This is the May edition of the Arthur Cox Insurance Regulatory Update, the monthly bulletin of the Arthur Cox Insurance Group focused on recent developments in insurance regulation, law and practice.
This issue includes: Central Bank announces updates to Retail Intermediary Authorisation Process. In the UK, the FCA, is progressing with its test case on business interruption policy cover and has produced a sample list of wordings as well as draft guidance for insurers who might be affected. In European news, EIOPA will now deliver its advice to the European Commission on its review of Solvency II at the end of December 2020.
Central Bank announces updates to retail intermediary authorisation process
The Central Bank has updated the authorisation process for retail intermediaries.
Submission of hard copy applications will no longer be required for applications for authorisation or registration as a retail intermediary under the:
- Investment Intermediaries Act 1995 (as amended);
- European Union (Insurance Distribution) Regulations 2018;
- Consumer Credit Act 1995 (as amended); and/or
- European Union (Consumer Mortgage Credit Agreements) Regulations 2016.
Instead, these applications should be submitted via the Central Bank's secure file transfer system. Access to this system can be requested via email to RIAuthorisations@centralbank.ie.
Changes to Professional Indemnity Insurance Requirements
From 12 June 2020, entities seeking authorisation under the Investment Intermediaries Act 1995 or the European Union (Insurance Distribution) Regulations 2018 will be required to show that they have professional indemnity insurance cover of ?1,300,380 per claim and ?1,924,560 in aggregate. The Central Bank intends to amend the Handbook of Prudential Requirements for Investment Intermediaries to ensure that the professional indemnity insurance requirements applicable to Investment Intermediaries will be consistent with the new requirements for Insurance Intermediaries. The Central Bank will engage directly with relevant entities that have already submitted applications.
Central Bank to extend scope of national claims information database to employers' and public liability insurance
The Central Bank has published a study, which finds that Employers' and Public Liability (EL and PL) insurance data is to be included in the scope of the National Claims Information Database (NCID). The study, which was prompted by the Cost of Insurance Working Group's recommendation that the Central Bank examine the merits and feasibility of including EL and PL insurance data in the NCID, makes the following key findings:
- There is clear merit in extending the scope of the NCID to include EL and PL data and it is feasible to do so;
- Producing publicly available data in relation to EL and PL insurance premiums, claims and settlement costs would be of benefit to all stakeholders in the insurance market;
- Given the broad range of risks that EL and PL covers, data collection is more complex than that of the motor insurance sector. Collection of data will need to be done on an incremental basis (for example it will not be possible to identify from the initial data collection: (i) trends within certain subsectors; (ii) whether the cost of insurance has stopped firms taking out EL and PL; and (iii) comparing costs across an industry-wide definition of risk); and
- As a significant amount of EL and PL is purchased as part of a formal or informal package including non-liability coverages (most notably commercial property), it will be necessary for the Central Bank to get an understanding of other commercial lines included in such packages.
In terms of next steps, the Central Bank is currently in talks with the Department of Finance on updating the NCID regulations and intends to consult stakeholders on data specifications and definitions clarification of the first year's data collection, which the Central Bank aims to commence in H2 of 2020. The Central Bank intends to publish the first EL and PL report NCID report in H1 2021.
A link to the Central Bank's press release is here.
Society of Actuaries in Ireland publishes revised Code of Professional Conduct
The Society of Actuaries in Ireland has published version 2.0 of its Code of Professional Conduct, which takes effect on 1 June 2020. The Code applies to all members of the Society in the performance of their professional services, whether such services are remunerated or not, and sets out five basic principles that its Members are required to follow namely: integrity, competence and care; impartiality, compliance, speaking out and open communications.
In addition to the Code, the Society has also published a Professional Requirements Guide for Members, which aims to explain to members (and other stakeholders) how its professional requirements are structured.
