08/07/2019
Briefing

In this issue, topics covered include: the Central Bank (Amendment) Bill 2019, the Central Bank’s Insurance Quarterly, funding the cost of financial regulation, EIOPA’s draft opinion on integrating sustainability in Solvency II, and agreed common minimum standards for data revisions.

Domestic News

Central Bank Publishes Insurance Quarterly

On 28 June 2019, the Central Bank published its quarterly newsletter for Q2 2019. Some of the topics covered include: trends in (re)insurers asset allocations; the value of public disclosures and best practices in presenting them; and general updates on domestic and European supervisory matters from the Central Bank and EIOPA respectively.

Overall, the insurance industry continues to demonstrate a conservative approach to investment and one that is well-aligned with the prudent person principle. However, the report highlights a noticeable shift towards riskier asset allocation at the industry level. For example, from 2016 to 2018, the percentage of fixed income investments in sovereign bonds dropped from 55% to 47%. The move likely reflects efforts to maintain profitability in low-yield economic conditions, but the Central Bank encourages boards of insurers to remain conscious of their assets’ security, liquidity and quality.

The importance of the Solvency and Financial Condition Report (SFCR) to ensuring a transparent and effective (re)insurance market is also discussed. The Central Bank’s confidence that its SFCR online repository contains accurate information is achieved through cross-validation of data and reasonable assurance opinions. They set out a number of “do’s and don’ts” for presenting information in SFCRs in order to assist the Central Bank in its cross-validation role by enhancing machine readability.

Central Bank Publishes Intermediary Times

The Central Bank recently published the second edition of the Intermediary Times for 2019 which covers, amongst other things, Brexit, the fitness and probity (F&P) regime and authorisations under the Investment Intermediaries Act, 1995 (IIA). Insurance intermediaries that conduct cross-border mediation are advised to be sufficiently prepared for a no-deal Brexit scenario. Insurance intermediaries are required to ensure that they have carefully assessed their obligations to current and potential customers, and taken any necessary steps to mitigate any potential risks. Post-Brexit, insurance intermediaries registered with the Central Bank under the EU (Insurance Distribution) Regulations (IDR) may only intermediate business on behalf of a UK or Gibraltar insurer if that insurer is authorised in the EU.

The F&P regime, and the obligations associated with the regime, continue to be an area of focus for the Central Bank. In April 2019, the Central Bank issued a communication to the management of all firms urging them to comply with their legal obligations under the regime. Firms are required to be ‘satisfied on reasonable grounds’ that the relevant person complies with the F&P requirements prior to allowing them to carry out a controlled function. The Central Bank is critical of firms that fail to report identified F&P concerns and individuals that omit material information from their F&P applications for approval for senior roles.

In February 2019, EIOPA published recommendations for the insurance sector in the event the UK exits the EU without a withdrawal agreement. Recommendation 9 states that UK insurance intermediaries that intend to continue or commence insurance distribution activities to EU27 policyholders or in relation to EU27 risks will have to be established and registered in the EU27 in accordance with the relevant provisions of the EU Insurance Distribution Directive.

Since the IDR has removed insurance policies from the scope of the IIA, the Central Bank encourages investment firms to review their authorisation under the IIA in light of the activities it undertakes. If a firm considers its activities to be outside the scope of the IIA, it should seek to revoke its authorisation.

The Intermediary Times is available here.

Central Bank: Funding the cost of Financial Regulation

On 14 June 2019, the Central Bank published a press release and statement regarding funding the cost of financial regulation and supervision. The aim is to eliminate the cost to the taxpayer by implementing a “user pays” system, whereby 100% of funding needs will be met by levies that are based on incurred costs. The Central Bank plans to reach this target over the next five years. Industry pays approximately 66% of the costs today.

The Central Bank is also seeking to improve the transparency and predictability associated with the levy.

Ed Sibley, Deputy Governor Prudential Regulation, commented that the increased cost of regulation is attributable to a number of factors, including changes in the Central Bank’s supervisory mandate and the growth of the Irish financial services industry as a result of Brexit. He continued to say that the Central Bank is “committed to stabilising staff numbers and costs to ensure [its] long-term financial independence and to limit the rate of future increases in levies on regulated firms”.

Central Bank (Amendment) Bill 2019

The Government has given its approval for the Department of Finance to draft the heads of a Bill for the implementation of the proposed Senior Executive Accountability Regime (SEAR). The Heads of the Central Bank (Amendment) Bill 2019 will provide for:

  • the introduction of the SEAR and Conduct Standards;
  • set out enhancements to the existing Fitness and Probity Regime; and
  •  remove what is known as the “Participation Link”, which requires the Central Bank to first prove a contravention of financial services legislation against a regulated financial services provider before it can commence action against an individual.

On welcoming the government’s approval, Minister for Finance and Public Expenditure and Reform Paschal Donohoe commented that:

“The message is clear; leading change in cultural attitudes starts from the top down but we need to start talking to each other and learning from each other at all levels to achieve the goal of cultural change that we are striving for.”

