Insurance Regulatory Update July 2020
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.
This issue includes: an update on business interruption COVID-19 claims, the Irish Government’s proposals for insurance reform, new professional indemnity insurance cover thresholds for retail intermediaries and the Central Bank consultation on regulations for pre-emptive recovery planning for (re)insurers. In European news, insurers respond to EC consultation on draft regulations on sustainable finance; ESAs held public hearing on ESG disclosures and EIOPA consults on new business models arising from digitisation.
Update on business interruption COVID-19 claims
As reported in our previous bulletins, developments in the FCA test case on business interruption claims due to COVID-19 are being scrutinised both by industry stakeholders and the regulator on this side of the water.
On 3 July, the FCA published its reply to the defences submitted by each of the eight defendant insurers. The FCA’s reply is available to read here.
The next step is the service of arguments from both sides which is expected between 10 July and 14 July. An eight day court hearing before Lord Justice Flaux and Mr Justice Butcher is scheduled for 20-23 July and 27-30 July.
On 7 July, the Governor of the Central Bank, Gabriel Makhlouf, told the Oireachtas special committee on COVID-19 that the Central Bank was “taking advice” as to whether it should follow the example of the FCA in the UK and take legal action to resolve the impasse between insurers and businesses over losses arising from COVID-19.
He said that the Bank was also talking to the insurance company involved. “We are absolutely determined that insurance companies should pay up where they have to pay up. They shouldn’t be obligated to pay up where there’s nothing in the contract. It’s inevitable in some cases this is something that needs to be taken to the courts”.
Insurance reforms contained in the new Programme for Government
On 15 June, Fianna Fáil, Fine Gael and the Green Party signed off on the draft Programme for Government, which contains several measures for insurance reform. The new government has indicated that it supports the Central Bank’s direction on compensating business with disruption cover for infectious diseases and intends to work to protect customers during and after the COVID-19 crisis, with particular emphasis on business disruption insurance, travel insurance and rebates for motor insurance customers. The government is also exploring the feasibility of a group insurance scheme to support the tourism sector which has been badly affected by COVID-19 and to facilitate the sector’s expansion.
Proposed reforms are also included to tackle rising insurance costs:
- enhancing and reforming the role of the Personal Injuries Assessment Board;
- regulating claims management companies and claims harvesters;
- potential changes to the Occupiers Liability Act and the Civil Liability Act (duty of care) to strengthen waivers and notices to increase protections for consumers, businesses, sporting clubs and community groups; and
- evaluating the need for a constitutional amendment to enable the government to establish guidelines on award levels.
The government also intends to increase transparency, tackle anti-competitive behaviour, and foster competition in the Irish insurance market by:
- requesting stakeholders to give an assessment of the expected impact on premium levels of the key reforms being fully introduced;
- expanding, with urgency, the National Claims Information Database to include employer liability and public liability insurance to track the level of claims;
- establishing a databank within the Central Bank for new entrants;
- working to remove dual pricing from the market; and
- creating an office within Government tasked with encouraging greater competition in the Irish insurance market.
Insurance Ireland has also published a statement from its Chief Executive, Moyagh Murdock, welcoming the Government’s commitment to insurance reform and stating that it looks forward to working with everyone involved to expedite the changes required in the best interests of policyholders.
New requirements on professional indemnity insurance cover for retail intermediaries
The minimum amount of professional indemnity insurance cover that must be held by insurance intermediaries as well as intermediaries registered under the Investment Intermediaries Act, 1995 has been increased to €1,300,380 per claim and €1,924,560 aggregate cover per annum with effect from 12 June 2020. These replace the previous figures which were €1,250,000 and €1,850,000 respectively. The amendment applicable to insurance intermediaries has been implemented in Irish law by the European Union (Insurance Distribution) Amendment Regulations 2020 (S.I. No. 215 of 2020). The Central Bank has also amended the Handbook of Prudential Requirements for Investment Intermediaries and its guidance for retail intermediaries to reflect the changes.
The change arises from a regular review of the base amounts for professional indemnity insurance by EIOPA to take account of changes in the index of consumer prices published by Eurostat.
Central Bank invites feedback on CP131 Regulations for pre-emptive recovery planning for (re)insurers
The Central Bank is inviting feedback in advance of 30 October 2020 on the CP131 Regulations for pre-emptive recovery planning for (re)insurers. CP131 includes a proposal for Regulations requiring insurers to have a financial recovery plan and a plan for transfer of business in certain specified financial scenarios. It also includes proposed Guidelines as to what the (re)insurers’ plans need to address.
