Insurance Insights November 2018 | KPMG | IE
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Insurance Insights

Insurance Insights

Insurance Insights

IFRS 17 – Proposed deferral of effective date to 2022

In response to stakeholders’ concerns and implementation challenges regarding the new insurance contracts standard, IFRS 17, the IASB has recently raised the possibility that the standard could be amended.

At its November 2018 meeting, the IASB tentatively decided to propose that:

  • the mandatory effective date of IFRS 17 be deferred by one year to 2022; and
  • the fixed expiry date for the optional temporary exemption from applying IFRS 9 Financial Instruments, granted to insurers meeting certain criteria, also be deferred by one year to 2022.

This means that all companies preparing financial statements under IFRS would be required to apply both IFRS 9 and IFRS 17 for annual periods beginning on or after 1 January 2022.

Find out more here: IFRS 17 – Proposed deferral of effective date to 2022
 

Cybersecurity and its implications for the insurance industry

This month’s InsurTech Insights looks at cyber security and its implications for the insurance industry.

Dovetailing with this edition KPMG are hosting a webinar on the same topic, on Thursday 5 December 2018.

Please click here to register.

Individual Accountability in Financial Services

In recent years a number of regulators, including in the UK, have focused increasingly on individual accountability. Regulated firms are being required to identify senior managers, allocate responsibilities to these senior managers, draw together responsibility maps for the firm, and ensure that senior managers (and in some cases a wider range of staff) are fit and proper for their roles and meet conduct rules established by the regulator.

This paper comments on the UK approach (PDF, 550KB), including forthcoming developments, as well as providing an international perspective.

In Ireland, the Central Bank of Ireland (“CBI”) proposed earlier this year that it is considering the possible introduction of a senior manager accountability framework for financial institutions in Ireland, in part in response to the conduct issues that have arisen with tracker mortgages in Ireland. The CBI is looking at the experience of the UK to assess the implications of introducing a senior manager accountability regime.

In a UK context, the PRA has published final rules for the implementation of the extension of the Senior Managers and Certification Regime to insurers (“SMCR”) ahead of the regime coming into effect on 10 December 2018.

Central Bank of Ireland Update

Motor Insurance: Consumer Research on Attitudes and Behaviours

On 7 November the Central Bank published its findings following research into the attitudes, preferences and behaviours of motor insurance consumers (PDF, 1.3MB), including how they purchase insurance, whether they know the identity of their insurer, and whether the domicile of the motor insurer/underwriter has an impact on consumers’ attitudes towards such companies and their purchasing decision.

Central Bank Strategic Plan 2019-2021

The Central Bank of Ireland has published its Strategic Plan 2019-2021 (PDF, 1.3MB), setting out its key priorities for the next three years. The Central Bank is set to further develop their approach to consumer protection supervision, by ”conducting more intrusive and targeted assessments of those firms and products that pose the greatest potential harm to consumers” and by keeping their focus on individual accountability, governance and risk management cultures.

“Rapid Technology Developments and Conduct Risk – What does the Future look like through the Regulator’s Eyes”

During her speech at the European Insurance Forum on 25 October, Derville Rowland, Director General at the Central Bank of Ireland, said that the Central Bank would be updating the Consumer Protection Code in 2019 to take into account the feedback it received on the discussion paper on the Consumer Protection Code in light of the digitalisation of financial services (PDF, 3MB). Additionally, she referred to the Central Bank’s recommendation to the Government to apply an Individual Accountability Framework, similar to the Senior Managers Regime in the UK, not only to banks but also to “certain insurance undertakings and investments firms – those which represent a higher risk from a prudential and/or conduct perspective”.

EIOPA update

EU - U.S. Insurance Dialogue Project Insurance Industry Cybersecurity Issues Paper

EIOPA publishes the result of the work of the EU – U.S. Insurance Dialogue Project in 2018. This covers key areas linked to the Project initiatives addressing challenges and opportunities for the insurance sector in the European Union and the United States related to cyber security risks and the cyber insurance market, the use of big data, and intra-group transactions. There are specific papers for the following:

  • Insurance industry cybersecurity issues paper
  • The cyber insurance market
  • Big data issue paper
  • Supervision of intra-group transaction

The papers served as a basis for the panel discussions at the public forum: EU - U.S. Insurance Project on 10 November 2018 in Luxembourg.

