be more effective by using the EU definition of small and medium enterprises, increasing the length of time for renewals and introducing an insurance watchdog.
The feedback is available here.
Health Insurance (Amendment) Act 2018 (Commencement) Order 2019
Section 3 of the Health Insurance (Amendment) Act 2018 came into effect on 27 June 2019. Section 3 of the Act provides for an increase in the Health Insurance Authority’s membership from 5 to 7 members, and for an expansion of the quorum from 3 to 4. The aim of this section is to provide the Authority with additional expertise in the carrying out of its functions as an advisory body for the Minister for Health in private health insurance matters.
The Order is available here.
A Proportionality Toolbox for Solvency II
Insurance Ireland and the Dutch Association of Insurers have put a discussion paper, “A Proportionality Toolbox for Solvency II“, before the European Commission and EIOPA. The paper calls for the application of a range of proportionate measures under Solvency II in respect of small to medium-sized non-life insurers underwriting non-complex products. Under the proposed framework, eligible EU insurers would be subject to the same Pillar I (capital) requirements of Solvency II but fewer Pillar II and III requirements. Key elements of the proposal include:
- increasing the threshold application of Solvency II from €5 million premium income to €10 million premium income; and
- the application of proportional measurers in respect of EU non-life insurers earning €10-€50 million in premium income (plus comparable increases in other Solvency II thresholds).
Among the proportionate measures proposed by the proportionality toolbox are:
- a simplified standard formula as a default that is not conditional on such insurers meeting the requirements of Article 109 of Solvency II;
- fewer Solvency II Quantitative Reporting Templates including an ability to omit those that are not directly relevant to the business written (for example, where no cross-border business or reinsurance is undertaken by the insurer), combined with an exemption from the requirement to prepare semi-annual QRTs unless the insurer has (a) either submitted substandard QRTs in the past or (b) has an unstable solvency position; and
- replacement of the full Own Risk and Solvency Assessment with a proportionate version coupled along with simplifications to the current form of the Solvency and Financial Condition Report.
Both associations believe that these measures, if implemented, would facilitate the consistent application of the principle of proportionality at EU level. They are also of the view that the toolbox would enable small and medium insurers such as InsurTechs to gain a foothold in the market by reducing their compliance burden but without adversely affecting policyholders or prudent regulatory supervision.
Commission Report on Group Supervision under Solvency II
Under Article 242 of Solvency II, the Commission is required to assess the value of enhancing group supervision and capital management within insurance groups to determine if the Directive should be amended. EIOPA’s assessment determines that it is appropriate to include group supervision within the review in 2020.
- Scope of group supervision and supervisory powers over (re)insurance groups. Diverging applications of the rules on group supervision in Solvency II may be damaging to policyholder protection, depending on how national supervisory authorities establish the scope of supervision, and exercise supervision at the parent holding companies’ level. The need to ensure that groups whose parent company is headquartered in a third country are properly supervised is also highlighted as a concern.
- Group solvency calculation and supervision. A number of legal uncertainties and diverging supervisory practices that can have an important effect on group solvency have been identified in this area. This report states that the use of group internal models can also present issues that need to be addressed. For example, a different implementation of the same internal model at solo level and at group level on fundamental aspects such as the dynamic volatility adjustment can affect group risk management. Additionally, the use of a partial internal model by a group could cause regulatory arbitrage concerning the way to integrate in the group solvency the entities out of scope of the model.
- Group governance and reporting. Governance requirements at group level are not fully specified in the Directive and as a result, a very wide margin for interpretation exists. In terms of Pillar III requirements, the definition and scope of intragroup transactions to be reported are deemed by EIOPA and NSAs to be unclear and incomplete. Supervisors have yet to form a united view in respect of the appropriate level of harmonisation of the reporting of intra-group transactions and risk concentrations.
- Insurance guarantee schemes. The lack of uniformity regarding IGS in Europe can adversely affect policyholders, as illustrated by a number of recent cases of failures of insurers operating cross-border. The need for harmonisation of IGS is currently being investigated by EIOPA.
The report is available here.
EIOPA publishes June 2019 Financial Stability Report
On 1 July 2019, EIOPA published its June 2019 Financial Stability Report. Some of the key conclusions of the report are:
- as a result of uncertain economic conditions, monetary policy is likely to remain expansionary, which increases the risk of a prolonged low-yield environment;
- there are signs of an increase in yield-seeking behaviour and this trend could continue as insurers and pension funds struggle to meet their long-term financial obligations;
- the insurance sector remains adequately capitalised but profitability is under pressure as a result of the low-yield environment;
- the reinsurance sector has performed well in challenging circumstances, remaining adequately capitalised despite 2018 being the fourth costliest year ever in terms of catastrophe losses;
- valuations in certain financial and real estate markets are stretched, indicating a risk of future volatility in market prices. In turn, this raises the possibility of a sudden reassessment of risk premia; and
- climate-related and cyber risks are becoming increasingly prominent and continue to demand the attention of insurers and reinsurers.