The rationale underpinning the requirement for (re)insurers to put in place a pre-emptive recovery plan is to encourage companies to future-proof their businesses against a range of potential adverse scenarios. Effective planning and preparation means that it is far less likely that insurers will fail and, even if they do, lessens the impact of that failure. This safeguards both policyholders and fiscal stability.
The Central Bank welcomes general comments or suggested amendments to the Regulations or the Guidelines that accompany them. In particular, the Central Bank asks that respondents consider:
- What, if any, other areas should be covered in the Guidelines or in future guidance?
- Are there any areas where the application of proportionality can be improved or clarified?
Submissions should be marked ‘Pre-emptive Recovery Planning’ and sent with return contact details to:
Insurance Consultation 2020
Central Bank of Ireland
PO Box 9708
Or by e-mail to: [email protected]
CCPC launches public consultation on public liability insurance market
The Competition and Consumer Protection Commission (CCPC) launched a public consultation on the public liability insurance market. The CCPC called on stakeholders within the insurance industry, customers and public bodies to submit their views on competition in the market for public liability insurance by Friday, 3 July 2020. The consultation focused on market trends and concerns which were evident prior to the emergence of the COVID-19 pandemic. The CCPC will then make recommendations to deal with those concerns.
Contributions on the following are of particular interest to the CCPC:
- the degree of competition in the public liability insurance market – including conditions for entry into, expansion of and exit from the market;
- the interplay between the “insurance cycle” and the cost and availability of public liability insurance;
- the function of switching;
- the level of price inflation observed in the market; and
- the digitalisation of the delivery of insurance services.
Suggestions on how to improve the performance of the market are also welcome.
A link to the CCPC press release is available here.
Central Bank publishes insurance corporations’ statistics – Q1 2020
The Central Bank has published insurance corporations’ statistics for Q1-2020. The data indicates a negative impact as a result of COVID-19. However, the full scale of the economic impact caused by the pandemic may take some time to become apparent.
- Total Assets fell from €363 billion at end 2019 to €337 billion in Q1 2020, returning to Q2 2019 levels. This was largely attributable to a decline in investment fund (IF) shares, equities and debt securities as a result of the initial impact of COVID-19.
- Unit-linked life insurance technical reserves (ITRs) accounted for 99 % of the €26 billion decline in liabilities since Q4 2019.
Director General of Financial Conduct at the Central Bank delivers speech on protecting consumers, investors and SMEs during COVID-19
Director General of Financial Conduct at the Central Bank, Derville Rowland, delivered a speech to the Association of Compliance Officers in Ireland on the 5 June. The speech was on the subject of protecting consumers, investors and SMEs during COVID-19.
In her speech, Ms Rowland acknowledges the “sizeable economic and personal cost” that COVID-19 has brought to bear on Irish society. She addresses both the scale of the economic impact as well as key measures implemented by the Bank since the outbreak of the pandemic.
In terms of assessing the economic impact of the pandemic, the true extent remains, as yet, unknown. The path to recovery is indelibly linked to the duration and nature of containment measures.
Ms Rowland points to the important role played by insurers in protecting households and firms and reiterated the expectation of the Central Bank that insurance firms “act honestly, fairly and professionally and in the best interests of their customers at all times and particularly during the Covid-19 crisis” and adhere to the Consumer Protection Code 2012.
The speech addresses the issue of insurance cover for business interruption during COVID-19. The Central Bank expects most policy wordings to be clear in terms of what cover is provided/excluded but, where there is any ambiguity in the wording of the policy, “the interpretation most favourable to the consumer should prevail”. Moreover, where a claim can be made because a business has closed because of a Government direction due to contagious or infectious disease, the Central Bank takes the view that “recent Government advice to close a business in the context of COVID-19 should be treated as a direction”.
There is a real risk of unfair sales practices at this time. The Central Bank reminds firms not to incentivise staff into meeting targets where this may result in inappropriate sales to customers.
Ms Rowland cautioned against an assumption that enforcement will be any less effective during this time of crisis. She rejected that misconduct during a time of crisis is inevitable and instead calls for continued and heightened vigilance – particularly in relation to money laundering, terrorist financing and pandemic-related scams that target the vulnerable in society.
She acknowledged the opportunity which the COVID-19 crisis presents for financial services to play an essential and significant role in the economic recovery of the country.
