Ireland: Insurance Quarterly Legal And Regulatory Update - 1 October 2011 – 31 December 2011

Solvency II

On 16 November 2011, the European Insurance and Occupational Pensions Authority ("EIOPA") hosted its first Annual Conference, where amongst other things EIOPA provided an update on its on-going work in preparing for the future implementation of the Solvency II Directive and the timeline of activities necessary to prepare for Solvency II.

The timeline proposed by EIOPA is based on a number of assumptions around the development of the political process, namely:

• the approval of the Omnibus II Directive by the European Parliament and the Council of the European Union and the publication of the proposal for a Delegated Act by the Commission in the first half of 2012;
• a phasing-in period of the new regime during 2013; and
• the application of Solvency II as of 1 January 2014. EIOPA emphasised that the work plan for the consultation may be adjusted depending on the realisation of these assumptions.

Under the current European Parliament and European Council proposals, a distinction is drawn between the implementation of Solvency II by Member States (1 January 2013) and the application of Solvency II to insurers (1 January 2014).

Despite the delayed implementation of Solvency II, it is likely that insurers will be obliged to prove their readiness in respect of its provisions before that implementation date.

EIOPA Consultations: Solvency II

EIOPA published two consultation papers setting out its draft proposals on:

• Own Risk and Solvency Assessment ("ORSA") guidelines; and
• Guidelines for Supervisory Reporting and Public Disclosure.

The ORSA guidelines paper sets out 24 guidelines, 15 of which relate to individual firms and groups and 9 of which relate to groups. The guidelines focus on identifying and assessing firms' overall solvency needs (rather than just capital needs) and highlight the need to distinguish between risks which firms propose to cover with capital and those which will be managed through other risk mitigation techniques. The paper contains some useful guidance for firms using either the standard formula or an internal model for the calculation of their regulatory capital requirement and how the OSRA should link to and support this process. The principle of proportionality should be reflected throughout the ORSA and it should be noted that an ORSA should be performed at least annually and should trigger a corresponding Solvency Capital Requirement ("SCR") calculation.

The EIOPA Consultation Paper on guidelines for supervisory reporting and public disclosure contain proposals which define the content and format of insurers' Solvency II reporting consisting of private reporting to their supervisors and public reporting to all stakeholders. This Consultation Paper consists of guidelines which cover:

• the content of the narrative Solvency and Financial Condition Report;
• the content of the narrative Regular Supervisory Report;
• reporting in the case of predefined events; and
• processes for public disclosure and supervisory reporting.

This Consultation Paper represents an important milestone in the development of the Solvency II regime, particularly as many supervisory authorities have already indicated that preliminary Solvency II reports will be required in 2013.

The consultation period for both papers ends on 20 January 2012. This period provides the last chance for stakeholders to influence the reporting requirements before they are finalised. A copy of both papers can be found on EIOPA's website at:

http://eiopa.europa.eu/consultations

Central Bank Solvency II Matters: Issue 6

The sixth edition of the newsletter, circulated on 6 December 2011, focuses on the latest Solvency II policy developments and implementation activities and events, including the following:

• Industry Readiness Survey: This was issued to industry on 1 September. Approximately 220 firms submitted completed responses. Firms that did not respond to the survey should be aware that the Insurance Supervision teams will be following up to obtain updates on their Solvency II preparations.
• Implementation update: The Central Bank is working on the assumption that Member States will be required to transpose Solvency II by 1 January 2013, while insurers will have until 1 January 2014 to implement the provisions. However, insurers are advised that they may be subject to reporting and other requirements during 2013.
• Omnibus II: The European Parliament has revised its indicative timelines for the adoption of the Omnibus II Directive. The vote on the ECON Committee report on the Directive has been moved back from 20 December 2011 to 24 January 2012 and the indicative date for the wider plenary vote has moved from 13 February to 17 April 2012.

A copy of the newsletter is available on the Central Bank's website at: www.centralbank.ie.