EIOPA calls for immediate action to ensure service continuity in cross-border insurance

On 5 November EIOPA revealed it is closely monitoring the contingency plans of insurers domiciled in the UK and Gibraltar and writing cross-border business into the EEA30 and expressed concern regarding those firm’s contingency plans to ensure service continuity in case of a withdrawal without an agreement between the United Kingdom and the European Union. EIOPA said that “In case of a withdrawal without an agreement, 9.1 million EEA30 policyholders might face uncertainty and delays in receiving payments”.

Consultation on revised draft ITS on the mapping of ICAIs' credit assessments

On 26 October, the European Supervisory Authorities Joint Committee (“ESAs”) issued a consultation paper on the amendment to the implementing technical standards (“ITS”) on the allocation of credit assessments. The draft amending ITS specify the allocations that should be used for determining the credit risk for the purpose of calculating the standard formula SCR. Together with the revised draft ITS, individual amended mapping reports were also published on the EIOPA website. The consultation paper can be found here (PDF, 245KB). The consultation closes on 30 December 2018.

EIOPA’s analysis of IFRS 17

On 18 October, EIOPA published an analysis report (EIOPA-18-717) on IFRS 17 (PDF, 1.37MB). Whilst EIOPA regards IFRS 17 as a positive development, it expressed reservations on a few concepts that may affect the comparability and relevance of IFRS 17 financial statements.

European Supervisory Authorities and European Commission Update

ESAS Consult On Proposed Changes To The Key Information Document For PRIIPs

The European Supervisory Authorities (“ESAs”) have issued a consultation paper on targeted amendments to the Delegated Regulation covering the rules for the Key Information Document (“KID”) for Packaged Retail and Insurance-based Investment Products (“PRIIPs”).

The ESAs, on 1 October 2018, set out in a letter to the European Commission (PDF, 445KB) their intention to make proposals to support legislative changes to avoid the possibility of duplicating information requirements for investment funds from 1 January 2020, and to tackle key issues that have arisen since the implementation of the KID. The consultation paper addresses, in particular, amendments to the information regarding investment products' performance scenarios.

The proposals are made in the context of the ongoing discussions between the European co-legislators on the application of the KID by certain investment funds as well as the timing of a wider and more comprehensive review of PRIIPs, which was due this year. The outcome of this targeted review is without prejudice to that wider review, and it would be beneficial to conduct such a wider review early in the next term of the European Parliament. In addition, when deciding upon the nature of their final recommendations following this consultation in January 2019, the ESAs will take into account the feedback from respondents to this consultation and the latest information of these political discussions on the application of the KID by certain investment funds and the timing of the wider review. The deadline for submission of feedback is by Thursday, 6 December 2018.

Draft regulated act amending the Solvency II standard formula calculation

On 9 November the European Commission published for consultation a draft act amending the Solvency II Delegated Regulation which specifies, among others, the technical rules for the calculation of the Solvency Capital Requirement using the standard formula. The draft act takes into account EIOPA’s technical advice to the Commission and, if it is adopted by the European Commission, will amend the Solvency II Delegated Regulation as follows:

  • Capital charges in the standard formula for insurers’ unrated debt and unlisted equity will be reduced.
  • In certain circumstances, ring-fenced long-term investments in equity will benefit from the same capital charge as strategic participations.
  • Further simplifications will be available, including in relation to look-through requirements and the use of external ratings.
  • The classification of own funds and exposures to central counterparties as well as the treatment of exposures to regional governments and local authorities will be aligned with other EU financial legislation.
  • Additional requirements will be introduced in relation to deferred taxes.
  • A number of parameters will be updated, including risk calibrations for non-life premium and reserve risk.
  • The recognition of risk mitigation techniques, the group solvency calculation and the volume measure for non-life premium risk will be further refined.

The consultation is open until 7 December. The draft act is available here.

