In this issue, topics covered include: the passage of the Government’s no-deal Brexit contingency legislation; EIOPA’s no-deal Brexit Memorandum of Understanding with the Bank of England and the FCA; the Cost of Insurance Working Group’s eighth quarterly progress update on motor insurance and employer and public liability insurance; and the Central Bank’s third annual demographic report on diversity in pre-approval controlled function applications.

Domestic News

Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Act 2019 signed into law

The Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Act 2019 was signed into law on 17 March. The Act is designed to minimise the adverse impact of a “hard” no-deal Brexit. If the UK leaves the EU without a withdrawal agreement in place, the Act will take effect on the date that the UK exits.

The Act provides for various contingency measures in 15 areas covering key economic sectors with a view to protecting consumers and businesses.

Part 8 of the Act will be of particular relevance for insurance companies and insurance intermediaries. This part provides for a temporary run-off regime whereby undertakings based in the UK or Gibraltar who are providing insurance or insurance distribution services in Ireland immediately prior to Brexit on a freedom of establishment or freedom of services basis, may continue to operate in Ireland, solely to administer their existing portfolio of business for a period of three years from the date of the UK’s withdrawal from the EU if they fulfil certain conditions.

Amendments have also been made to the Stamp Duties Consolidation Act 1999 to provide for UK based insurers to remain liable for certain levies on their Irish premiums going forward.

Cost of insurance working group publish eighth quarterly progress update on motor insurance and employer and public liability insurance

The Cost of Insurance Working Group has published its eighth quarterly progress update focusing in particular on the status of all of the recommendations set out in the Action Plan of the Report on the Cost of Motor Insurance (Motor Report). The last deadline within the Motor Report Action Plan passed at the end of 2018. Of the 33 recommendations in the Motor Report, the progress update states that 29 have been completed, are ongoing or have been concluded in so far as the direct involvement of the Working Group is concerned.

Among the recommendations that are ongoing is the recommendation that insurers should set out reasons for large increases in premiums to consumers and an examination of the impact that legal and other fees have on personal injury awards. The examination in relation to legal fees has been delayed pending the commencement of certain provisions of the Legal Services Regulation Act 2015. The establishment of an Insurance Fraud Database has also been delayed due to data protection related issues.

In relation to the Report on the Cost of Employer and Public Liability Insurance, five of seven recommendations have been achieved.

Minister of State D’Arcy has issued a press release welcoming the update.

Updates made to the Central Bank of Ireland’s Brexit FAQs for consumers and financial services

The Central Bank updated its Brexit FAQs for Consumers on 7, 15 and 25 March.

Substantial updates include:

  • Clarifications that, in the event of a “hard” or “no-deal” Brexit, firms providing financial services in Ireland without the necessary authorisation will no longer have an option to provide services into Ireland on a Freedom of Establishment or Freedom of Services basis;
  • The addition of links to the Government of Ireland’s “Getting Ireland Brexit Ready” and “Brexit Contingency Action Plan” information pages;
  • The inclusion of information regarding the temporary run-off regime for UK and Gibraltar insurers and brokers, which will allow them to continue to service existing contracts of insurance with Irish policyholders in the event of a “hard” or “no-deal” Brexit;
  • The addition of FAQs regarding the status of bank accounts with UK-authorised banks and UK branches of Irish credit institutions, including the applicability of the Irish Deposit Guarantee Scheme post-Brexit;
  • The inclusion of a section concerning Irish clients of UK investment firms; and
  • The inclusion of a section concerning payment systems, which deals with the UK’s membership of SEPA post-Brexit.

The Central Bank updated its Brexit FAQs for Financial Services on 6, 15, 19 and 25 March.

Substantial updates include:

  • The inclusion of information regarding opinions and recommendations issued by the EBA, ESMA, and EIOPA and the Memoranda of Understanding agreed between the Bank of England, EIOPA, and all National Competent Authorities of the EEA;
  • An update to the FAQ regarding Irish-authorised firms with activities in the UK to include details of the UK’s temporary permissions regime;
  • The inclusion of information regarding the Central Bank’s progress towards developing an individual accountability framework to perform similar functions to the UK’s Senior Managers and Certification regimes;
  • An update to the FAQ regarding the identification of the appropriate resolution authority for third country banks and investment firms domiciled in Ireland; and
  • The inclusion of additional FAQs concerning (i) Brexit-related resolution issues, (ii) delegation and outsourcing arrangements under the Multilateral Memoranda of Understanding (MMoU) agreed between European securities regulators and the FCA, and (iii) the applicability of Regulation 5(5)(b) of the European Union (Markets in Financial Instruments) Regulations 2017 concerning co-operation arrangements to the MMoU.