UK Financial Services' Authority Publish Solvency II Information

On 9 November 2011, the Financial Services Authority ("FSA") published the first of their Consultation Papers (CP 11/22) on the transposition of Solvency II. The Consultation Paper contains an explanation of the draft rules and guidance which will form the new prudential sourcebook for insurers in the FSA Handbook (SOLPRU). Submissions are invited until 15 February 2012.

CP 11/22 can be found on the FSA website at: www.fsa.gov.uk.

EIOPA Consultation: Complaints Handling by Insurers

On 9 November 2011, EIOPA issued a consultation paper - "The Proposal for Guidelines on Complaints Handling by Insurance Undertakings" (the "Draft Guidelines").

The Draft Guidelines are being issued to clarify EIOPA's expectations regarding the internal complaints handling system of insurers. In addition, it provides guidance on the provision of information to consumers and procedures for responding to complaints, thereby ensuring the adequate protection of both policyholders and beneficiaries.

The Draft Guidelines, which are addressed to the competent supervisory authorities in each Member State, set down minimum standards that insurance supervisors should apply in supervising complaints handling by insurers. Accordingly, supervisors may choose to specify more detailed requirements than those included in the Draft Guidelines. There are seven guidelines which deal with:

• Complaints management policy;
• Complaints managements function;
• Registration;
• Reporting;
• Internal follow-up of complaints-handling;
• Information to consumers; and
• Procedures for responding to complaints.

EIOPA has also published a 'Report on Best Practices by Insurance Undertakings in handling complaints', which provides more detailed provisions on insurance undertakings' internal controls when handling complaints.

This consultation period ends on 31 January 2012. Comments should be submitted via email to CP-010@eiopa.europa.eu.

Both the Draft Guidelines and Best Practices Report can be accessed on EIOPA's website at: https://eiopa.europa.eu

European Commission: Review of the Insurance Mediation Directive

On 25 November 2011, the European Commission published their final report on the review of the Insurance Mediation Directive ("IMD"). A key finding contained in the report is that the most common conflict of interest in the insurance mediation industry is the remuneration of persons selling insurance and their relationship to the consumer. The report indicates that mandatory disclosure on the nature and source of remuneration seems to be the best and most cost-efficient solution to this issue.

The report can be found at: http://ec.europa.eu/.

Financial Conglomerates Directive

On 9 December 2011, Directive 2011/89/EU of the European Parliament and of the Council entered into force.

The purpose of this Directive is to:

• Amend the existing Financial Conglomerates Directive (2002/87/EC) and also the relevant banking and insurance supervision legislation, including the Capital Requirements Directive and the Directive on Supplementary Supervision of Insurance Undertakings in Insurance Groups;
• Identify financial conglomerates throughout the EU according to the extent to which they are exposed to group risks, based on common guidelines issued by EIOPA, ESMA and the European Supervisory Authority (European Banking Authority), following cooperation within the Joint Committee of the European Supervisory Authorities; and
• Introduce regulatory oversight of legal and operational structures of financial conglomerates, including all legal entities, banks, insurers and financial conglomerates with cross-border activities by European supervision authorities and the Joint Committee, as appropriate, and ensure that information is made available to the relevant competent authorities.

The scope of Directive 98/78/EC (Supplementary Supervision of Insurance Undertakings in an Insurance Group) will be extended to mixed financial holding companies and alternative investment fund managers.

Directive 2011/89/EU requires transposition by Member States by 10 June 2013 (with the exception of some provisions which provide for transposition by 22 July 2013).

European Commission: Consultation on the application of Directive 2007/44/EC

The European Commission has issued a consultation paper on the application of Directive 2007/44/EC as regards acquisitions and increase of holdings in the financial sector.

The Directive was adopted in 2007 and lays down uniform rules and evaluation criteria for national supervisors to prudentially assess mergers and acquisitions in the financial sector. The main objective of the Directive was to make sure that all acquisitions of a qualifying holding are treated in the same way throughout the EU and across sectors, in particular due to the frequent use of group structures that extend across multiple Member States whereby a single acquisition of a qualifying holding may be subject to scrutiny in several Member States by several sectoral authorities.

