PRA supervision of annuity providers: BoE speech
The Bank of England (BoE) has published a speech (and accompanying appendix), given by Charlotte Gerken, Prudential Regulation Authority (PRA) Executive Director, Insurance Supervision, on developments in the PRA's supervision of annuity providers. Ms Gerken focuses on three areas of the PRA's supervisory risk analysis. In her speech, she:
- takes stock of market developments since 2019, including the continued growth in the bulk annuity market;
- discusses the implications of those developments for the PRA's supervision of the matching adjustment (MA), putting it in context, setting out the rationale behind it, and discussing asset eligibility matters; and
- shares some thoughts from the PRA's supervisory analysis on the size of the MA, how the current fundamental spread approach has been implemented and the risk sensitivity of the FS.
Ms Gerken concludes that close supervision of the MA contributes to securing an adequate degree of protection for policyholders and that the PRA will continue to develop its analysis both to improve its supervision and to inform policy development. She explains that HM Treasury's call for evidence on the review of the Solvency II regime has drawn a wide range of views on the nature of the MA and the PRA is committed to working with industry and HM Treasury to deliver meaningful and progressive reform to Solvency II, in line with HM Treasury's objectives for the review.
Ms Gerken also stresses that annuity writers will continue to receive significant supervisory challenge from the PRA. This reflects the nature and importance of the annuity product, the significant judgements and assumptions that underpin the MA benefit available to firms, and the impact of annuity providers on the PRA's policyholder protection objective.
Firms offering buildings insurance for leasehold properties: FCA expectations
The UK Financial Conduct Authority (FCA) has published a new webpage setting out its expectations of regulated firms when arranging and providing fair value buildings insurance for leasehold apartment buildings. The FCA explains that the webpage does not provide an exhaustive description of what firms need to consider. Rather, it highlights some important elements firms need to consider as part of their overall approach.
The FCA notes that, in recent years, the cost of buildings insurance has increased significantly for some apartment buildings, especially if the building's exterior is clad with potentially combustible materials. This has led to a rise in charges for some leaseholders. Insurers and insurance intermediaries should consider the value of these insurance products for customers (including any policyholders who could bring a claim under the policy). This will include considering whether all relevant aspects of the policy, such as the total price, coverage and the effects of distribution arrangements (and associated remuneration), would mean the product offers fair value.
Where intermediaries propose a policy to a property managing agent as their customer, the FCA expects firms to consider any of the property managing agent's wider obligations to leaseholders, which are likely to inform the assessment of their demands and needs.
Depending on the contract of insurance and the circumstances, firms may owe some obligations directly to leaseholders. For example, if a leaseholder has direct rights to bring a claim under the policy, firms would need to consider whether they are arranging insurance that is consistent with their obligation to act honestly, fairly and professionally, in the best interests of the leaseholders as well as the property owner (this is the "customer's best interests" rule in the Insurance: Conduct of Business sourcebook (ICOBS 2.5.-1R)).
There are many different arrangements through which buildings insurance can be taken out by a property owner or property managing agent. The FCA expects regulated firms to ensure they are meeting all of its applicable rules and take account of any wider legal obligations (for example, under landlord and tenant legislation) that are relevant to taking out insurance cover. This includes property managing agents that are directly regulated by the FCA, or those that act as appointed representatives of FCA-regulated firms in relation to arranging buildings insurance (and any other regulated activities they provide).
Regulated insurance intermediaries, who receive remuneration for their work distributing buildings insurance policies, must also ensure the remuneration is consistent with the customer's best interests rule.
Solvency II: Implementing Regulation on technical information for calculating technical provisions and basic own funds for Q2 2021 reporting
Commission Implementing Regulation (EU) 2021/744, which lays down technical information for the calculation of technical provisions and basic own funds for reporting under the Solvency II Directive has been published in the Official Journal of the EU. The Implementing Regulation, made under Article 77e(2) of the Solvency II Directive, sets out the technical information for reinsurers and insurers to use when calculating technical provisions and basic own funds for reporting with reference dates between 31 March 2021 and 29 June 2021.
The Implementing Regulation entered into force on 8 May 2021 and applies from 31 March 2021.
EIOPA launches 2021 EU-wide insurance sector stress test
The European Insurance and Occupational Pensions Authority (EIOPA) has announced the launch of the 2021 EU-wide stress test for the insurance sector. EIOPA explains that the 2021 stress test focuses on a prolonged COVID-19 scenario in a "lower for longer" interest rate environment. The scenario, developed in cooperation with the European Systemic Risk Board (ESRB), will assess the impact of the economic consequences of the COVID-19 pandemic, which affect confidence worldwide and prolong the economic contraction. The stress test will evaluate both the impact on the capital and the liquidity position of the undertakings in scope.
The objectives of the 2021 stress test are to:
- assess the resilience of participants to adverse scenarios from a capital and liquidity perspective to provide supervisors with information on whether the insurers are able to withstand severe but plausible shocks;
- consider possible recommendations to the industry and allow supervisors to engage with insurers on potential remedial actions; and
- complement the micro-prudential assessment with the estimation of potential spill-over from the insurance sector triggered by widespread reactions to the prescribed shocks.
The 2021 exercise includes 44 European (re)insurance undertakings. The companies were selected based on size, EU-wide market coverage, business lines conducted (life and non-life business), number of represented jurisdictions and local market coverage. In total, the target sample, defined in cooperation with the national competent authorities, covers 75% of the EEA based on total assets under the Solvency II Directive.
EIOPA states that it is now carrying out a questions and answers process to provide further clarifications to participants. It plans to publish the stress test results in December 2021.
IBOR transitions and issues information request: EIOPA consultation
EIOPA has published a consultation paper on Interbank Offered Rates (IBOR) transitions.
The consultation considers adjustments to EIOPA's risk-free rate (RFR) methodology and production in light of the EU Benchmark Regulation (EU BMR), which requires financial benchmarks to be transparent and to measure the underlying economic reality in a representative way. EIOPA aims to adopt a common approach for all currencies on the transition to the new rates to continue producing consistent RFR term structures.
The proposed approach takes into consideration recent market developments and responses received to EIOPA's discussion paper, which was published in January 2020.
The consultation closes on 23 July 2021.
Alongside the consultation, EIOPA has issued an information request from national supervisory authorities (NSAs) on the impact of IBOR transitions. Insurance and reinsurance undertakings from the EEA, who are subject to the Solvency II Directive, are asked to provide information on the impact of IBOR transitions on the solvency position of undertakings with reference date 31 March 2021. NSAs will contact a representative sample of undertakings to participate in the information request. Insurance and reinsurance undertakings should submit the completed reporting template to the respective NSA by 25 June 2021. The template should be filled according to the instructions in the technical specifications and taking into account the technical information.
EIOPA plans to disclose results from the information request, together with its consultation on the IBOR transitions, in September 2021.
Comparable outcomes and high-level principles: IAIS consultation responses
The International Association of Insurance Supervisors (IAIS) has published a document setting out the main comments received on its consultation on comparable outcomes and high-level principles.
In November 2020, the IAIS consulted on a draft definition and high-level principles to inform the criteria that will be used to assess whether the aggregation method (AM) provides comparable outcomes to the insurance capital standard (ICS). The document sets out details of the feedback received to the consultation and IAIS' policy decisions taken in response to feedback.
The IAIS states that it has decided to retain without changes the draft definition of comparable outcomes and high-level principles. It also notes that many of the comments on the consultation requested clarification of the terminology used. It intends to address the issue of clarity of interpretation as part of the development of the criteria.
IAIS intends to consult on the draft criteria in Q4 2021.
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Authored by Yvonne Clapham