In this latest series of Evolving Insurance Risk and Regulation, KPMG member firm experts discuss the issues that are likely to shape the industry's future. And new Secretary General of the IAIS, Jonathan Dixon talks to Rob Curtis, Global Insurance Regulatory Lead, KPMG Australia about the progress of the second iteration of the Insurance Capital Standard, and about how the current initiatives will shape the IAIS and the global insurance industry for years to come.
As we head into the age of autonomous vehicles, the insurance sector is expected to go through a ‘chaotic middle’, where insurers will face a dual challenge: migrating their operations to a new business model, while managing the changes in their businesses brought on by the new technology.
Facing the potential of lower revenue and new competition, how should insurers adapt to the changes? Here are eight actions to adapt and take advantage of the chaos.
The risks inherent in the chaotic middle may be significant, but new markets, revenue streams and opportunities are emerging rapidly. With apt insights and bold actions, the chaotic middle could prove to be the transforming agent that most insurance CEOs are looking for.
Transformation of such scale will not be easy, and the time to act is now.
Senior Management Accountability Framework for Irish financial services firms
In its response (PDF, 564KB) to the Law Reform Commission Issues Paper “Regulatory Enforcement and Corporate Offences” of December 2017, the Central Bank strongly recommended that reforms assigning responsibility to senior personnel are adopted in Ireland and modelled on the UK’s Senior Managers and Certification Regime; such reforms would allow the Central Bank to “require every senior manager to present a statement of responsibilities that clearly states the matters for which they are responsible and accountable”. On 20 March, Gerry Cross, Director of Policy and Risk, referred to the current work the Central Bank is undertaking on this area as they consider the possible introduction of a senior manager accountability framework for Irish firms.
Gerry Cross’ comments were given in response to the Inaugural Lecture by Professor Steven L. Schwarcz, Duke University School of Law, in the Distinguished Visitor Public Lecture Series: “Corporate Governance of Risk-Taking in Systemically Important Financial Firms”.
Central Bank’s Insurance Quarterly Newsletter - March 2018
The Central Bank has published their Spring 2018 instalment of the Insurance Quarterly Newsletter (PDF, 2.2MB). The publication contains articles on a wide range of topics, including:
• Insurance Supervision Directorate’s Risk Culture Model – Governance
• Quality of regulatory reporting data
• The SFCR – Considerations for the second submission
• Guidance on the Summary RSR
• Key findings from the Central Bank’s onsite inspection review of outsourcing
The FCA has published a discussion paper (DP) on transforming culture in financial services. The paper gathers opinions from thought leaders, including financial services leaders, academics and change practitioners. It is intended to stimulate further debate on what else needs to be done to drive cultural change. The set of essays within the paper discuss what a good culture might look like, the role of regulation and regulators, how firms might go beyond incentives, and how to change behaviour for the better.
The FCA has re-stated that culture and governance remains a priority for them and that they continue to have a strong focus on the role of the individual as well as the firm. In the foreword to the DP the FCA continues to place emphasis on the role of culture by saying:
“Culture in financial services is widely accepted as a key root cause of the major conduct failings that have occurred within the industry in recent history, causing harm to both consumers and markets. For markets to work and firms to be successful, it is critical that they are seen as trustworthy. Social expectations have changed, and public interest has raised questions of trust in firms, and in the industry as a whole. To increase confidence, firms need to demonstrate they are working in the interests of consumers and the market.”
Given the impact of culture within financial services, firms should foster cultures which support the spirit of regulation in order to halt harm to consumers and markets.
On the publication of the DP, FCA Executive Director of Supervision - Retail and Authorisations, Jonathan Davidson noted the challenges that accompany the measurement of culture, however, he continued to state that those challenges notwithstanding, “…firms can and should take responsibility for ensuring their culture is healthy for both their employees and customers, which can complement and support their business strategy.”
The DP contains 28 essays arranged around the four themes, these are as follows:
The FCA is not requesting formal feedback on this paper. However, the DP should contribute to the debate as to what constitutes a healthy culture and how to promote it. The FCA have not announced any new regulatory measures in this Discussion Paper, however, they have linked it to the individual accountability principles, contained in the minimum standards of behaviour set out in the 5 Conduct Rules within the Senior Managers and Certification Regime (SM&CR).
