Ireland: Insurance Regulatory Update, May 2015

Last Updated: 10 June 2015
Article by Elizabeth Bothwell and Jennifer McCarthy

THIS MONTH'S NEWS

  • CENTRAL BANK PUBLISHES SOLVENCY II NEWSLETTER
  • CENTRAL BANK PUBLISHES GUIDANCE ON NEW PCF ROLES
  • CENTRAL BANK DIRECTOR OF INSURANCE SUPERVISION SPEAKS ON THE CHANGING LANDSCAPE OF GLOBAL REGULATION
  • CENTRAL BANK DEPUTY GOVERNOR'S ADDRESS TO PWC ANNUAL CEO INSURANCE DINNER
  • CENTRAL BANK PUBLISHES ANNUAL REPORT AND PERFORMANCE STATEMENT
  • IMF PUBLISHES REPORT ON OBSERVANCE OF STANDARDS AND CODES AND THE DETAILED ASSESSMENT OF OBSERVANCE OF THE INSURANCE CORE PRINCIPLES
  • EIOPA UPDATES SOLVENCY II WEBPAGE
  • EIOPA REPORTS ON STAFFING AND RESOURCES NEEDED TO COMPLETE SOLVENCY II TASKS
  • BANK OF ENGLAND SAYS UK INSURERS WILL NEED MORE TIME TO MEET EU SOLVENCY RULES

IN DOMESTIC NEWS...

CENTRAL BANK PUBLISHES SOLVENCY II NEWSLETTER

On 27 May, the Central Bank published Issue 18 of its Solvency II newsletter, Solvency II Matters. In particular the newsletter provides important information on timing and types of reporting. The Central Bank notes that its online reporting system is now open to receiving formal submissions of preparatory phase reporting data and reminds firms that the deadline for submissions for High and Medium impact firms is 3 June 2015. The Central Bank also encourages Low and Medium Low rated firms to participate in the preparatory phase reporting in order to test their data and reporting processes. However, there are no consequences if these firms prefer not to submit any preparatory phase data. The timelines applicable to High and Medium impact firms do not apply to Low and Medium Low rated firms.

The Central Bank reminds firms that they are required to report on both a Solvency I and Solvency II basis throughout 2015 and 2016, and clarifies that no reporting exemptions from Solvency I requirements will be granted. The newsletter provides a helpful overview of the reporting requirements and submission deadlines.

The newsletter notes that once Solvency II is implemented firms are required to submit the following reports to the Central Bank, (i) Solvency and Financial Conditions Report (ii) the Own Risk and Solvency Assessment (ORSA) supervisory report (iii) the annual and quarterly quantitative reporting templates, and (iv) regular supervisory report. Again, the newsletter provides a helpful list of submission deadlines for the various reports.

Finally, on 13 May the Central Bank published feedback on firms' Forward Looking Assessment of Own Risks (FLAOR). In particular, the Central Bank reminds firms that they should take a 'top-down' approach and that the board of directors needs to consider the FLAOR process and not merely act as a reviewer. The Central Bank also highlights that the board needs to be aware of all material risks facing the firm, not just those captured by the solvency capital requirement.

A link to the newsletter is here.

A link to the Central Bank's feedback on FLAOR is here.

CENTRAL BANK PUBLISHES GUIDANCE ON NEW PCF ROLES

On 27 May, the Central Bank published guidance on notifying the Central Bank in relation to the due diligence undertaken in respect of six new Pre- Approval Controlled Function (PCF) roles introduced in December 2014. The Central Bank notes that, while those already carrying out the functions as at 31 December 2014 do not require pre-approval, firms are required to carry out due diligence to ensure those persons are fit and proper. The guidance provides firms with practical steps on how to submit the necessary documentation through the Central Bank's online reporting system.

The new PCF roles are: Chief Operating Officer, Head of Claims, Signing Actuary, Head of Client Asset Oversight, Head of Investor Money Oversight and Head of Credit.

A link to the guidance is here.

CENTRAL BANK DIRECTOR OF INSURANCE SUPERVISION SPEAKS ON THE CHANGING LANDSCAPE OF GLOBAL REGULATION

On 14 May, the Director of Insurance Supervision, Sylvia Cronin delivered a speech entitled 'The Changing Landscape in Global Regulation' at the DIMA Conference. Ms. Cronin addressed topics such as the new regulatory initiatives facing the insurance sector and exploring more effective methods of collaboration between the industry and regulators in order to protect consumers and safeguard financial stability.