EIOPA consults on Guidelines for Cloud Outsourcing
EIOPA is consulting on draft guidelines regarding outsourcing to cloud service providers. The consultation will close for comment on 30 September 2019.
EIOPA identified the need to provide specific guidance on how the provisions in Solvency II should be applied in relation to outsourcing to cloud service providers. The guidelines seek to clarify the application of the Solvency II rules on outsourcing, and to encourage supervisory convergence concerning the expectations and processes applicable in regard to cloud outsourcing.
The guidelines cover the following areas:
- criteria to identify which cloud services are outsourcing;
- principles and elements of governance of cloud outsourcing, which include documentation obligations and a notification requirement in writing to supervisory authorities;
- pre-outsourcing analysis, comprising a materiality assessment, risk assessment and due diligence on the service providers;
- management of access and audit rights, security of data and systems, sub-outsourcing, monitoring and control of cloud outsourcing and exit strategies; and
- principle-centred advice for national supervisory authorities on the supervision of cloud outsourcing arrangements including, where relevant, at group level.
The guidelines will apply from 1 July 2020 to all cloud outsourcing arrangements entered into, or altered on or after, that date.
EIOPA publishes Q&A on regulation
EIOPA’s Question and Answer process is a mechanism through which stakeholders in the insurance and pensions industries can submit questions on EU law and EIOPA Guidelines. The objective of the process is to ensure consistent and effective regulation and to promote supervisory convergence in the EEA. EIOPA and the European Commission collaborate closely on responses to questions raised to ensure they remain consistent with the relevant legislative texts.
On 4 July 2019, EIOPA published its most recent Q&A concerning the Solvency II Directive. In total, there were 11 questions and answers, which related to such topics as: the reporting of technical provisions for unit-linked contracts, and outsourcing of critical or important functions or activities. The Q&As are not legally binding, nor are they subject to “comply or explain”. However, they are intended to help achieve a level playing field for participants and their application is therefore scrutinised by EIOPA and national supervisory authorities.
EIOPA calls for candidates to join Consultative Group on Digital Ethics in insurance
EIOPA recently issued a call for candidates to join a multidisciplinary Consultative Expert Group on Digital Ethics in insurance following its thematic review on the use of Big Data Analytics in motor and health insurance. The review indicates a strong trend towards data-driven business models throughout the insurance value chain. Traditional data sources are being increasingly combined with, as opposed to replacing, new sources like online media data. BDA tools such as artificial intelligence are already actively used by 31% of firms that participated in an EIOPA survey.
There are risks to digitalisation, which need to be managed, and the significance of these risks is magnified in the context of BDA. In particular, ethical issues relating to the fairness of the use of data and regarding the accuracy of certain BDA tools must be addressed.
The role of the Group is to assist EIOPA in the development of smart policy proposals that promote responsible financial innovation for the benefit of the European consumer. The Group’s tasks will include:
- contributing to the development of a set of principles of digital responsibility in insurance;
- addressing, from an ethical standpoint, the use of new business models, technologies and data sources in insurance; and
- giving specific focus to pricing and underwriting, taking into consideration the specificities of the insurance sector. Certain groups of vulnerable consumers will be given special consideration.
EIOPA consults on the Harmonisation of National Insurance Guarantee Schemes
As part of the Solvency 2020 review, EIOPA is consulting on the harmonisation of national Insurance Guarantee Schemes. This consultation paper is a draft response to the IGS aspect to the Solvency II Call for Advice from the European Commission. The advice in the draft paper will be amended following input gathered from this consultation and will be included in the Solvency II opinion that will be submitted to the European Commission.
EIOPA is seeking feedback on draft technical advice on the need to establish minimum harmonising rules at EU level on IGSs and what those rules should cover.
EIOPA’s call for advice sets out 6 key features of a harmonised EU wide approach to IGS and sets out a range of options as to how each feature can be approached, then identifies its recommendations amongst those options. Recommendations on the minimum set of harmonised features for national IGSs include:
Eligible policies – EIOPA favours national IGSs covering specific life and non-life policies;
Eligible claimants – natural persons and micro and small-sized legal entities should fall within the scope of national IGSs;
Coverage level – a harmonised minimum coverage level is preferred, with member states able to increase the level of coverage in their jurisdiction; and
Funding – ex-ante contributions by insurers, possibly supplemented by ex-post funding arrangements where there are capital shortfalls, should form the basis of the funding of IGSs.