FCA update on business interruption test case
The UK Financial Conduct Authority (FCA) has published additional information on its plan to bring certain business interruption wordings before the English High Court in a Test Case to resolve contractual uncertainty as to whether losses arising from COVID-19 are covered by policies containing such wording. Christopher Woolard, Interim Chief Executive at the FCA has said that the case is "aimed at providing clarity and certainty for everyone involved in these business interruption disputes, policyholder and insurer alike".
The Test Case will focus on the cohort of business interruption policies where it is arguable that they include cover for COVID-19 losses. The FCA has set out its approach to choosing the representative wording for the Test Case: since 1 May, the FCA has approached 56 insurers and reviewed over 500 policies. In addition, the FCA received over 1,200 submissions from policyholders and brokers that are in dispute with their insurers over the terms of their policies. Arising out of that, the FCA has now produced a sample list of 17 policy wordings that capture the key issues that are in dispute. These issues include, for example, whether the policy covers government advice to close the business or whether a government order forcing the closure of the business is required or whether the outbreak of an infectious disease must take place within a certain vicinity of the business. The sample list of wording is here.
On its website, the FCA identifies the eight insurers that have entered into a framework agreement with the FCA and have agreed to be defendants in the Test Case. A further eight insurers are also listed on the website as using at least one of the policy wordings set out in the sample but will not be directly involved in the Test Case. The agreement says that the objective of the case is to achieve the maximum clarity possible for the maximum number of policyholders and to set a legal precedent to resolve "to a substantial degree" the uncertainty that has arisen in relation to business interruption policies in the context of the pandemic. The framework agreement also sets out the detail of the process for the Test Case that the FCA and the eight defendant insurers have agreed: a set of "agreed facts" will be decided between the parties. This will include facts such as the dates on which certain government decisions were made. A separate set of "assumed facts" will be presented to the Court to illustrate the potential fact patterns that might arise in relation to the disputed policies.
An indicative timeline is included in the framework agreement. A claim form will be submitted to the English Commercial Court on 9 June 2020 with a view to having the case heard in the second half of July.
The FCA has stressed that the list of policies and the insurers affected are not exhaustive and, with that in mind, has produced a consultation on draft guidance for insurers and intermediaries who are handling claims or complaints on policies which may be relevant to the dispute during the period of the test case. The FCA have cautioned against policyholders assuming that their losses are covered simply because their policy wording is included in the sample. They note that the Court may decide that some of the wordings in the sample are responsive to the COVID-19 pandemic and others are not.
The FCA webpage where all information on the Test Case is provided is here.
EIOPA postpones its advice on the Solvency II review until end December 2020
EIOPA will now deliver its advice on the Solvency II review to the European Commission at the end of December 2020. In March, EIOPA had previously extended the deadline of the information request for the holistic impact assessment of the 2020 Solvency II Review by two months to 1 June 2020. This further extension to the end of December is designed to allow for an assessment of the impact of COVID-19 on the industry.
EIOPA aims to update its advice with a collection of data with a reference date of 30 June 2020. This information will be gathered between July and mid-September 2020 and will supplement the ongoing request for information in order to update EIOPA's review to reflect the impact of COVID-19 on the sector. This additional and more focused request will be addressed to a sub-set of those already subject to the ongoing information request.
EIOPA will continue to track the evolving COVID-19 crisis and its effects on the industry and will work with all participants to guarantee a transparent process.
A link to the EIOPA article is available here.
EIOPA warns of increased risk exposures for insurers due to COVID-19
EIOPA has published a risk dashboard for Q4-2019 summarising the main risks and vulnerabilities in the insurance sector throughout Europe. The data is based on Solvency II reporting information, provided by 96 insurance groups and 2,837 solo insurers. While some of the risk indicators used do not reflect the latest developments arising from the COVID-19 crisis, the assigned risk levels were based on a forward-looking consideration reflecting all available information.
Macro and market risk indicators have deteriorated severely and are listed on the dashboard as "Very High" risk. The dashboard notes that EU GDP estimates for the first quarter of 2020 indicate the sharpest downturn in GDP and employment in two decades.
