Insurance regulatory news, 2 August 2021

FIG Bulletin

Reports on recent UK PRA and FCA, and EIOPA regulatory developments of interest to insurers and their intermediaries. See also our Financial institutions general regulatory news in the Related Materials links.

 Contents:

Solvency II review: PRA QIS material and related Dear CEO letter on data gathering

The Prudential Regulation Authority (PRA) has updated its Solvency II Review Quantitative Impact Study (QIS) webpage with the QIS materials, and has published a related Dear CEO letter from Charlotte Gerken, PRA Executive Director, Insurance, introducing the QIS and setting out the PRA's thinking on the risk margin and the matching adjustment. The updated QIS webpage includes links to the QIS templates and instructions for completion, a QIS Q&A to assist firms with the completion of the QIS and SONIA spreadsheets.

The deadline for submitting responses to the QIS is 20 October 2021. The PRA intends to publish a series of qualitative questions to inform its thinking about other aspects of Solvency II reform in August 2021.

Recalculation of the transitional measure on technical provisions: PRA statement

The PRA has published a statement on the PRA's approach to the recalculation of the transitional measure on technical provisions (TMTP), relevant to PRA-regulated insurance firms.

The PRA states that, in line with its supervisory statement, "SS6/16 - Maintenance of the 'transitional measure on technical provisions' under Solvency II", the PRA has been monitoring market conditions since the previous biennial TMTP recalculation in December 2019. The PRA also considers whether changes in market conditions since then can reasonably be considered to have been sustained. In the PRA's view, recent movements in risk free rates (RFR) meet the threshold for a material change in risk profile as set out in SS6/16. 

The PRA will accept applications from firms to recalculate TMTP as at 30 June 2021. In any application, the PRA expects firms to be able to demonstrate that a material change in risk profile has occurred. In the period up to 31 July 2021, the PRA considers that it would be reasonable for a firm to take a forward-looking view that encompasses how the risk profile is expected to evolve as a result of the GBP RFR transition to SONIA.

In order to expedite the application process, the PRA expects applications at this time to use firms' existing TMTP calculation methodology. Furthermore, the PRA states that applications received at this time would be in addition to the expected biennial TMTP recalculation on 31 December 2021.

Part VII FSMA insurance business transfers: PRA CP16/21

The PRA has published a consultation paper, CP16/21, on updating its approach to insurance business transfers under Part VII of the Financial Services and Markets Act 2000 (FSMA) and the Friendly Societies Act 1992. The changes reflect legislative changes following the UK's withdrawal from the EU and the completion of the transition period. It also provides additional guidance for independent experts IEs and firms on the PRA's expectations. The proposals in CP16/21 would result in changes to the PRA's statement of policy on its approach to insurance business transfers.

The consultation closes on 28 October 2021. The PRA proposes that the implementation date for the changes is 29 November 2021.

We reported on 19 July 2021 that the FCA has published a guidance consultation, GC21/3, on proposed changes to the guidance on its approach to the review of Part VII insurance business transfers.

Travel insurance: FCA updates COVID-19 expectations of general insurance firms

On 19 July 2021, the Financial Conduct Authority (FCA) updated its webpage on its expectations of general insurance firms in the light of COVID-19 to clarify its expectations about travel insurance. The FCA states that it expects firms to take account of the changes to the travel landscape in their marketing, sale, design and monitoring of travel insurance products and to consider their regulatory requirements given the changed travel market. This includes requirements relating to communication (including marketing), sale standards, demands and needs, product governance (all of which are covered in greater depth on the webpage) and relevant coronavirus guidance that the FCA has issued. The FCA emphasises that its expectation is that firms must ensure they continue to treat customers fairly during the whole product cycle.

Solvency II: EIOPA supervisory statement on ORSA in context of COVID-19

On 19 July 2021, the European Insurance and Occupational Pensions Authority (EIOPA) published a supervisory statement on the own risk and solvency assessment (ORSA), required of undertakings under the Solvency II Directive, in the context of COVID-19. The supervisory statement is addressed to national competent authorities and aims to promote supervisory convergence. It focuses on the supervision of undertakings' internal processes that are necessary for a good quality ORSA and guiding undertakings through supervisory expectations under the current situation triggered by the COVID-19 pandemic.

While the statement addresses the current situation of COVID-19, EIOPA states that the recommendations are applicable to any similar situation with the necessary adaptions.

The statement covers the following topics:

  • ORSA as a management tool;
  • timing of the regular ORSA and ad-hoc ORSAs; and
  • scenarios used in the ORSA.

Solvency II: EIOPA consults on supervisory statement on supervision of run-off undertakings

EIOPA has published a consultation paper on a draft supervisory statement on supervision of run-off undertakings under the Solvency II Directive. The draft supervisory statement is intended to ensure that supervision of run-off undertakings or portfolios subject to regulation under Solvency II is of high-quality and convergent.

EIOPA explains that acquisition of run-off portfolios and run-off undertakings by other insurance undertakings is increasing and is attracting interest from specialised investment entities, such as private equity. It believes that it is therefore necessary to specify supervisory expectations to address the risks arising from run-off business models. Supervision of run-off undertakings is challenging because of the specific risk profile of such undertakings (for example, relating to the changes in ownership), and the lack of specific regulation for run-off undertakings in the Solvency II framework.

The supervisory statement covers the authorisation of acquisition of run-off undertakings or portfolio, the ongoing supervision, and prudential and conduct of business issues. In particular, EIOPA recommends potential acquirers engage in an early dialogue with national supervisors to communicate the intention to run off the full (or material) part of insurance obligations. As part of the ongoing supervision, national supervisory authorities should perform a business model analysis with a specific focus on how the undertaking is expected to remain profitable in the near future. National supervisory authorities should also focus on ensuring compliance with Solvency II rules, such as technical provisions, investments, reinsurance and making sure that policyholders are treated fairly.

The deadline for responses is 17 October 2021.

EIOPA will consider the feedback received and develop the impact assessment based on the responses received. It will then publish a final report on the consultation and submit the final version of the supervisory statement for adoption by its Board of Supervisors.

Solvency II: EIOPA consults on amendments to ITS and guidelines on supervisory reporting and disclosure requirements

EIOPA is consulting on amendments to implementing technical standards (ITS) set out in Commission Implementing Regulations (EU) 2015/2450 and 2015/2452 relating to supervisory reporting and disclosure requirements under the Solvency II Directive, as well as related guidelines. EIOPA's proposals and impact assessment are set out in documents available on the webpage for the consultation.

The proposed amendments reflect recommendations made by EIOPA in its December 2020 report on quantitative reporting templates, which was published alongside EIOPA's opinion on the 2020 review of Solvency II. However, EIOPA's view is that these amendments should now be implemented without waiting for the outcome of the Solvency II review.

EIOPA states that the proposals include simplification of quarterly reporting for all undertakings, the elimination of some reporting templates for all undertakings and new thresholds to promote better risk-based and proportionate reporting requirements. This will lead to a reduction of the number of templates to be reported for the majority of the undertakings.

The consultation closes on 17 October 2021.

EIOPA updates conduct of business supervision strategy

EIOPA has published an updated paper setting out its 2021 strategic approach to a comprehensive risk-based and preventive framework for conduct of business supervision on a European level. To ensure robust and effective implementation of this framework, EIOPA will submit a report of the findings from an implementation review to its Board of Supervisors in spring 2023.

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Authored by Yvonne Clapham

 

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