According to Article 6 of the Directive, the Commission has to review the application of the Directive and submit a report to the European Parliament and the Council, together with any appropriate proposals to review the Directive. The Commission is seeking evidence on how the Directive was applied in the EU Member States to assist it in the preparation of this report.

The public consultation has been grouped into four sections:

• General questions on the application of the Directive in the EU Member States;
• Specific questions regarding the procedure as laid down in the Directive for the prudential assessment of the acquisitions of qualifying holdings in the financial sector, i.e. notification requirements and time limits amongst others;
• Specific questions in relation to the assessment criteria, required information and competing proposals; and
• Other issues, including questions on sanctions and the uniformity of application of the provisions of the Directive.

The consultation period is open until 10 February 2012 and interested parties may respond via email to MARKT-02@EC.EUROPA.EU.

The Consultation paper may be viewed on the Commission's website at: http://ec.europa.eu/.

Reform of the EU Data Protection Directive

On 29 November 2011, the EU's Justice Commissioner Viviane Reding announced formal proposals to revise and update EU data protection law. It was indicated that the European Commission will submit proposals to reform the Data Protection Directive (95/46/EC) by the end of January 2012.

The proposals aim to fix weaknesses in the current data protection framework. The proposals suggested include:

• Creating a single and streamlined data protection regime whereby the binding corporate rules ("BCR") approved by any one Data Protection Authority in a Member State are recognised in all other EU Member States with no need for further authorisation. Currently BCRs must be approved by the Data Protection Authority in each EU Member State before they are considered effective;
• Creation of a more business-friendly regulatory environment by removing unnecessary costs and administrative burdens; and
• Strengthening and coordinating the powers of data protection authorities so that all data protection agencies may use administrative sanctions whenever there is a breach of the law.

Insurance Compensation Fund

From 1 January 2012, non-life insurers (to include non-life insurers authorised in another Member State) will be required to pay a contribution of 2% of the gross premium income they receive in respect of risks situated in the Irish State. This requirement comes on foot of a notice published by the Central Bank on 4 November 2011, pursuant to Section 6 of the Insurance Act 1964 (as amended by the Insurance (Amendment) Act 2011) (the "Act") which requires non-life insurers to provide financial support for the Insurance Compensation Fund (the "Fund") where the Central Bank opines that such support is necessary.

The levy is payable on a quarterly basis, beginning with the period 1 January 2012 to 31 March 2012 and the Revenue Commissioners are the appointed collectors. Each quarter the non-life insurer, must provide the Revenue Commissioners with a written statement showing the aggregate gross premiums paid to it by its policyholders during that quarter in respect of risks situated in the Irish State. This statement must be delivered, and the relevant contribution paid, within 30 days of the end of the quarter to which the statement relates.

Accordingly the first statement and contribution should be delivered by 30 April 2012.

The Health Insurance (Miscellaneous Provisions) Act 2011

The Health Insurance (Miscellaneous Provisions) Act 2011 (the "Act"), enacted on 16 December 2011, amends the Irish State's existing tax credit system which seeks to offset the burden of increasing health insurance premiums for older people. This system is, in effect, funded by health insurers (and, ultimately, their policyholders) through the payment of a health insurance levy. The net effect of these changes is that the health insurance levy will be increased from €205 to €285 for an adult and from €66 to €95 for a child from January 2012, representing an increase of approximately 40%.

In addition, the Act amends provisions of the Health Insurance Act 1994 relating to the provision of information returns by health insurers to the Health Insurance Authority. Health insurers must now provide information concerning the type of cover that is being provided to a particular age group and must also highlight any changes to the level of such cover during the relevant period. Where the level of such cover has materially changed, the Minister for Health and Children is now empowered to make regulations requiring a health insurer to make separate information returns in respect of each material level of benefit.

Credit Institutions (Eligible Liabilities Guarantee) (Amendment) Scheme 2011

On 8 December 2011, the Credit Institutions (Eligible Liabilities Guarantee) (Amendment) Scheme 2011 was signed into law by the Minister for Finance Michael Noonan. This scheme provides for further amendments to the Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009 (S.I. No. 490 of 2009) by extending the Government Guarantee for short-term bank liabilities, including corporate and interbank deposits as well as debt securities with participating credit institutions up until the 31 December 2012 (subject to continuing EU state aid approval).