Brexit: Consultation Paper From The PRA and FCA

PRA Consultation Paper: Approach to amending financial services legislation under the EU Withdrawal Act 2018

On the 25 October 2018, the Bank of England issued an update to firms on its regulatory and supervisory approach to financial services legislation under the European Union (Withdrawal) Act 2018. The majority of proposed changes to the PRA rules affecting insurers are consequential to changes expected to be made by the draft Solvency II statutory instrument published on 11 October 2018. The general approach to changes will be to reflect that EEA states would be treated as ‘third countries’ by the UK, and the EU would treat the UK as a ‘third country’. The PRA is also considering exercising transitional powers to grant relief to firms in a broad way to delay the application of on-shoring changes that will alter the regulatory standards that apply to firms. This includes in respect to the location of branch assets for UK branches of third country firms. The deadline for responses to the CP is 2 January 2019.

FCA Consultation Paper: Temporary permissions regime for inbound firms and funds

Following the draft Statuary Instrument published by HM Treasury on 24 July, which introduces the Temporary Permissions Regime (TPR) for EEA firms that currently access the UK market via passporting licences (“TP firms”), the Financial Conduct Authority (FCA) has published a consultation paper on the detail of how the regime will work. It seeks comments by 7 December, with feedback and final rules scheduled for Q1 2019, ahead of the day of exit.

For EEA firms and funds, the FCA’s overall intention is to preserve the status quo as much as possible. However, certain additional rules and levies will apply to inbound firms and funds using the TPR, so it will not quite be business as usual. Inbound firms and funds need to factor in the various FCA timelines for the TPR notification process and the subsequent full authorisation application, which will be open in prescribed time slots between October 2019 and March 2021. They will also need to plan and action their own internal processes for coming into compliance with the additional rules (as set out in the CP) by exit day. In particular, the FCA Principles for Business are wide-ranging in scope and provide an over-arching framework for how the FCA expects firms to operate. It is not clear what “meeting the Principles” will mean for EEA firms and whether, and if so what extent, elements of the Principles might in practice fall under the “substituted compliance” proposal.

Waivers or modifications may apply in some instances, as described in the FCA’s consultation on Handbook changes.

Other PRA related updates

Other PRA related updates which may be of interest to Irish (re)insurers

  • 31 October: PRA approach to insurance supervision: The PRA has updated its approach document (PDF, 1MB) to insurance supervision to clarify its current approach to supervising insurance firms. The document has been updated to reflect recent developments in policy and approach (including to reflect the UK’s withdrawal from the EU) and to simplify and improve readability.
  • 25 October: Equity release mortgages: The PRA has decided to delay the implementation date to 31 December 2019 for proposals contained in CP13/18 (PDF, 688KB), issued earlier this year. The consultation period ended on 30 September 2018 and had originally proposed an implementation date of 31 December 2018. The PRA will publish final supervisory statements in due course.
  • 17 October: Modelling of the volatility adjustment: The PRA issued a supervisory statement (PDF, 592KB) confirming that it would consider applications from internal model firms that include a dynamic volatility adjustment (“DVA”). The PRA sets out its expectations as they relate to compliance with the volatility adjustment conditions set out in the Solvency 2 Regulation, including the Prudent Person Principle, systems of governance requirements. It also highlights the respective responsibilities of the Chief Risk function and the Chief Actuary function, how the volatility adjustment methodology is modelled in the solvency capital requirement (SCR) and quantification of benefit in the Solvency and Financial Condition Report. This follows The European Insurance and Occupational Pensions Authority (EIOPA) ‘Opinion on the supervisory assessment of internal models including a dynamic volatility adjustment (PDF, 248KB)’. The EIOPA Opinion implicitly accepts that firms that use an internal model to model credit risk may, as a general principle, apply a dynamic volatility adjustment (DVA) by allowing the VA to change when modelling credit spreads during the 1-year forecast of basic own funds.
  • 15 October: Financial Risks and Climate Change: The PRA has outlined its expectations on firms to address financial risk from climate change for banks and insurers in a consultation (PDF, 568KB) which ends on 15 January 2019. The PRA expects insurers to: embed climate change within their existing governance frameworks; assign board-level accountability for oversight; conduct long-term scenario testing to inform the firm’s strategic response to climate change; build climate change into risk management processes (such as the ORSA) and consider the firm’s approach to climate risk related financial disclosures.

Transition to IFRS 17

Every month KPMG Ireland’s IFRS team is producing an update on the progress of the industry to date on the implementation of the new insurance accounting standard.