In a speech to the All Party Parliamentary Group (APPG) on Wholesale Financial Services Annual Dinner (March 27, 2018), the Chief Executive of the FCA Andrew Bailey, strongly welcomed the agreement reached by the European Council on the Brexit transitional arrangement and he stressed the importance of making the most use of this transition or implementation period.
He further stated that the key issue was need for continuing authorisation for firms which are undertaking cross-border business between the UK and the EU, and for which their passporting rights would be lost on the UK leaving the EU. Firms that rely on these rights would be unable to perform regulated activities in order to meet their contractual obligations until they gain authorisation from the state in which they were undertaking such cross-border business.
In particular he noted that while all financial industry contracts requiring a cross-border performance of a regulated activity could be affected, the impact is expected to be greatest for insurance policies and derivative products. In the Insurance sector he provided the following example of, insurers in the UK and the European Economic Area not being able to pay claims, or receive premiums from policyholders in the other jurisdiction. In the UK this could affect around £27bn of insurance liabilities and 10 million policyholders, while in the EEA the numbers could be around £55bn of liabilities and 38 million policyholders.
He stressed that these types of cross-border Brexit risks are symmetric in that they affect both the UK and the EU and in order to minimise disruption UK and EU 27 regulators would need to work together to find effective solutions and preserve financial stability.
In practical terms, Mr. Bailey recognised that the formal agreement and adoption of a transition or implementation period depends on everything being agreed. In the intervening period, “markets and firms, and regulators, want as much certainty as they can get". With that in mind he made reference to the UK Government’s December commitment to legislate to allow EEA firms to continue to operate and as accordingly, continue to service contracts. The granting of temporary permissions by the FCA is the practical mechanism which will enable firms to conduct business on an ‘as usual’ basis in this period of transition.
EIOPA consults on corrections and amendments to the implementing technical standards on reporting and disclosure
On 28 March EIOPA published a consultation paper on proposed amendments to the implementing technical standards (ITS) on reporting and on public disclosure. The proposed amendments, which also include corrections to templates and instructions, originate from the European Commission's Delegated Regulation (EU) 2917/1542 on infrastructure corporates; EIOPA’s Explanatory Notes on Variation Analysis templates and issues previously identified in the EIOPA Question & Answers process. The consultation period closes on 11 May 2018.
EIOPA publishes Q&A document in relation to Variation Analysis Templates
On the 28th March 2018 EIOPA published a question and answer document in relation to the variation analysis templates (S.29.01 to S.29.04), which are required to be submitted by (re)insurance undertakings at year-end 2017. This follows a series of questions received from (re)insurance undertakings across Europe on how to interpret the guidance provided to date. EIOPA expects that (re)insurance undertakings use the explanations and further clarifications provided in the paper in the implementation and reporting of the templates at year-end 2017. However, EIOPA has said that a “best efforts approach” is expected, to acknowledge that the templates have raised many questions to date and because the clarifications from EIOPA have been published close to the submission date.
Public Hearing on Solvency II
The European Commission published a speech given by Vice President Valdis Dombrovskis, European Commissioner for Financial Stability, Financial Services and Capital Markets Union (CMU) on reforms to the legislative framework established under the Solvency II Directive. In the speech, Mr Dombrovskis considers issues including simple, transparent and standardised (STS) securitisation; a review and amendment of the Solvency II Delegated Regulation intended to help insurers invest in growth creation, to improve proportionality particularly in relation to reporting, and to remove inconsistencies; and sustainable finance. By 2019, the Commission intends to revise its guidelines for corporate disclosure in line with the recommendations of the Task Force on Cli mate-related Financial Disclosures (TCFD). The Commission will also consider incorporating sustainability into prudential rules through amendments to Solvency II. It will send a request for advice to EIOPA on this issue later in 2018.
EU-US insurance agreement concluded
On 20 March 2018 (PDF, 20KB), the Council adopted a decision (PDF, 209KB) concluding a bilateral agreement (PDF, 320KB) between the European Union and the United States of America on insurance and reinsurance. The bilateral agreement provides legal certainty for EU and US insurers and reinsurers in the application of regulatory frameworks; and under the ag reement EU reinsurers accepting risk from US insurers will not be required by US regulators to pledge collateral