European Commission invites feedback on draft delegated regulations on sustainable finance
The European Commission invited feedback by 6 July on a draft delegated regulation amending Delegated Regulation 2015/35, the regulations that expand the Solvency II framework in terms of additional requirements in relation to, among other things, governance and risk management of (re)insurers to provide for sustainability factors.
The new draft delegated regulation provides for the integration of sustainability factors in (re)insurers’ risk management processes and for sustainability risks to be taken into account by the actuarial function in assessing uncertainty when calculating technical provisions.
This draft delegated regulation is part of a broader project by the European Commission to “include social and governance (sustainability) considerations at the heart of the financial system to help transform Europe’s economy into a greener, low-carbon, more resilient, resource-efficient and circular system.”
European Commission invites feedback on draft delegated regulations on the integration of sustainability factors into the product oversight and governance requirements
The European Commission has also invited feedback on draft delegated regulations amending Delegated Regulation 2017/2358 and Delegated Regulation 2017/2359 regarding the integration of sustainability factors and preferences into the product oversight and governance requirements for insurance undertakings and insurance distributors and into the rules on conduct of business and investment advice for insurance-based investment products.
These draft regulations will also form part of the EU’s action plan on sustainable finance, which would require insurers and brokers to give honest and transparent advice to clients on the social and environmental risks inherent in their investments.
European supervisory authorities held public hearing on ESG disclosures
The three European supervisory authorities (EIOPA, the European Banking Authority and the European Securities and Markets Authority) held a public hearing on 2 July 2020 on proposed environmental, social and governance (ESG) disclosure standards for financial participants, advisers and products.
The hearing was to gather views on a consultation paper, published by EIOPA on 23 April discussing the proposed regulatory technical standards (RTS) under Regulation (EU) 2019/2088 (the Sustainable Finance Disclosure Regulation or SFDR). The SFDR arose from the European Commission’s “Financing Sustainable Growth” action plan to clarify fiduciary duties and enhance transparency in order to increase levels of sustainable investment and manage risks arising from climate change and other environmental and social issues. The SFDR seeks to harmonise ESG disclosure standards throughout the EU and the draft RTS contain specific requirements on ESG-related information to be included in product information documents, websites and periodic reports detailing, for example, any adverse impact financial services products may have and the sustainable investment objectives associated with financial services products.
Separately, a group of financial services associations (including Insurance Europe) have called for a centralised public register of ESG data in a letter to the European Commission. As further regulatory obligations in relation to sustainable finance, arising from the EU “Green New Deal” and “Financing Sustainable Growth” action plan, are imposed on financial services provider, the need for comparable and reliable ESG data has become pressing. Currently available data is insufficient for the new regulatory disclosure and taxonomy requirements.
EIOPA consults on new business models arising from digitalisation
EIOPA has launched a public discussion on the (re)insurance value chain and new business models arising from digitalisation. The discussion paper notes the rapidly changing nature of technology and its impact on the business models of insurers and intermediaries. In particular, changing technology has compelled insurers and intermediaries to use more third-party services and outsourcing.
The increasing complexity of these business models is bringing benefits, such as more cost effective and efficient processes, but also risks, particularly risks arising from data protection issues and the resulting reputational risks. The discussion paper states that the “value chain”, linking the insurer and intermediary and other entities in the business model, is becoming more fragmented due to the increased complexity. Supervisory authorities need to be able to identify areas where greater supervision is needed in order to keep their regulatory functions operating effectively in a technologically changed world. As many new business models contain various cross-border elements, supervisory convergence is needed to ensure that supervision is consistent.
EIOPA is asking interested parties to give their views on the risks and benefits arising from technological changes and whether they have any proposals on solutions or next steps.
Comments must be received by EIOPA before 7 September 2020.
EIOPA’s press release can be found here.
EIOPA supports the ESRB’s call on enhanced monitoring of liquidity risks in the insurance sector
EIOPA supports the European Stability Risk Board’s (ESRB) call for enhanced monitoring of liquidity risks in the insurance sector with a view to future-proofing the industry from potential shocks such as COVID-19 which may arise going-forward.
To this end, and in direct response to the outbreak of the coronavirus pandemic, EIOPA implemented a framework to enable it to track liquidity risks in the sector with increased effectiveness. It should be noted that, to date, no such risks have presented themselves.
In addition, EIOPA’s review of Solvency II places an emphasis on developing enhanced mechanisms to both identify and deal with liquidity risks.