Central Bank publishes demographic report on diversity in applications for pre-approval controlled functions in regulated firms

The third annual report analyses over 5,000 applications to the Central Bank for pre-approval controlled functions focusing on diversity in regulated firms. The report examines the applications by age, gender and nationality. The analysis continues to show a pronounced gender imbalance at board level and in revenue generating roles across the financial sector. There is a small improvement in the number of applications for approval for female appointments, from 22% in 2017 to 24% in 2018. This improvement was particularly evident in the banking sector.

While acknowledging that there has been progress, Deputy Governor Ed Sibley noted that the improvements are from a “low base”. More needs to be done to meaningfully address the acute lack of diversity at senior levels.

International News

European Commission adopts delegated regulation amending Solvency II delegated regulation

On 8 March 2019, the European Commission published new draft rules to help insurers provide long-term finance to businesses by investing in equity and private debt.

Delegated Regulation (C(2019) 1900 final) (the Draft Regulation) aims to, among other things: (i) remove unjustified constraints to the financing of the economy; (ii) enhance proportionality; (iii) remove unjustified inconsistencies between different pieces of EU financial legislation; and (iv) improve the risk sensitivity of the standard formula.

The Draft Regulation attempts to achieve these aims by, among other things: (i) introducing new prudential criteria that allow insurers to reduce capital charges in the standard formula for unrated debt and unlisted equity investments; (ii) simplifying burdensome elements of the standard formula; (iii) further aligning the rules applicable to the standard formula with equivalent rules in the banking sector; and (iv) refining the recognition of risk mitigation techniques and the group solvency calculation.

Insurance Europe acknowledged that the new rules achieved some much-needed improvements and simplifications but expressed its disappointment at “the lack of progress on key issues impacting the industry’s ability to maintain and develop their long-term products and investments.” In particular, it highlighted the industry’s concerns that the Commission had taken no action to (i) reduce the risk margin or (ii) address problems with the volatility adjustment.

On 12 March 2019, Vice-President of the European Commission Valdis Dombrovskis wrote to the Chair of the European Parliament Committee on Economic and Monetary Affairs. The letter addressed concerns raised by the Committee in respect of: (i) the criteria for long-term equity investments (in particular the minimum holding period and ring-fencing criteria); (ii) shortcomings in the activation of the country component of the volatility adjustment; and (iii) the level of the risk margin.

The next step is for the European Parliament and Council of the EU to consider the Draft Regulation. The Draft Regulation will enter into force twenty days after it’s publication in the Official Journal. However, a number of its provisions will apply from 1 January 2020.

EIOPA agrees no-deal Brexit memoranda of understanding with Bank Of England and Financial Conduct Authority

A press release on 5 March confirms that EIOPA, the EU and EEA national competent authorities (NCAs), and the UK PRA and FCA have agreed memoranda of understanding (MoUs) in the event of a no-deal Brexit. The MoUs provide for the reciprocal flow of appropriate and reliable information to ensure risk-based and effective supervision of cross-border (re)insurance establishments incorporated either in the UK or in an EEA member state, cross-border groups, or special purpose vehicles established in the UK or in an EEA member state. The PRA and UK have also published a joint press release relating to the MoUs.

The press releases state that the following MoUs (which have not been published) would apply in the event of a no-deal Brexit:

  • A multilateral MoU on supervisory co-operation, enforcement and information exchange between the UK authorities and EU/EEA NCAs; and
  • A bilateral MoU between the UK authorities and EIOPA on information exchange and mutual assistance in the field of insurance regulation and supervision.

Draft delegated regulation amending the PRIIPS regulation

The European Commission has published a draft Commission Delegated Regulation amending Delegated Regulation (EU) 2017/653 supplementing Regulation (EU) No 1286/2014 of the European Parliament and of the Council on key information documents for packaged retail and insurance-based investment products (PRIIPs).  The draft Commission Delegated Regulation proposes extending the transitional period under which UCITS and non-UCITS funds are exempt from the requirement to provide a Key Information Document (KID) under the PRIIPs Regulation until 31 December 2021. Until this date, UCITS and non-UCITS may continue to prepare the Key Investor Information Document (KIID) as required under the UCITS Directive. Once the European Parliament and Council have considered the draft Commission Delegated Regulation, it will enter into force twenty days after publication in the official journal.

EIOPA publishes report on best practices on licensing requirements, peer-to-peer insurance and the principle of proportionality in InsurTech

EIOPA has published a report that provides an overview of current authorising and licensing requirements in the area of financial innovation and particularly an assessment of how the principle of proportionality is being applied in practice, including the approach to InsurTech start-ups.

Among the issues discussed in the report is “peer-to-peer” insurance. This is essentially online risk-sharing where a group of individuals with mutual interests pool their “premiums” to insure against a risk. In this regard, EIOPA states that best practice is for national competent authorities (NCAs) to inform the public about the unregulated nature of these risk-sharing platforms and the lack of consumer protection available. EIOPA also states that peer-to-peer insurance platforms should be encouraged to disclose to consumers clearly and prominently that they are not regulated insurance entities.