Credit, liquidity and funding risks have all increased due to the deterioration in the financial markets and increased strain on the disposable liquidity of insurers. Liquidity risks were broadly stable in Q4-2019 but the situation is expected to worsen due to a decrease in premiums and new business and an increase in claims. Solvency risk is also expected to worsen due to the "double-hit" scenario squeezing insurers, a decrease in the value of assets together with an increase in liabilities. Credit risks, Liquidity and funding risks, Profitability and Solvency risks, and Insurance (underwriting) risks are all listed as "High" risk.
Insurance Europe publishes insight briefing: GDPR two years on
Ahead of the European Commission's upcoming review of GDPR and on the second anniversary of its introduction, Insurance Europe has published an insight briefing on the Regulation. The insurance industry supports the aims of the GDPR but notes that there are certain areas of the GDPR and of the European Data Protection Board (EDPB) guidelines that, in the view of Insurance Europe, require further attention. This insight briefing focuses on those areas including:
- Innovation - new technologies provide opportunities for insurers but digital innovation could be hampered by certain provisions of the GDPR and/or the EDPB guidelines which, according to Insurance Europe, are not fit for the digital age.
- The EDPB guidelines- there are some areas of the GDPR where the EDPB's interpretation of GDPR has gone further than the wording of the Regulation by creating additional requirements or limiting the interpretation of certain provisions contained in the Regulation.
- Consistency- the consistent Europe-wide application of GDPR is hindered by certain guidelines at national level that have caused inconsistent application.
Insurance Europe believes it is too soon to amend the GDPR, where the industry has spent a significant amount of time and money on adapting to its requirements. Instead, it encourages the Commission to develop further guidance on the GDPR, in tandem with the EDPB where appropriate, where the review demonstrates that the objectives of the GDPR have not been reached.
A link to the Insurance Europe press release is available here.
A link to the Insurance Europe insight briefing is available here.
European climate law proposal: EU insurers ready to continue playing pivotal role in addressing climate change challenge
Insurance Europe has published a position paper, which outlines its view on several aspects of the European Commission's proposal for a European Climate Law.
While EU insurers are committed to playing a continuing and central role in the EU's pledge to be climate neutral by 2050, Insurance Europe cautions that member states are affected by the climate change challenge in different ways and this will require a varied approach at national level to respond to the unique issues facing different EU member states.
Insurance Europe also recognises that data and statistics play a key role in understanding climate change risks and trends but notes that high-resolution datasets form the basis of an insurer's risk calculations and should be classed as intellectual property. Insurance Europe cautions that the Commission, in examining data use, should pay particular attention to the intellectual property of insurers.
A link to the Insurance Europe article is available here.
EIOPA publishes speech on digital responsibility and the role of actuaries
On 29 April, Gabriel Bernardino, chairman of EIOPA, delivered a speech at the annual conference of the German Association of Actuaries, which covered: the state of play of Big Data analytics in the insurance sector; EIOPA's work on digital ethics; and the role of actuaries in the digital age.
The state of play of Big Data Analytics (BDA) in the insurance sector
The European Commission estimates that the volume of data produced globally will increase five-fold by 2025. This directly affects the insurance sector, where data processing has always been at the heart of insurance business. Last year, EIOPA published a thematic review on BDA, which revealed that new internal and external data sources are being used in insurance, such as data from connected health devices. When combined with traditional data sources, this has the effect of providing more detailed information about consumers' characteristics, lifestyles and behavior. These developments present opportunities for insurers, such as reduced operational cost but also, present ethical risks such as fairness of use, transparency, explainability and auditability.
Role of EIOPA: EIOPA's Expert Group on Digital Ethics in Insurance
EIOPA is working to find solutions to the risks inherent in BDA. EIOPA is relying upon work produced by the Commission and other international bodies on Artificial Intelligence and tailoring this to the insurance sector. It has set up three work streams focusing on fairness and non-discrimination, transparency and governance.
