Insurance Regulatory Update March 2020
This is the March edition of the Arthur Cox Insurance Regulatory Update, covering: COVID-19 guidance issued from Central Bank and Insurance Ireland, EIOPA recommendations regarding Solvency II reporting deadlines in light of COVID-19 and the Central Bank Consumer Outlook Report.
We hope you find this Update useful. If you would like to discuss any particular topic covered, please feel free to contact a member of our team.
Central Bank sets out expectations of insurers in light of COVID-19 emergency
Questions over policy coverage for COVID-19 related claims have been at the forefront of the media for the last week, in particular business interruption (BI) policies that may include an add-on for infectious disease cover. The Central Bank has sent a “Dear CEO” letter to the CEO/Chairman of each insurer on Friday last, setting out its expectations of how insurers should treat their customers during the COVID-19 emergency and in particular, how they should approach the adjudication of COVID-19 claims.
The letter reminds insurers that have an obligation to act honestly, fairly and professionally in the best interest of consumers and to comply with the Central Bank’s Consumer Protection Code. Insurers are reminded to engage openly with customers and to point out policy terms that may be favourable to them. Where coverage exists, insurers are to assess and pay claims promptly. CEOs are also made responsible for the oversight of how their firm is managing determinations of whether claims are covered or not in the context of COVID-19 and insurers should retain information on the decisions that they have made in that regard as the Central Bank may need to certify their responses to COVID-19 claims if requested by the Central Bank.
Significantly, the Central Bank has weighed in on the BI coverage debate, having stated that in its view, where a claim can be made under a BI policy because a business has closed as a result of a Government direction due to contagious or infectious disease, the recent Government advice to close a business in the context of COVID-19 should be treated as a direction. While the Central Bank expects the policy wording to be clear in most cases, it also reminds insurers that where there is a doubt about the meaning of a term under an insurance policy, the interpretation most favourable to their customer should prevail.
The Central Bank also expects CEOs, Board of Directors and senior management teams of insurers to develop consumer-focused solutions on policy payment breaks, rebates and claims in light of COVID-19 as a matter of urgency and will be following up with insurers in this regard.
A link to the Central Bank press release is available here.
Insurance Ireland guidelines on COVID-19
Prior to the issue of the Dear CEO letter above, Insurance Ireland published an information guide in relation to coverage for COVID-19, which addresses the following:
- Business Insurance – Business interruption on standard commercial/ SME policies are unlikely to provide cover for government directions to close or contagious diseases. However, in light of the Central Bank’s letter, if a policy provides coverage for government directed closures insurers have been put on notice that the Central Bank considers the recent advice by government as such a direction and more generally, insurers are reminded of their duty to act honestly, fairly and professionally when considering claims under such policies.
- Travel Insurance – Some policies sold prior to March 2020 will provide cover for non-refundable cancellation costs if there is a government directive prohibiting travel. Cover may also be provided when a customer has purchased an optional travel disruption extension and the government advises against all but essential travel. Travel policies sold since March 2020 generally do not cover cancellation costs due to the COVID-19.
- Home Insurance – standard home insurance policies should cover working from home (assuming the work is clerical in nature). However, business equipment, such as work laptops provided by employers, will most likely not be covered by household policies and may be covered by the employer’s material damage policy.
- Motor Insurance – COVID-19 has caused disruptions to transport and manufacturing supply chains and it may take longer to get the necessary parts for repairs. However, the priority for insurers is that customers continue to have claims paid.
- Life Assurance – Most life assurance policies will cover death as a result of a COVID-19 infections.
- Income Protection – Generally in order to claim this kind of insurance, a person must have been diagnosed with an illness (such as COVID-19) and have been advised to take time off work. Many policies will include a deferred period which must take place before the claim will be paid.
- Critical Illness Cover – This is a benefit that is paid when a defined critical illness, such as a stroke or heart attack, is diagnosed. While, COVID-19 is not a defined critical illness and would not be covered by this type of policy, complications from the infection may lead to the development of a critical illness, which may be covered.
Central Bank publishes consumer protection outlook 2020
The Central Bank’s Consumer Protection Outlook Report identifies key consumer protection risks and explains how the Central Bank intends to implement its 2020 consumer protection priorities to respond to these risks as part of its mandate. The key cross-sectoral risks identified by the Central Bank which are relevant for the insurance industry include (i) lack of a consumer focused culture; (ii) poor governance and oversight of outsourcing arrangements; (iii) ineffective disclosure of key terms and conditions of products and services; (iv) information technology and cyber risks; and (v) risks from Brexit.
