DOMESTIC NEWS - MARCH 2018 UPDATE
CENTRAL BANK RELEASES SPECIAL EDITION OF INTERMEDIARY TIMES ON BREXIT PLANNING
The Central Bank has published important information on service continuity post-Brexit relevant to Irish insurance intermediaries passporting into the UK. As the UK will become a third-country after it formally withdraws from the EU, Irish insurance intermediaries will no longer be able to provide services in the UK under their current registration (and vice versa for UK insurance intermediaries passporting into Ireland). Accordingly, the Central Bank has set out the necessary steps that it expects all Irish intermediaries passporting into the UK to take with regard to their contingency planning:
- Assessing, on an on-going basis, the impact of Brexit on their business, including for the service of continuity of insurance mediation contracts concluded by way of freedom of establishment and freedom to provide services;
- Developing contingency plans that set out measures to prevent insurance mediation activity without registration to ensure service continuity after Brexit, taking into account the FCA's communication regarding the temporary permission scheme. The features of the FCA's temporary permission period were discussed in the January 2018 edition of the Arthur Cox Regulatory Update, which is here; and
- Implementing the necessary measures to prevent insurance mediation activity without registration and ensure service continuity by the date that the UK formally withdraws from the EU, which will take place on the date of entry into force of a Withdrawal Agreement or two years after the notification i.e. 30 March 2019 or on the expiry of any agreed and applicable transition period.
In order to identify firms that may be eligible for temporary permission the Central Bank and the FCA are encouraging firms to complete the FCA's online survey, which closes on 11 May 2018. UK registered intermediaries that are considering applying to the Central Bank for registration are encouraged to contact the Central Bank as soon as possible.
The Central Bank's Intermediary Times Newsletter is here.
CENTRAL BANK PUBLISHES INSURANCE QUARTERLY NEWLETTER
The newsletter provides an update of the activities of the Insurance Directorate in Q1 2018. The Central Bank has been focused on how risk culture in firms can be captured and this edition of the newsletter contains a second article on the Insurance Supervision Directorate Risk Culture Model, the first of which was published in December 2017. This detailed article focuses on governance and the role it plays in a firm's risk culture.
The newsletter also contains articles on annual Solvency II reporting, Solvency II data quality checks, and SFCR submission considerations. In this regard, the Central Bank encourages firms to consider EIOPA's recently published statement relating to areas subject to improvement when submitting SFCRs.
Feedback from the Central Bank's themed inspection on outsourcing also featured in this edition of the newsletter. Among the Central Bank's key findings is the need for the role of Risk Function and Internal Audit Function to be enhanced with respect to oversight of outsourcing and for an increase in the quality and frequency of reporting on outsourcing metrics to the Board and Committees.
The Central Bank's Insurance Quarterly newsletter is here.
DIRECTOR OF POLICY AND RISK, GERRY CROSS DELIVERS SPEECH ON PROPOSED AMENDMENTS TO THE ADMINISTRATION OF THE INSURANCE COMPENSATION FUND (ICF)
On 8 March, Director of Policy and Risk addressed the Oireachtas Committee on Finance to discuss the proposed amendments to the Insurance Act 1964 as part of the pre-legislative scrutiny of the Insurance Amendment Bill 2017 (the Bill). The features of the Bill were discussed in the July 2017 edition of the Arthur Cox Regulatory Update, which is here. Given the uncertainty regarding compensation arrangements that followed the liquidation of Setanta Insurance, the Central Bank welcomes the clarity that the Bill seeks to bring to the insurance compensation framework and is particularly supportive of the extension of compensation for third party motor claims in the case of insolvency from 65% to 100%.
Mr. Cross stated that the Central Bank believes that the Bill's treatment of the proposed split in funding for third party motor claims, (which would be covered 35% and 65% by the MIBI and the ICF respectively), would not give rise to undue complexity for affected consumers. However, the Central Bank would welcome further analysis of the current differences of approaches between the situation where a firm is in administration and when it is in liquidation.
The Central Bank is also working with EIOPA to assist in its examination of a proposed European harmonised recovery and resolution framework for the insurance sector.
The Director of Risk and Policy's speech is here.