The full text of this legislation may be found on www.irishstatutebook.ie.

Central Bank of Ireland

(i) Revised Fitness and Probity Regime

On 1 September 2011 the Central Bank introduced a new regime to regulate the 'fitness and probity' of persons in Pre-Approval Controlled Functions ("PCF") and Controlled Functions ("CF") in regulated financial service providers (each a "Regulated Firm"). The new regime will apply to both new and existing PCFs from 1 December 2011 and to new CFs from 1 March 2012. Persons currently occupying a CF function have until 1 December 2012 to comply.

While the Central Bank had issued Regulations and Standards of Fitness and Probity on 1 September 2011, modified Regulations (S.I 615 of 2011) and Standards of Fitness and Probity ("Standards") were issued on 1 December 2011, in line with the publication of the final Guidance on the Fitness and Probity Standards on 23 November 2011.

The final Guidance ("Guidance") as well as the updated Regulations and Standards can be accessed on the Central Bank's website at: www.centralbank.ie.

The revised Guidance addresses issues raised during the consultation process by several industry participants. Some welcome clarifications in the revised guidance include:

• PCF Due Diligence Process:

• Outsourcing to a Regulated Entity

• Outsourcing to an Unregulated Entity

• Company Secretary

• Provision of services on a branch basis

In line with the new regime, the Central Bank has issued a revised form of the Individual Questionnaire ("IQ") with effect from 1 December 2011. Since 1 December 2011, the IQ is an online application and the Central Bank will no longer accept the old paper based IQ. Persons proposed for appointment to a PCF will be required to complete the online IQ which must be endorsed by the Regulated Firm and submitted for approval to the Central Bank electronically using the Online Reporting System ("ONR"). Guidance on the use and navigation of the new IQ and the ONR system can be found on the Central Banks website at: www.centralbank.ie.

(ii) Guidance on Fitness and Probity Investigations

In December 2011, the Central Bank issued 'Guidance on Investigations Conducted under Part 3 of the Central Bank Reform Act 2010' which provides PCF/CFs and Regulated Firms with an overview of the manner in which investigations as to the Fitness and Probity of a PCF/CF and the decisions following from such investigations will operate.

This Guidance can be found on the Central Bank's website in the fitness and probity section at: www.centralbank.ie.

(iii) Updated FAQ document on the Corporate Governance Code for Credit Institutions and Insurance Undertakings

The Central Bank has updated the FAQ document which accompanies the Corporate Governance Code for Credit Institutions and Insurance Undertakings (the "Code"). The amended FAQ updates the Central Bank's earlier version which was published at the end of May 2011. The FAQ provides guidance on the application of the Code and the amendments have been made in line with the Central Bank's developing practice and experience in applying the Code. The amendments provide clarification in respect of the following issues:

• Physical attendance at board meetings by directors is encouraged 'wherever possible', however, the Central Bank recognizes that physical attendance is not always possible and provides for attendance by way of video-conferencing/teleconferencing;
• Counting of group directorships - All directorships held within a group, whether they are in financial or non-financial companies, shall be counted as one directorship; and
• Where the board comprises only five members, the full board, including the CEO and Chairman may act as the Audit Committee provided that the Chairman of the Audit Committee is an independent non-executive director.

The FAQ document relating to the Corporate Governance Code for Captive Insurance and Captive Reinsurance Undertakings has also been updated in relation to physical attendance at board meetings. This update also provides that physical attendance at board meetings is preferable 'wherever possible', however, also makes provision for directors to attend via video-conferencing/tele-conferencing. It also provides that physical attendance is required at a minimum of one board meeting annually.

These updated FAQ documents may be found on the Central Bank's website at: www.centralbank.ie.

(iv) Publication of Central Bank's Auditor Protocol

On 6 December 2011, the Central Bank published the Protocol between the Central Bank and Auditors of Regulated Financial Service Providers (the "Auditor Protocol"). The Auditor Protocol provides a framework which allows the Central Bank and the auditing profession to exchange relevant information on a timely basis with the aim of enhancing both the regulatory and statutory audit processes.

