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COVID-19: FCA update on business interruption insurance test case
The UK Financial Conduct Authority (FCA) has updated its webpage on its business interruption insurance test case. Among other things, the FCA has published draft transcripts of the Supreme Court hearing on days one, two and three, and a link to the videos of the appeal hearing.
The Supreme Court appeal hearing has now ended. The FCA notes that Lord Reed recognised the importance of an early judgment for the businesses affected. He said that the Justices would do what they could to provide judgment as quickly as possible but could not comment on whether that would be before Christmas or in January. The FCA will update its webpage as soon as it can.
GI firms: PRA Dear Chief Risk Officer letter reserving and exposure management
The UK Prudential Regulation Authority (PRA) has published a letter to Chief Risk Officers of general insurance (GI) firms, sharing insights from its recent review of the GI sector, focussing on reserving and exposure management, including some observations on contract uncertainty in light of COVID-19.
The PRA notes that bias in reserve estimates and possible weakening in case reserve estimates persist as areas of concern, despite being highlighted in its November 2019 letter to chief actuaries. It states that firms can expect the PRA to sharpen its focus on those firms that have material exposure to financial lines of business if it considers that adequate measures have not been taken.
The PRA also notes that the pandemic has given rise to additional complexity and uncertainty in estimating ultimate losses. It highlights issues concerning four key areas that it encourages firms to consider as part of their year-end reserving exercise: data, discontinuities in historical trends, appropriateness of common reserving methodologies and reinsurance adequacy.
The PRA also highlights best practices that it has observed in its reviews of exposure management practices. The PRA states that it will sharpen its focus on those firms which are materially exposed to man-made catastrophe risk and where progress towards better practice remains slow.
The PRA encourages firms to actively consider whether current risk and capital management frameworks, including current stress and scenario testing, sufficiently address the risks posed by contract uncertainty and unintended exposures. It states that it may be useful to consider the identification, definition, and monitoring of all risk related to contract wording, including any key assumptions related to expected coverage.
The PRA states that CROs can expect the PRA to inquire how they have considered each of the points raised in the letter. It expects this letter to be discussed at the board risk committee, alongside any further analysis deemed necessary to identify actions that should be taken by the firm in response. It also recommends sharing the Dear CRO letter with the holder of the chief actuary function.
GI industry: PRA response on framework for assessing financial impacts of physical climate change
The PRA has published its response to the insurance industry feedback to its publication, "A framework for assessing financial impacts of physical climate change: A practitioner's aide for the general insurance sector", which it published in May 2019. The PRA summarises the feedback received and areas where further development is recommended.
Based on the feedback, the PRA identifies the following priority areas for further development:
- assessing each hydro-meteorological region-peril in detail and commenting on their future climate projection characteristics;
- assessing how current catastrophe model calibrations allow for climate change that has crystallised to date; and
- assessing how the insurance industry's experience on quantifying physical climate change risk on the liability side of the balance sheet could be used to develop a similar framework for assessing the risk on the asset and investment side of the balance sheet.
The PRA will continue to engage with insurance firms on their progress with embedding the expectations set out in its supervisory statement on enhancing banks' and insurers' approaches to managing the financial risks from climate change (SS3/19) and in its 1 July 2020 letter to all PRA-regulated firms on managing climate-related financial risk. It will also consider whether a follow-up report is required, depending on the progress across industry and results from other climate exercises.
Solvency II: ECJ case on re-organisation and winding-up provisions
In Bulstrad Vienna Insurance Group АD v Olympic Insurance Company Ltd (Case C 427/19), the European Court of Justice (ECJ) considered the interpretation of re-organisation and winding-up provisions in Title IV of the Solvency II Directive. It followed a reference for a preliminary ruling from a Bulgarian court.
The ECJ ruled that Article 274 of the Solvency II Directive must be interpreted as meaning that:
- a decision of the competent authority to withdraw the authorisation of the insurance undertaking concerned, and to appoint a provisional liquidator, cannot constitute a "decision to open winding-up proceedings with regard to an insurance undertaking" within the meaning of that article. This is unless either, firstly, the law of the home member state of the insurance undertaking provides that that provisional liquidator is empowered to realise the assets of the insurance undertaking and distribute the proceeds among its creditors; or, secondly, that the withdrawal of the authorisation of the insurance undertaking has the effect of automatically opening the winding-up proceedings, without the need for a separate authority to adopt a formal decision to that end; and
- if the conditions required for a decision to withdraw the authorisation of an insurance undertaking, and to appoint a provisional liquidator for that undertaking, to constitute a "decision to open winding-up proceedings with regard to an insurance undertaking" (within the meaning Article 274) are not met, the courts of other member states are not obliged to apply the law of the home member state of the insurance undertaking concerned. In this case, this is where such law provides for the stay of all court proceedings that have been opened with regard to such an undertaking.
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Authored by Yvonne Clapham