THE CENTRAL BANK RELEASES ITS DEMOGRAPHICS OF APPLICATIONS FOR REGULATORY APPROVAL FOR SENIOR FINANCIAL ROLES
On 7 March, the Central Bank published a detailed report, breaking down over 3,600 applications it received in 2017 for approval for senior financial roles, by age, gender and country of origin. Following on from the Central Bank's earlier report in 2017, where a similar exercise was undertaken for 2012 - 2016, concern remains over the lack of diversity at senior level in regulated firms. This is highlighted by a major gender imbalance at board level and in revenue generating roles. The report recognises that although there are modest increases in gender diversity in the applications, the current imbalance is significant and remains a concern for the Central Bank. As such, the Central Bank reaffirmed its commitment towards increasing the levels of meaningful change in diversity at senior levels and intends to publish this report on an annual basis.
The Central Bank's press release is here.
The Central Bank's report is here.
DIRECTOR OF POLICY & RISK DELIVERS SPEECH ON CURRENT THEMES IN EUROPEAN FINANCIAL REGULATION
On 14 March, Gerry Cross, Director of Policy & Risk addressed the Barclays Capital Conference on some of the current themes in financial regulation at EU level. From an insurance perspective, the key points in Mr. Cross' speech were:
- In relation to the Capital Market Union project, Mr. Cross welcomed the preferential treatment of 'qualifying infrastructure investments' under Solvency II and described it as a regulatory approach that is grounded in an accurate reflection of risk. He noted that as the Capital Markets Union project develops, it needs to maintain its current risk-relative approach and should avoid the temptation to prioritise short term gains against over longer term soundness;
- The Central Bank is broadly supportive of the proposals for a Pan-European Personal Pension Product provided that the legislative process delivers high quality outcomes on key aspects of the proposal;
- Referring to the European Commission's Action Plan on fintech, Mr. Cross noted that the current challenge for regulators is to facilitate good innovation and to prevent or limit innovation that is detrimental to the goal of a well-functioning financial services market;
- On the topic of Brexit preparedness, Mr. Cross noted that the expectation among regulators is still that firms be prepared to deal with a no-deal Brexit and that such plans should include clear timelines and trigger points for the actions that they will take; and
- Mr. Cross also addressed the European Commission's proposals for the restructuring of the European Supervisory Authorities (ESAs), stating that while the aims of the proposals are laudable, care should be exercised to ensure that such changes do not undermine the integrity of the decision making process and accountability of the ESAs.
The Director of Policy and Risk's speech is here.
DIRECTOR OF POLICY & RISK DELIVERS SPEECH ON ENHANCING THE CULTURE OF RISK-TAKING IN FINANCIAL FIRMS
On 20 March, Gerry Cross, Director of Policy & Risk delivered a speech addressing the interplay between risk governance and firm culture. The question of culture is one that is high on the Central Bank's agenda. In reiterating the responsibilities that firms have under their respective Corporate Governance Codes, the Director also noted the role that diversity has to play in a firm's culture, particularly at management level.
The Central Bank is also considering introducing a senior manager responsibility scheme similar to those that have been introduced in the UK and in Australia. According to Mr. Cross, the objective of such a scheme would be to provide individual senior managers with a clear framework of responsibilities in the hope that this would to help foster a culture of accountability within firms.
The Director of Policy & Risk's speech is here.
EUROPEAN AND INTERNATIONAL NEWS - MARCH 2018 UPDATE
THE EUROPEAN COMMISSION DELIVERS SPEECH ON SOLVENCY II REFORMS
On 27 March, Vice-President Valdis Dombrovskis, European Commissioner for Financial Stability, Financial Services and Capital Markets Union, delivered the opening keynote speech at the Public Hearing on Solvency II. Mr Dombrovskis's speech addressed the following points on the reforms to the legislative framework of Solvency II:
- The Commission intends to continue the amendments to the capital requirements in Solvency II to accommodate the simple, transparent and standardised framework established in the Securitisation Regulation ((EU)2017/2402);
- The Commission plans for further focused improvements to the Solvency II Delegated Regulation, namely improving the ability of insurers to invest in growth creation, improving proportionality in areas including reporting and to removing inconsistencies identified in the implementing rules;
- In relation to the impact of Solvency II on long-term investments, the Commission intends to ask EIOPA to compile additional information over the coming years, noting that any major reforms targeting the potential impact for insurance companies' long term business will be reviewed in 2020; and
- Mr Dombrovskis notes the insurance relevant elements of the Commission's March 2018 action plan on sustainable finance. He highlights that the Commission also intends to clarify the duties of various actors including insurance distributors in relation to sustainability, while incorporating sustainability generally into the prudential rules through the amendment of Solvency II.
The Vice President's speech is here.