EIOPA will continue to assist the ESRB in its efforts to promote and maintain the fiscal stability of the insurance sector.
EIOPA publishes annual activity and supervisory reports
Annual Activity Report
EIOPA’s annual activity report for 2019 has been published. In particular, EIOPA has noted its thematic review on the use of Big Data analytics, which led to the establishment of a consultative expert group on digital responsibility in insurance, and its thematic review of consumer protection in travel insurance, which led to a warning to insurers and intermediaries with a view to tackling high commissions for travel insurance.
During the course of 2019, EIOPA continued to promote consistent supervisory practices throughout Europe. Priority was given to proportionality, the supervision of internal models and cross-border supervision. EIOPA also continued to identify risks and vulnerabilities in the market. The ongoing low yield environment continues to be of concern.
In relation to insurance distribution, EIOPA worked on a number of deliverables including the provision of technical advice to the European Commission on incorporating sustainability risks in delegated acts and an examination of general good rules under the Insurance Distribution Directive.
Supervisory Activity Report
EIOPA separately published its report on supervisory activities for 2019. In addition to the activities described in the annual activity report, the supervisory report notes the ongoing Solvency II 2020 review. EIOPA has identified areas of inconsistency in how Solvency II is being implemented including technical provisions, group supervision, proportionality and the supervision of captives. The identification of such problems will enable EIOPA to recommend legislative change or guidance to facilitate supervisory convergence.
EIOPA’s press release is here.
EIOPA publishes findings of regular supervisory report peer review
EIOPA has published the findings of a peer review exercise in relation to supervisory practices throughout Europe concerning the submission of Regular Supervisory Reports (RSRs) by (re)insurers. All national competent authorities (NCAs), including the UK, were assessed for consistency in the application of the principle of proportionality in their decisions as to the frequency of submissions of RSRs.
Under Delegated Regulation 2015/35, (re)insurers are obliged to submit RSRs to their NCAs on a regular basis. It is up to the relevant NCA to take a proportionate approach to decide whether an RSR must be submitted more frequently than once every three years. The NCA can also decide whether a full RSR is required or a summary RSR describing material changes.
EIOPA identified significant divergence among NCAs in relation to the frequency of submission, the definition of “material changes” and the communication of NCA decisions in this area to market participants. EIOPA issued fifty one recommended actions addressed to NCAs in twenty-six countries. These include calling on NCAs to take proportionality into account, make risk-based assessments and create internal policies outlining the decision process behind decisions around frequency of submission of the full RSR. NCAs were also asked to ensure that (re)insurers submit formal notifications of “no material changes” where relevant.
EIOPA’s press release can be found here.
EIOPA responds to the European Commission’s digital finance strategy consultation
EIOPA has responded to the European Commission’s consultation on an EU-wide digital finance strategy and has identified a number of areas for improvement. These were:
- Insurance regulation must address both the threats and opportunities that new technologies and ways of working present.
- Data must be used ethically and transparency is key to achieving this. EIOPA is consulting with an expert group on Digital Ethics in the insurance industry to develop guidance on governance issues linked to the use of artificial intelligence and other related matters.
- In the context of access to relevant datasets, EIOPA emphasises the importance of:
- Identifying the possible benefits and risks to the industry of Open Finance/Open Insurance;
- Data exchange between different platforms;
- Developing a framework for reporting cyber incidents; and
- Standardising the approach to data, innovation and digitalisation across the EU.
EIOPA’s press release can be found here.
Insurers respond to EC proposals for a European data strategy
Insurance Europe has also issued its response to the European Commission’s proposals for a common EU data strategy. It claims that a shared European data strategy would enable member states to support data-centric businesses whilst also safeguarding consumer rights as we move towards a more digital economy. In Insurance Europe’s view enhanced availability of data will improve insurers’ risk management, augmenting the customer experience and increasing fraud detection and prevention.
Equally, a common EU strategy on data would allow individuals access their own personal data to a far greater extent than has previously been possible. However, it will be necessary to design an effective system by which data could be shared safely between companies and which would allow customers secure access to their sensitive data whilst at all times protecting their privacy. A cohesive framework will be central to the success of a common data policy that maximises the benefits of data usage and minimises the risks to users’ rights.
Insurance Europe’s press release is available here.
AMICE have also responded to the Commission’s proposals for a European data strategy and have acknowledged the need for such a strategy to facilitate the digital transformation of European society.