The Central Bank is undertaking the following activities to address identified risks, as part of its 2020 consumer protection mandate:
- A review of differential pricing in the motor and home insurance sector is underway, which will seek to establish the extent to which such practices lead to outcomes that are consistent with the Consumer Protection Code;
- A substantial review of the Consumer Protection Code is ongoing and this year, it is intended to look at emerging trends and risks to consumers in the context of that review and also, to transfer the text of the Code into a Central Bank Regulation;
- Review the insurance sector’s compliance with: (i) disclosure requirements for motor insurance; (ii) product oversight and governance requirements; and (iii) disclosure obligations on performance measures and remuneration;
- Review intermediaries’ compliance with disclosure requirements in relation to fees and commissions;
- Enhance the Central Bank’s authorisation process by ensuring that all applicants have substance, are capable of being supervised and have individuals who are fit and proper running them. In this regard, the Central Bank intends to challenge firms seeking to relocate from the UK on the credibility of the substance of their proposal in areas such as staffing and decision making; and
- Shape European and domestic policy initiatives in areas such as PRIIPs and sustainable finance disclosures for consumers.
A link to the Central Bank’s press release is here.
Insurance Ireland comments on central bank’s consumer protection outlook report
In meetings between the Central Bank and Insurance Ireland, the Central Bank outlined its top two priorities in respect of insurance: namely the strengthening of the consumer protection framework (including the review of the Consumer Protection Code) and driving firms to embed a consumer-focused culture (including reviews of pricing in home and motor insurance). Insurance Ireland intends to contribute to the Central Bank’s review of the Consumer Protection Code, which is expected to be available in outline later this year.
The outlook report indicates that the Central Bank intends to focus on embedding a consumer –focused culture in regulated firms. Insurance Ireland are calling for the Central Bank to clarify its expectations in this regard, to provide good/poor practice examples and to support firms in meeting the Central Bank’s expectations.
The outlook report also refers to changes in technology and the corresponding need to protect against cyber risks and related problems. While accepting that, Insurance Ireland calls on the Central Bank to also support firms in developing products and services to increase consumer engagement with regulated firms so as to facilitate innovation that is in the consumers best interests.
Gender diversity for policy making: a central banking perspective
The Deputy Governor of the Central Bank, Sharon Donnery, recently delivered a keynote speech at the OMFIF Gender Balance Index 2020 launch in London.
According to the Deputy Governor, diversity can help us move away from groupthink, poor risk assessment and insufficient challenge and diversity can lead to improved outcomes in terms of governance, decision-making, and productivity. The Central Bank has been publishing data on the level of gender diversity at senior levels of regulated firms since 2017, the first regulator to do so, and the Central Bank is committed to publishing this data on an annual basis as part of its overall strategic plan. Ms Donnery noted that the firms the Central Bank regulates now expect challenge, when there is a lack of diversity and inclusion at board and management levels.
Shortly after this speech, the Central Bank published a Demographic Analysis of over 4,500 applications for approval to occupy senior roles within regulated firms in Ireland under the Fitness and Probity regime in 2019. 26% of applicants were female compared to 24% in 2018 and 16% in 2012. However, the analysis notes that while there was an increase in the gender balance of applications last year, the pace of change remains low and there were significant difference across sectors. For example, over 1 in 4 senior role holders in the insurance sector are women whereas only 1 in 8 senior roles in the asset management sector are held by women.
Although female applications for board level positions increased from 20% in 2018 to 24% in 2019, the data continues to show gender imbalance at board level and in revenue generating roles as opposed to second line of defense roles. The lack of diversity is also pronounced in the incumbent role-holders. For example, men hold 74% of current pre-approval controlled function positions in the largest insurers.
The Central Bank will shortly be publishing the findings of a recent review of diversity and inclusion in the insurance sector.
A link to the Central Bank press release on the demographic analysis is available here.
Cost of insurance working group (CIWG) publishes tenth progress update report
The CIWG’s tenth progress update report focuses on the cost of motor, employer liability and public liability insurance. In relation to motor insurance, 23 of the CIWG’s 33 recommendations have now been completed, while 14 of the 15 recommended action items have been achieved in the area of employer and product liability insurance.