Statement on Insurance Ireland’s 2017 Factfile: From 2013-2017 Irish insurers made underwriting losses of €1.1 Billion in motor and business insurance

On 13 June 2019, Insurance Ireland published its annual Factfile which gives a comprehensive insight into the Irish insurance market. The 2017 Factfile shows that the recovery experienced in the non-life insurance market has not been consistent across the board, with business insurance still making underwriting losses of €47 million in 2017, making its total losses between 2013-2017 €349 million.

In the same period, motor insurance had losses of €757 million but managed to return to underwriting profitably in 2017 and brought the non-life market overall underwriting profit to €126.5 million for 2017. This represents a 6.5% return on premium for the non-life sector, a significant improvement from a return of 0.5% in 2016.

Kevin Thompson, CEO of Insurance Ireland, urged insurers to uphold disciplined underwriting practices in what he described as a “volatile market” as vital claims reforms have not been delivered and this must be addressed as an urgent concern to ensure stability in the market.

Updated Brexit FAQS for Financial Services Firms

The updated FAQs address the issue of seconding staff located in the UK to Irish authorised firms to do business that was previously carried out by a UK authorised firm. The Central Bank will consider applications for the use of secondees on a case by case basis, taking into account factors such as the time being dedicated to the Irish firm’s operations and the availability of adequate local management resources to oversee the seconded employees. In addition, the extent to which the interests of the secondees are aligned with the Irish firm, as opposed to another economic or legal entity, will be an important consideration.

The FAQs are available here.

International News

EIOPA re-consults on new amendments to technical standards on the mapping of ECAIS

EIOPA is consulting on draft technical standards amending Implementing Regulation (EU) 2016/1800 concerning the mapping of credit assessments of External Credit Assessment Institutions (ECAIs) for credit quality steps (Draft ITS). The consultation will close for comment on 10 July 2019.

For the purpose of calculating insurers’ technical provisions and SCR, Solvency II allows the use of external credit assessments, that have been issued or endorsed by ECAIs. The Draft ITS, which amend the Implementing Regulations, set out the allocations to be used for each ECAI when determining credit risk for the purpose of calculating the SCR using the standard formula under Solvency II.

The consultation paper follows on from a previous consultation on the same topic conducted by the three European Supervisory Authorities in October 2018. The decision to re-consult was taken because of functional issues with the manner in which respondents were asked to share their views in October 2018. In addition, some elements in the mapping table needed to be updated to reflect the latest assessments.

Common minimum standards for data revisions agreed between the ECB, EIOPA, National Central Banks and National Competent Authorities

On 13 June 2019, EIOPA and the European Central Bank (ECB) published common minimum standards for supervisory and statistical reporting by (re)insurers agreed between EIOPA, the ECB, national central banks (NCBs) and national competent authorities (NCAs).

Under Solvency II, data reported by (re)insurers is used by NCAs in the supervisory review process and by the majority of NCBs as input in the preparation of insurance industry statistics, which the NCBs then submit to the ECB.

Taking into account the integrated reporting approach for supervisory and statistical reporting to EIOPA and the ECB, the bodies require a common understanding of the minimum level of data quality required, coupled with knowledge of when data revisions are necessary. The Standards cover:

  • Revising data. When NCAs or NCBs should request financial institutions to revise data previously submitted.
  • Synchronisation. The same data must be available at all levels (financial institutions, NCAs, NCBs, EIOPA and the ECB) at all times. Therefore, any revision of data should occur at every level of the transmission chain to ensure that all parties involved have the same data.
  • Timeliness. The revisions should be sent by the NCAs and NCBs to EIOPA and the ECB, respectively, in accordance with the identified timelines.
  • Historical revisions. When an issue is identified that would result in important revisions and also affects back data, revisions should be provided, at a minimum, as far back as technically possible, considering the operational limitations of the data collection infrastructure.
  • Explanatory notes. All special revisions of aggregated data and significant standard revisions of aggregated data should be accompanied by notes from the NCA/NCB explaining what prompted the revision.
  • Notice. To indicate that a data revision is required, NCAs should either use the erroneous flag available in the XML metadata file of the EIOPA Central Repository Specification or send an email to EIOPA informing it of the need for revision.

The ECB and EIOPA indicate that the Standards should not prevent stricter practices from being adopted at national level. The NCAs and NCBs are responsible for requesting data revisions when required from financial institutions.

The Standards are available here.

EIOPA invites comments on a draft opinion on integrating sustainability in Solvency II

On 3 June 2019, EIOPA published a consultation paper on a draft opinion on integrating sustainability in Solvency II. Comments are invited up to 26 July 2019. The opinion builds on the Technical Advice by EIOPA on the integration of sustainability risks and factors in delegated acts under the Solvency II Directive and the Insurance Distribution Directive.

The draft opinion addresses the challenges on integrating sustainability risks in prudential Pillar I requirements, and comments on how sustainability risks (specifically risks associated with climate change) can be incorporated into the investment and underwriting practices of (re)insurers. The opinion focuses on the areas of valuation of assets and liabilities, investment and underwriting practices and capital requirements.

EIOPA will submit the final draft opinion to EU institutions by 30 September 2019.

The full set of questions to which EIOPA invites Stakeholders to respond is set out at Annex 3.