The final version of EIOPA’s advice will be contained in its opinion on the 2020 Solvency II review.
EIOPA consults on increased proportionality of supervisory reporting and public disclosure
Following on from the European Commission’s request in February 2019 for advice on the review of the Solvency II Directive, EIOPA has published a cover note and press release on a package of consultations on supervisory reporting and public disclosures being carried out as part of its Solvency II 2020 review. It has also published consultation papers relating to draft technical advice to the European Commission on:
- general issues on supervisory reporting and public disclosure – as part of its proposals, EIOPA intends to extend its deadline for annual reporting by two weeks;
- individual Quantitative Reporting Templates and Annexes – it is proposed that QRTs be divided into core and non-core categories with different risk-based thresholds for annual or quarterly submissions;
- Solvency and Financial Condition Report – certain elements of SFCR such as the overview of the system of governance may be moved from the SFCR to the Regular Supervisory Report to make the SFCR more accessible and usable by the public; and
- financial stability reporting – there are proposals to collect additional information in respect of certain identified information gaps and also to reduce the entry points, thereby reducing the reporting burden for the industry.
The deadline for responses is 18 October 2019. EIOPA will include the final version in its opinion on the 2020 Solvency II review, which will be published for consultation in the fourth quarter of 2019.
EIOPA examines national general good rules
On 22 July 2019, EIOPA published a report analysing national general good rules in the context of the proper functioning of the Insurance Distribution Directive and the internal market.
The report, which is required by Article 11(5) of the IDD, provides:
- a description of the types of rules applicable to insurance distribution activities that are required by national competent authorities; and
- an assessment of the main areas of divergence of general good rules and the impact they are having on the proper functioning of the IDD and the internal market.
The main findings of the report are:
- 2 of the 28 NCAs need to take further steps to ensure the appropriate publication of national general good rules;
- when viewed collectively, diverging general good requirements present significant entry costs for entities wanting to do cross-border business; and
- some Member States include general good rules that allow host NCAs to impose registration and organisational requirements that are within the competence of home NCAs under the IDD. This contravenes the “single registration” principle and is detrimental to the proper functioning of the IDD and the Single Market.
To address the issues raised, EIOPA plans to:
- issue individual recommendations to NCAs as to best practice for publishing general good rules to enable insurance distributors to access and understand them;
- consult with stakeholders to identify general good rules that may be disproportionate to the goal of balancing consumer protection against ease of doing business on a cross-border basis; and
- further analyse the issue of certain Member States’ general good rules encroaching on the competence of home NCAs and, where appropriate, take further action.
Eiopa’s Risk Dashboard – July 2019
The latest Risk Dashboard is based on Solvency II data from the first quarter of 2019. The results illustrate that while the risk exposures of the insurance sector are stable in general, macro and market risks have increased to a high level. These increased risks are due to a further decline in swap rates and lower returns on investments in 2018.
Credit risks are unchanged at medium level. SCR ratios exceed 100% for the majority of the examined undertakings, even when the effect of transitional measures is excluded.
EIOPA consults on the Draft Opinion on Supervision of Remuneratoin Principles
On 25 July 2019, EIOPA launched a consultation paper on the draft opinion on the supervision of remuneration principles in the (re)insurance sector.
To discourage excessive risk-taking, the European Commission Delegated Regulation (EU) 2015/35 contains high level remuneration principles for (re)insurers, which has led to divergent supervisory practices emerging across the EU. EIOPA has prepared the Draft Opinion to give guidance to NSAs on the application of these principles to ensure effective and consistent supervision across the EU.
The Draft Opinion addressed to NSAs aims to enhance supervisory convergence. It:
- includes guidance on how to challenge the application of the principles;
- aims to promote a proportionate approach by reducing the scope of the principles to focus on staff that are identified as being higher profile risk-takers; and
- identifies benchmarks for the purpose of triggering supervisory dialogue.
The supervisory approach in respect of the principles is risk-based. In this regard, risk should be assessed at two levels: (i) the overall risk profile of undertakings; and (ii) the design of remuneration policies. NSAs have greater discretion to adopt a proportionate approach when undertakings are categorised as low-risk.
The deadline for responding to the consultation is Monday 30 September 2019.