The report indicates that the InsurTech market is “at an early stage but evolving” and that most NCAs have only limited experience dealing with InsurTech companies. NCAs are encouraged to make licensing and registration requirements technologically neutral and to facilitate online systems that allow the submission of applications digitally. Twenty four NCAs have introduced a role of “innovation facilitator”, a recognition of the importance of this developing area. In the context of Ireland, the Central Bank has set up an “innovation hub” to engage with fintech firms outside of the normal regulatory engagement processes.

EIOPA’s goal, outlined in the report, is to strike a balance between supporting financial innovation and ensuring continued consumer protection. EIOPA encourages NCAs to engage with one another on the issues around new technology-driven business models and the use of new technologies.

EIOPA requests information for its fourth long-term guarantees (LTG) report and Solvency II Review

EIOPA has issued a request for EEA insurers subject to Solvency II to provide it with information on LTGs. The purpose of the information request is to compile data for EIOPA’s fourth annual LTG Report. The data request includes: (i) details on the LTG measures; (ii) information on the dynamic volatility adjustment; and (iii) information on long-term illiquid liabilities. The deadline for relevant insurers to submit their results to national competent authorities (NCAs) in a specific template format is 17 May 2019, who will in turn report to EIOPA by 29 May 2019. The deadline for affected firms submitting their dynamic volatility adjustment to NCAs is 14 June 2019.

EIOPA report on outsourcing to cloud service providers

EIOPA has published a report on outsourcing to cloud service providers in furtherance of the European Commission’s FinTech Action Plan, which requests that the European Supervisory Authorities explore the need for guidance in this area by the end of the first quarter of 2019. Although not yet extensively used by the majority of insurers, large insurers are expanding their usage of the cloud in line with their wider digital transformation strategies.

The purchase of cloud computing services falls within the scope of Solvency II’s rules on outsourcing. However, the current guidance on regulatory measures on outsourcing, including at the national level, is not homogenous. The majority of the National Supervisory Authorities (NSAs) responsible for banking and insurance monitoring are considering the Recommendations provided by the European Banking Authority, which have been merged into guidelines on outsourcing arrangements as a reference for management of cloud outsourcing. Therefore, to avoid potential regulatory arbitrage, EIOPA has decided to develop guidelines on the outsourcing of cloud computing services, which it plans to issue by the end of 2019. A joint market monitoring initiative undertaken by EIOPA, ESMA and the EBA will commence in the second half of 2019. The aim of this activity is to collect input for policy views on how to manage cloud outsourcing in the financial sector taking into account the increased use of cloud computing and the potential for large cloud service providers to be a single point of failure.

EIOPA comparative study on market and credit risk modelling for year-end 2017

EIOPA has published its second comparative market study on market and credit risk modelling under Solvency II, which summarises key findings from the study undertaken in relation to 2017 year-end data. Market and credit risk contribute significantly to the solvency capital requirement (SCR) of insurers and are important for the majority of insurers with approved internal models. The study forms part of the process of monitoring internal market and credit risk models to identify any significant variations in asset model outputs, which may require further supervisory scrutiny.

The study focuses on euro denominated instruments and involved nineteen participants from eight Member States, (including Ireland) with an approved internal model covering market and credit risk in the EEA. National competent authorities (NCAs) are considering what steps to take in respect of some of the study’s findings, which identified: (i) certain outliers for interest rate figures; (ii) variation in insurer’s credit risk charge for credit spread risk and (iii) variation of risk charges for property and strategic participations. EIOPA has also stated that certain insurers have already planned to incorporate some of the study’s observations into their regular model validation activities.

Council presidency and parliament reach provisional deal on supervisory framework for european financial institutions

On 21 March 2019, the Council of the EU announced that the Romanian Council Presidency and the European Parliament reached political agreement on legislative reforms to the European System of Financial Supervision (ESFS).

The proposed reforms represent the first fundamental review of the tasks, powers, governance and funding of the European Supervisory Authorities (ESAs) and the European Systemic Risk Board (ESRB).

The agreed text seeks to, among other things:

  • improve the existing system for supervisory convergence;
  • reinforce the role and powers of the Chairperson of the ESAs’ Board of Supervisors while preserving the key role for national competent authorities in the ESAs’ governance structure; and
  • review the powers of each of the three ESAs. For example, ESMA is given direct supervision powers over third country critical benchmark administrators and the EBA is given more powers regarding anti-money laundering supervision.

Once the text is finalised from a technical perspective, the provisional agreement will be submitted to the Council’s Permanent Representatives Committee for endorsement. The Parliament and the Council will then be called on to adopt the proposed regulation at first reading.

The Parliament is scheduled to consider the proposals at its plenary session to be held between 15 and 18 April 2019.