Insurance regulatory news, 30 November 2020

FIG Bulletin

Recent regulatory developments of interest to insurers and their intermediaries. Among other things, includes UK FCA updates on preparing for the end of the UK-EU transition period. See also our General regulatory news in the Related Materials links.

Contents

Brexit: FCA update for UK life insurers

The UK Financial Conduct Authority (FCA) has updated its webpage on "Brexit: information for life insurers in the UK about pensions and retirement income" with additional guidance relating to after the transition period. Among other things, when servicing customers from the European Economic Area (EEA) after the end of the Brexit transition period, the FCA expects firms to act in accordance with local laws and local regulators' expectations. At the same time, firms need to make sure decisions are guided by obtaining appropriate customer outcomes. The FCA recognises that this may involve different considerations in different circumstances. It states that it would clearly be a bad outcome for a consumer not to receive the payment of a valid claim or any other payments they are entitled to.

The FCA explains that if a firm chooses to remove a right or option in a contract due to local member state laws, then as long as their primary cover is still in place, it may be possible to make up for the limitation through other steps. The firm would be expected to review its contractual obligations, as well as the ongoing fairness and value of the product. If appropriate, firms should consider offering the customer compensation or a refund for the loss of optionality.

For open market options, if the customer is unable to shop around due to local law restrictions, firms must consider what potential harms may arise for that customer. They should also consider any appropriate mitigation, including, for example, offering rates that would otherwise have been available to the customer.

The FCA explains that the underlying principle in these examples is the need for firms to consider customers' circumstances and take an approach that gives the customer an appropriate outcome. It is important to ensure that the customer does not lose out.

For customers who purchase a product after the end of the transition period, the FCA expects firms to set out the limitations of the contract at the point of sale. They should make it clear to customers that moving to the EEA may affect their ability to continue to benefit fully from their cover (although it may vary according to the particular EEA state). More broadly, the FCA explains that firms need to make sure they pay due regard to customers' information needs and be ready to answer customers' queries accurately and fairly.

Brexit: FCA update for UK general insurers and intermediaries

The FCA has updated its webpage on "Brexit: information for general insurers and intermediaries in the UK" with additional information on servicing EEA customers. The FCA expects firms to act in accordance with local laws and local regulators' expectations. They should ensure that decisions are guided by obtaining appropriate outcomes for their customers. The FCA states that it would clearly be a bad outcome for a customer not to receive the payment of a valid claim or any other payments they're entitled to.

The FCA recognises that this may involve different considerations in different circumstances. It advises that there is more guidance on its expectations in relation to long-term contracts with rights and options (see above).

COVID-19: FCA update on business interruption insurance test case

The FCA has updated its webpage on its business interruption insurance test case with links to the final transcripts for each day of the appeal hearing before the Supreme Court:

Lloyd's and London market insurers: FCA Dear CEO letter

The FCA has published a Dear CEO letter it has sent to Lloyd's and London market insurers, re-insurers, protection and indemnity (P&I) clubs and run-off firms (collectively, LLM). In the letter, the FCA sets out its view of the key risks of harm to customers or the markets firms operate in, which are posed by firms in the FCA's LLM portfolio. It also outlines the FCA's expectations, including how firms should mitigate the key risks. Firms are expected to consider the contents of the letter and explain what they have done in response.

Among other things, the FCA details expectations under the headings of governance and oversight; culture and non-financial misconduct; the general insurance distribution chain; employers liability insurance tracing procedures; cyber risk and operational resilience; hardening market; and EU withdrawal.

Solvency II: EIOPA consults on supervisory statement relating to SCR breach

EIOPA has published a consultation paper on a statement on supervisory practices and expectations in case of breach of the solvency capital requirement (SCR) under the Solvency II Directive.

The aim of the statement is to promote supervisory convergence in the application of the "supervisory ladder", in particular, in the way that insurers' recovery plans are developed, assessed and approved. EIOPA explains that the supervisory practices addressing the supervisory ladder are necessarily flexible and should consider each insurer's specific situation. However, it is important that when certain triggers are reached (such as non-compliance with the SCR), a minimum convergent approach is applied to ensure a similar level of policyholder and beneficiary protection across the EU.

EIOPA advises that this has always been an extremely important area, however, during the last four years there have only been a few SCR breaches. 12 insurers from six member states have breached the SCR for a period of two consecutive days. This represents less than 0.5% of all insurers subject to the Solvency II Directive.

EIOPA recognises that the ongoing uncertainty relating to COVID-19 could potentially lead to more frequent breaches of the SCR in future. It notes that EU insurers have, so far, demonstrated resilience. However, the current environment amplifies the risk of non-compliance. Therefore, EIOPA believes that supervisory convergence in this area is timely. The statement is drafted so it is applicable at any time. However, one specific paragraph has been included addressing supervisory expectations on the development of recovery plans in the course of the COVID-19 pandemic.

The consultation closes on 17 February 2021. EIOPA will consider the feedback received and publish a final report on the consultation. It will also submit the final version of the supervisory statement for adoption by its Board of Supervisors.

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Authored by Yvonne Clapham

 

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