EIOPA recognises that any resulting digital ethics framework should be flexible so as to adapt to an ever-evolving environment. For example, contact tracing apps would have been unthinkable a few months ago and yet are now part of everyday life as the world tries to combat COVID-19. EIOPA's group on digital ethics is working to achieve a balance between fostering innovation in the sector and ensuring consumer protection.
Role of Actuaries in the digital age
Actuaries occupy a role of growing importance in the digital age in ensuring effective oversight and good governance. In today's world, insurers are processing huge volumes of data and they benefit greatly from the knowledge and expertise of actuaries - particularly in the field of data analytics. Actuaries can provide advice on predictive-modeling and how to optimize the making of faster, more intelligent business risk decisions. Continuous learning and training is required to keep actuaries up to speed in a society where technology is constantly evolving.
A link to the speech is available here.
Commission adopts implementing regulation on the calculation of technical provisions and basic own funds
The recently published Implementing Regulation 2020/193 lays down technical information for insurers and reinsurers to use when calculating technical provisions and basic own funds for reporting with reference dates from 31 December 2019 until 30 March 2020 in accordance with Solvency II.
Annex I deals with the relevant risk-free rate term structures. Annex II concerns the fundamental spreads for the calculating of the matching adjustment and Annex III lays out the volatility adjustments for each relevant national market.
The Implementing Regulation, which can be found here, came into force on 12 February and shall apply from 31 December 2019.
The International Association of Insurance Supervisors (IAIS) facilitates global coordination on financial stability and policyholder protection during COVID-19 crisis
The IAIS has been closely monitoring developments and actively coordinating with other standard-setting bodies and the Financial Stability Board (FSB) to assess the impact of COVID-19 on the global insurance sector. In a press release issued on 7 May, the IAIS confirmed that it is committed to supporting the FSB's recently published principles for ensuring international cooperation and coordination of responses to COVID-19.
The IAIS also welcomes the variety of proactive steps taken by insurance supervisors and insurers in support of policyholders, but cautions against initiatives seeking to require insurers to retroactively cover COVID-19 related losses, such as business interruption, that are clearly not covered by the policy terms. Requiring insurers to cover such claims could result in material solvency risks and significantly undermine the ability of insurers to pay other types of claims, as the cost of such claims have not been built into the premium payments made by the insured. IAIS warns that such initiatives could ultimately threaten policyholder protection and financial stability, further aggravating the financial and economic impacts of COVID-19.
Financial policymakers discuss responses to COVID-19 with the private sector
The Financial Stability Board (FSB) reports that financial policymakers met virtually with private sector senior executives on 26 May to discuss responses to the ongoing COVID-19 crisis. Representatives from central banks, regulatory authorities and finance ministries and senior executives of about 30 international banks, insurance firms, asset managers, markets infrastructure and credit rating agencies were brought together in a meeting organised by the FSB Standing Committee on Supervisory and Regulatory Cooperation (SRC) in cooperation with the Basel Committee on Banking Supervision (BCBS), the Committee on Payments and Market Infrastructures (CPMI), the International Association of Insurance Supervisors (IAIS) and the International Organisation of Securities Commissions (IOSCO). The meeting discussed the prudential and financial policy measures taken to date as well as the challenges that are likely to arise in the future as the crisis continues and possible policy responses to those challenges.
Noting that the "world still faces an unprecedented level of uncertainties", Himino Ryozo, Chair of the SRC, noted that the liquidity stress caused by the crisis in March was largely contained due to the strong resilience of the global financial system and that insights gained from the meeting will "help the private and official sectors act to ensure financing to the economy, financial stability, and eventually, a strong recovery." The discussion is anticipated to help ongoing work in the FSB, BCBS, CPMI, IAIS and IOSCO and serve as input to the FSB's report on COVID-19 responses to the July G20 meeting.
The press release on the meeting can be found here.
Originally published 03/06/2020
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.