COUNCIL OF THE EU ADOPTS DECISION CONCLUDING AGREEMENT WITH THE US ON INSURANCE AND REINSURANCE
On 20 March, the Council adopted a decision concluding the bilateral agreement on insurance between the European Union and the United States. The agreement includes provisions on reinsurance, group supervision and the exchange of information, and it provides legal certainty for insurers and reinsurers within the EU and US. The agreement aims to strengthen supervisory co-operation regarding the exchange of information and to provide for the protection of policyholders. The implementation of the agreement will be overseen by a joint committee. However, it should be noted that some of the provisions have already been applied provisionally since the signing of the agreement in September 2017.
The Council's press release is here.
The Council's decision is here.
The agreement is here.
EUROPEAN COMMISSION PUBLISHES FINTECH ACTION PLAN
On 8 March, the Commission released its FinTech Action Plan to enable the EU financial sector to harness the opportunities presented by technologies such as blockchain, artificial intelligence and cloud services. The Action Plan is part of the Commission's efforts to build a Capital Markets Union and a create Digital Single Market and it sets out 19 steps to enable innovative business models to scale up and take up new technologies. Key proposals under the Action Plan include:
- A Regulation that would enable crowdfunding platforms to apply for an EU label based on a single set of rules;
- A consultation on how best to promote the digitisation of information published by listed companies in Europe, including by using innovative technologies to interconnect national databases;
- A comprehensive strategy on blockchain addressing all sectors of the economy to be produced by the EU's Blockchain Observatory and Forum;
- A EU FinTech Laboratory hosted by the Commission, where EU and national authorities will engage with tech providers in a neutral, non-commercial environment;
- Workshops run by the Commission to improve information-sharing regarding cybersecurity; and
- A blue print of best practices regarding regulatory sandboxes is to be produced by the Commission based on the guidance it receives from the European Supervisory Authorities.
The Commission's press release and FinTech Action Plan is here.
EUROPEAN SUPERVISORY AUTHORITIES (ESAs) WEIGH BENEFITS AND RISKS OF BIG DATA
In its final report on Big Data, the Joint Committee of the ESAs found that the potential benefits of Big Data outweighed the potential risks. The Big Data phenomenon refers to the processing of large data sets that traditionally could not be analysed by existing data processing software. The range of benefits of Big Data for financial service consumers includes the ability to tailor products and services to a higher degree of customer specificity, enhancement of fraud analytics and the improvement of organisational procedures. The main risk highlighted is the potential for error in Big Data processing, which may undermine any policies enacted as a result of this data. The report also warned that further customer segmentation could limit access to many of the benefits identified. These risks are currently mitigated by existing legislation and therefore the report concludes that no current legislative intervention is necessary. Developments in this area will be monitored by the ESAs in the coming years as they invite financial firms to develop good practices on the use of Big Data.
The EIOPA's press release is here.
The ESAs' report is here.
EIOPA PUBLISHES FINAL REPORT ON SECOND SET OF TECHNICAL ADVICE ON SOLVENCY II DELEGATED REGUALATION
On 1 March, EIOPA published its second and final set of advice to the European Commission on specific items in the Solvency II Delegated Regulation ((EU) 2015/35), which focuses on the methods, assumptions and standard parameters used when calculating the Solvency Capital Requirement with the standard formula. Following consultation with stakeholders, EIOPA's advice recommends a range of revised calibrations and simplifications in order to enhance the consistency of professional actuarial practices and promote supervisory convergence.
EIOPA's advice is here.
INSURANCE EUROPE PUBLISHES ITS POSITION PAPER ON THE CONSEQUENCES OF BREXIT ON EXISTING CONTRACTS
On 5 March, Insurance Europe published a position paper examining the consequences of Brexit on existing (re)insurance contracts and setting out their views as to how the legal post-Brexit framework should be structured regarding existing (re)insurance contracts. The paper first sets out what types of contracts fall within the concept of existing (re)insurance contracts. It explains the existing EU/EEA passporting rights and the effect that Brexit has on those passporting rights. The paper stresses that in order to protect consumers' rights the Withdrawal Agreement, should acknowledge the need for a grandfathering arrangement for existing long-term (re)insurance contracts, where there is a low possibility of effecting a portfolio transfer or if the cost would be excessive for customers. The need for longer transitions so that portfolio transfers can be effected in time is discussed. Insurance Europe also calls for a quick decision on transitional arrangements so that insurers have certainty as to what will happen. The paper points at cases where grandfathering provides the only permanent solution for continuity of certain types of (re)insurance contracts e.g. as profit sharing, where the relevant contract's assets and liabilities cannot be divided between the UK and EU27 components.