Despite this progress, Minister of State for Financial Services and Insurance, Michael D’Arcy, acknowledges that the cost of obtaining public liability insurance remains high for small businesses. According to the Minister for State, the high cost of public liability insurance is attributable to the withdrawal of several specialised underwriters from Irish market caused in part by Brexit concerns but are the primarily the result of losses experienced by underwriters in Irish public liability market. Contributing to the losses suffered by underwriters are the high level of court awarded damages, the large legal costs involved in and length of time taken to settle cases and the inconsistency of award levels agreed in courts.
To tackle these issues there are plans to extend the Central Bank’s National Claims Information Data Base to cover employer/public liability settlements. Additionally, the Law Reform Commission (LRC) is in the process of preparing a report on the possibility of developing constitutionally sound legislation to cap the amounts of damages that a court may award in respect of some or all categories of personal injuries. The LRC invited comments up until early March and its report was expected to be published by the end of H1 2020.
EIOPA statement on actions to mitigate the impact of coronavirus/COVID-19 on the EU insurance sector
In light of the significant consequences that the recent COVID-19 outbreak is likely to have on the global economy and the progressively difficult positions that insurers are likely to face in the immediate future, EIOPA has released a statement:
- Insurers should be ready to implement necessary measures to ensure business continuity. In this regard, EIOPA calls on insurers to take measures to preserve their capital position by following prudent dividend and distribution policies, including variable remuneration;
- National competent authorities (NCAs) should be flexible regarding the timing of 2019 supervisory reporting requirements. It is intended that EIOPA will co-ordinate with NCAs on the specifics of the approach to be adopted (see article below);
- In the short term, EIOPA is to limit its requests for information from insurers to essential elements needed to assess and monitor the impact of the current situation on the insurance sector; and
- The deadline for the Holistic Impact Assessment for the 2020 Solvency II Review has been pushed out by two months to 1 June 2020.
EIOPA reminds insurers that in the event of a breach of SCR, the Solvency II framework contains a ladder of supervisory intervention that allows for flexibility in cases of extreme situations, including measures to extend the recovery period of affected insurers. It also states that the recent industry stress tests indicate that the sector is well capitalised and able to withhold severe but plausible shocks to the system.
A link to EIOPA’s press release is here.
EIOPA and BMA recommendations on supervisory flexibility in light of COVID-19
In response to the COVID-19 crisis, EIOPA has published recommendations on a “comply or explain” basis, addressed to all NCAs, calling for supervisory flexibility regarding upcoming reporting deadlines. The recommendations are issued in accordance with Article 16 of Regulation (EU) No 1094/2010, and are designed to offer operational relief on a consistent basis across all member states by introducing the delays in reporting obligations set out below. Also, EIOPA confirm that COVID-19 should be considered a “major development” (as per Art 54 of the Solvency II Directive) and as such, it should be reflected in the reporting as appropriate.
Recommendation 1: Annual reporting referring to year-end occurring on 31 December 2019 or year-end after that date but before 1 April 2020
- An 8-week delay in the submission of the Regular Supervisory Report, at both solo and group level.
- An 8-week delay in the submission of the annual Quantitative Reporting Templates except for: Content of the Submission (S.01.01), Basic Information (S.01.02), Balance-sheet (S.02.01), Cash-Flow projections for life business (S.13.01), LTG (S.22.01), Own Funds (S.23.01) and SCR calculation (S.25.01 to S.25.03) at solo and group level and Undertakings in the scope of the group (S.32.01), where a 2-week delay has been recommended.
Recommendation 2: Quarterly Reporting referring to Q1 2020 – end occurring on 31 March 2020 or after that date but before 30 June 2020
- 1-week delay in submission of Q1-2020 Quantitative Reporting Templates and the Quarterly Financial Stability reporting, at solo and group level. There are some exceptions for Derivatives Transactions, where a 4-week delay is permissible.
- Insurance and reinsurance undertakings are expected to report in the Own Funds template (S.23.01) an estimation of the SCR for the end of the quarter reference date, and not the last calculated one as indicated in the instructions.
Recommendation 3: Solvency and Financial Condition Report (SFCR) referring to year-end occurring on 31 December 2019 or year-end after that date but before 1 April 2020
- An 8-week delay for the publication of the SFCR, except for: Balance-sheet (S.02.01), LTG (S.22.01), Own Funds (S.23.01) and SCR calculation (S.25.01) at solo and group level, where a 2-week delay is acceptable.