In order to fulfil its objectives, the Auditor Protocol requires that communication channels between the Central Bank and auditors should remain open. To achieve this, the Auditor Protocol requires that:

• Firms must advise the Central Bank of the contact details of the audit partner responsible for the audit within five days of their appointment and similarly firms should advise their auditor of the contact details of its senior examiner in the Central Bank within 5 days; and
• Meetings between the Central Bank and auditors shall be governed by the principal of sharing information which will lead to higher quality audits and all communications between the Central Bank and auditors shall be deemed confidential under Section 33AK of the Central Bank Act 1942 (as amended).

In line with the proposals contained in the draft consultation paper (CP56), the Auditor Protocol highlights the need to identify and remove barriers to sharing information. As such, contractual agreements between auditors and firms should not hinder information sharing and provision should be made therein acknowledging that the Central Bank and firms' auditors can discuss issues relevant to their oversight of the firm and that such communication will not be determined to be a breach of duty by either party.

The framework provides a structure for bilateral meetings (i.e. between the Central Bank and auditors) which should take place at least twice a year at the pre-and-post audit stage and trilateral meetings (i.e. between the Central Bank, auditors and the audit committee or Independent Non-Executive Director).

The Auditor Protocol is subject to annual review and will be updated to reflect changes in legislation, auditing practice and other relevant developments.

The Auditor Protocol will in the first instance apply to those firms which are rated High Impact under the Central Bank's new regulatory risk model PRISM, and will become effective in 2012.

The Auditor Protocol can be found on the Central Bank's website at: www.centralbank.ie.

(v) Guidelines on Annual Compliance Statements for Captive Insurance and Reinsurance Undertakings

In October 2011, the Central Bank issued Guidelines to assist captives in preparing the Annual Compliance Statement (the "Statement") which is required by Section 18 of the Corporate Governance Code for Captive Insurance and Captive Reinsurance Undertakings ("the Code").

The Code sets out guidance on a number of areas, including:

• Scope: The Statement should include reports of any material deviations from the Code and ad hoc reports of material deviations already reported to the Central Bank.
• Submission: The Statement should be signed by all directors and submitted to the captives supervisory team.
• Timeline: The first Statement must be submitted by 31 January 2013 and shall cover the period 31 May 2012 (or such earlier date as the captive has complied with the Code) to 31 December 2012.
• Material Deviations: Where a material deviation from the Code is identified, a report on the material deviation must be submitted to the Central Bank. The Board is responsible in the first instance for determining whether a deviation is material. The Central Bank views all areas of the Code to be equally important.
• Use of information: If a captive reports a material breach of the Code, the Central Bank may use that information for any of its regulatory functions, which may expose the captive and/or persons concerned in its management to, inter alia, financial penalties and other sanctions.
• Confidentiality: The Statement does not have to be published in the captives annual report and is confidential when submitted to the Central Bank. However, where a Statement contains reports of material non-compliance in respect of which the Central Bank subsequently takes enforcement action, publication of such noncompliance may be required as part of that enforcement action.
• Retention of documentation: Directors must undertake reasonable enquiries to satisfy themselves as to whether the captive has complied with the Code, this may be supported by certain documents which should be retained for 6 years and made available to the Central Bank if required. The Guidelines specify certain types of supporting documentation which may be used for this purpose in relation to the board, directors, sub-committees, the captives corporate governance policies and procedures and risk appetite.
• Availability to the Central Bank: The majority of directors must be reasonably available to the Central Bank at "short notice", the meaning of which will depend on the facts of the case and will be influenced, for example, by the urgency of the issue and the reasonable travel time needed by directors and potentially whether contact by telephone or video conference would suffice.

The Guidelines include, at Appendix 1, minimum templates for completion as part of the Annual Compliance Statement. The Central Bank has specified that the Guidelines are not exhaustive and should be read in conjunction with the Frequently Asked Questions on the Code, published on 16 August 2011.

The Guidelines and FAQs are available on the Central Bank's website at: www.centralbank.ie

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