Insurance Europe's position paper is here.
THE COUNCIL OF EUROPE POSTPONES THE APPLICATION OF THE INSURANCE DISTRIBUTION DIRECTIVE (IDD)
On the 9 March, the Council adopted a Directive to delay the application of the IDD. The delay is considered necessary so as to allow stakeholders more time to better prepare for the new implementing rules on product oversight and governance requirements, and information requirements applicable to the distribution of insurance-based investment products, which were issued in September 2017 by the Commission. The transposition deadline has been delayed to the 1 July 2018 and the deadline for application of the rules has been extended to 1 October 2018.
The Council's press release is here.
The Directive is here.
INSURANCE EUROPE PUBLISHES TEMPLATE FOR GDPR DATA BREACH NOTIFICATION
From 25 May 2018 the General Data Protection Regulations (GDPR) will apply. The GDPR includes an obligation for companies to notify data breaches to the competent supervisory authority, where feasible, within 72 hours of becoming aware of the breach. On 19 March, Insurance Europe published a template for notifying such data breaches. Insurance Europe believes the template will be of use to companies in assisting them in responding quickly in the event of data breaches. It will also be of use to supervisory authorities if it is adopted as a standardised format, which would allow for better data sharing and trend detection. The template is designed so that the information gathered could be shared without the need to be anonymised or aggregated after submission as it would not be possible to identify a company through the information submitted.
Insurance Europe's template is here.
INTERVIEW WITH DIMITRIS ZAFEIRIS, EIOPA'S HEAD OF RISKS AND FINANCIAL STABILITY DEPARTMENT
On 15 March, EIOPA published an interview with Dimitirs Zafeiris, where he answered a number of questions on the European insurance sector. The following points are important to takeaway:
- When asked about the lessons learnt from the financial crisis, Mr Zafeiris stressed the need for insurers to identify the sources of systemic risk arising from certain activities or products; the need for both a proper macroprudential framework, including a comprehensive set of tools to mitigate these sources of risk and the ability to view systemic risk from a holistic point of view, across sectors and jurisdictions;
- In relation to EIOPA's recently published Solvency II statistics and Greek insurance, Mr Zafeiris noted that the increase in both the Solvency Capital Requirement (SCR) and the Minimum Capital Requirement (MCR) ratios from 2016 to 2017 was a positive movement but the overall capitalisation of Greek insurers was still below the European Economic Area average in 2017. However, he noted that the Greek insurers who participated in the last stress test in 2016 performed similar to other European insurers; and
- Mr Zafeiris emphasised the need for further progress regarding the harmonisation of recovery and resolution of insurers to prevent a new major crisis in the insurance sector.
The interview with Mr Zafeiris is here.
EIOPA PUBLISHES THE SECOND PAPER OF A SERIES ON SYSTEMIC RISK AND MACROPRUDENTIAL POLICY IN THE INSURANCE SECTOR
EIOPA published the second in its series of papers, with the aim of extending the scope of the debate on systemic risk and macroprudential policy over the insurance sector and its individual elements. The paper delivers a preliminary assessment of the established tools of the Solvency II framework and how they could be used to mitigate any of the sources of systemic risk, as previously identified in the first paper EIOPA published on the topic in February of this year. The paper covers a wide range of topics including the extension of the recovery period in cases of non-compliance with the Solvency Capital Requirements (SCR) and potential prohibitions or restrictions of certain types of financial activities. The paper concludes by providing a detailed examination of the macroprudential impact of some of the long-term guarantees measures under stress in the annex.
Discussion from the February 2018 Arthur Cox Regulatory Update on the first paper published by EIOPA on systemic risk and macroprudential policy is here.
EIOPA's press release is here.
EIOPA's paper is here.
EIOPA TO APPLY THE UPDATED REPRESENTATIVE PORTFOLIOS IN 2018.
EIOPA announced its intention that from the end of March it will apply the updated representative portfolios for the calculation of volatility adjustment to risk-free interest rates that it published on 18 December 2017. This more recent and detailed data provides a more accurate depiction of the impact of market volatility under the Solvency II regime. The announcement noted that the application of the updated representative portfolios to the Danish Krone and the country portfolio of Denmark will be provisionally applied by the end of June 2018 due to an ongoing review of the calculation of the volatility adjustment of the Danish Krone.
EIOPA's press release is here.
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.