- As set out above, EIOPA has clarified that it considers COVID-19 to be “major development” as referred to in article 54(1) of Solvency II and therefore expects insurers to provide information on the effect of the virus on their business in addition to their year-end information in their SFCR.
Competent authorities are required to confirm to EIOPA within two months whether they comply or intend to comply with the recommendations, giving reason for any non-compliance.
Separately, the Bermuda Monetary Authority has indicated Bermudian insurers and intermediaries can avail of a one month extension from their respective annual filing date and may avail of off-island board meetings during this period.
The EIOPA Press Release is here.
Policymakers must keep EU financial markets open during COVID-19 pandemic
Insurance Europe, along with a number of other financial service associations, has sent a joint letter to several European and national policymakers seeking a commitment that the European markets will continue operating during the COVID-19 crisis.
The letter points out that financial markets are a critical infrastructure in the European market and that these markets are equipped to withstand the extraordinary stress and volatility that they are now experiencing. Closure would have a negative effect on the European economy and that even the rumours of such a closure are causing adverse effects.
A link to the Insurance Europe press release is available here.
Insurance Europe responds to review of the Non-Financial Reporting Directive (NFRD)
Updates to the directive are needed to address the increased requirements for sustainability data and for consistency with the wider reform on sustainability reporting, which includes the Disclosure Regulation and the Regulation on the Classification of Sustainable Economic Activities (the Taxonomy Regulation).
The insurance industry is supportive of transparent environmental social governance (ESG) data/assessments to be reported directly by investee companies. This will help address the issues of data availability and quality, which affect insurers’ ability to comply with their regulatory obligations.
Insurance Europe’s response noted that the revised NFRD should be consistent with the requirements of the Disclosure and Taxonomy Regulations to help investors comply with their data requirements. It stated that while strong requirements would help companies determine what to report on, it is important that a certain level of flexibility remains to avoid the NFRD becoming obsolete. The response also highlights the need for proportionality and that the size and complexity of undertakings should be considered when developing guidance or requirements. Insurance Europe also suggested that there should be a separation of financial reporting requirements and ESG reporting to avoid operational overload and to allow flexibility.
EIOPA Executive Director speaks on cyber underwriting and managing the risks of digital finance
Fausto Parente, Executive Director of EIOPA speaking at the 4th annual Fintech and Regulation Conference organised by Afore Consulting, noted that organisations holding data including (re)insurers must act fairly and responsibly regarding the uses they make of that data. To this end, EIOPA has set up a consultative expert group on digital ethics in insurance focusing, in particular, on fairness and non-discrimination around price optimisation practices, transparency and explainability, and governance.
As well as noting the threats to (re)insurers from cyber-attacks and data thefts, Perente discussed the rapid growth of the European cyber insurance market. The market is likely to see continued growth in the future as the prevalence of cyber-attacks, developments in technology and increased regulation will all increase demand.
EIOPA intends to develop, together with national authorities, the European Banking Authority, the European Securities and Markets Authority and the European Union Agency for Cybersecurity, a standardised cyber incident reporting framework to rectify the problem of a lack of quantitative information that is hampering underwriters’ ability to properly assess risk. EIOPA will also work with other European institutions to ensure that there is common understanding of contractual definitions to maintain consumer confidence and avoid disputes. EIOPA is working with national supervisors to ensure that underwriting standards are in place that can take account of the changing nature of technology and cyber-attacks.
The speech is available here.
Insurance Europe publishes joint statement on the COVID-19 emergency crisis
In response to the COVID-19 pandemic, Insurance Europe has published a Joint Trade Association statement, issued on behalf of the European social partners in the banking and insurance sectors confirming their commitment to supporting and protecting customers, employees and the wider EU economy during this unprecedented global crisis. The European social partners have called on the European financial services sector to help contain COVID-19 by adhering to the below safeguards.
- All actors in the financial services sector should strictly follow the recommendations of public and health authorities in relation to COVID-19.
- Employees should, where possible, work remotely.
- Face-to-face meetings with customers as well as physical visits to branches should be limited. Providers of banking and insurance services should endeavor to engage with customers over the phone or via email. Face-to-face interaction should only occur when absolutely necessary and public health guidelines must be followed at all times.
- Employees who continue to work in the workplace and those in public-facing roles must be provided with appropriate protective equipment and infrastructure to safeguard their own health and that of customers.
The Insurance Europe press release is available here.