Ms. Cronin highlighted the challenges to be overcome in order for Solvency II to deliver on its promise for reform, particularly the need for firms to 'wholeheartedly' embrace the Pillar II aspects of Solvency II, especially the ORSA. Ms. Cronin also highlighted the need for firms to focus on their readiness in the area of external user testing for the preparatory phase of the new regime.

Ms. Cronin discussed the issue of consumer protection and called for strategic structural changes within firms to promote good conduct, establish oversight and ensure transparency in dealings with consumers.

Ms. Cronin touched upon international regulatory developments and suggested that the advent of Solvency II has catalysed international movement towards risk based regulation and supervision. Ms. Cronin outlined the benefits and challenges inherent in the development of global capital standards, particularly as a method of resolving the shortcomings exposed by the financial crisis in terms of cooperation between supervisors.

Ms. Cronin outlined the new trends and risks associated with the shift towards digitisation, including online peer-to-peer insurance and noted that such trends are likely to heighten supervisory focus and scrutiny on insurance companies' business models, product development and distribution processes.

A link to Ms. Cronin's speech is here.

CENTRAL BANK DEPUTY GOVERNOR'S ADDRESS TO PWC ANNUAL CEO INSURANCE DINNER

On 13 May, the Deputy Governor of the Central Bank, Cyril Roux, delivered an address at the PWC annual CEO Insurance dinner. The main focus of his address was the impact of Solvency II on the cross border insurance sector. After expressing overall satisfaction with the engagement of international insurers with the Central Bank and highlighting some areas for improvement (namely Anti-Money Laundering (AML) and Counter Terrorist Financing compliance), Mr. Roux turned his attention to a number of aspects of Solvency II. The pressure that Solvency II implementation places on insurers was noted; and it was recognised that the required changes can be challenging even for the most well-resourced firms. Mr. Roux emphasised the importance of insurers actively embracing the risk management tools prescribed in the new regulations, for example, the ORSA, and suggested that insurers who do so 'will be best placed to meet the challenges ahead.' Board ownership of ORSA was further highlighted as a vital issue, with reference to the Central Bank's expectation that boards understand the limitations of any model they rely upon and develop sufficient knowledge and skills to challenge the model outputs. Mr. Roux noted the greater emphasis on group supervision under Solvency II and the impact of this development for cross border firms operating within a group.

A link to Mr. Roux's address is here.

CENTRAL BANK PUBLISHES ANNUAL REPORT AND PERFORMANCE STATEMENT

On 30 April, the Central Bank published its Annual Report 2014 and its Annual Performance Statement – Financial Regulation 2014-2015. The Annual Performance Statement summarises the Central Bank's financial regulatory activities during 2014 and those planned for 2015. Certain key activities carried out in 2014 and action points for the remainder of 2015 of interest to the insurance industry were highlighted:

  • Insurance supervision: the Central Bank carried out a number of reviews in respect of pricing, reserving and claims. A variable annuity market risk monitor was introduced in September 2014. In relation to Solvency II, the Central Bank has indicated that 17 firms are seeking approval for their Solvency II internal models and that the supervisory review process and online reporting for firms are scheduled to be completed by the end of 2015. The Central Bank also published requirements on reserving practices, Reserving Requirements for Non-Life Insurers and Non-Life and Life Reinsurers.
  • AML: the Central Bank intends to undertake 32 inspections in 2015 and continue to conduct a number of risk evaluations. The results of these activities will be used to assess the AML risks which face the financial sector.
  • Client Assets: the Client Asset Regulations for Investment Firms (the CAR) were approved by the Central Bank in the fourth quarter of 2014 and published in March 2015. The CAR apply to Irish authorised investment firms who hold client assets in a client account.
  • Intermediaries: a revised Handbook of Prudential Requirements for Authorised Advisors and Restricted Intermediaries was published with an effective date of 1 October 2014.

A link to the Annual Report is here.

A link to the Annual Performance Statement – Financial Regulation 2014- 2015 is here.

IMF PUBLISHES REPORT ON OBSERVANCE OF STANDARDS AND CODES AND THE DETAILED ASSESSMENT OF OBSERVANCE OF THE INSURANCE CORE PRINCIPLES

On 13 May, the International Monetary Fund (the IMF) published a Report on the Observance of Standards and Codes (the Report) and the Detailed Assessment of Observance of the Insurance Core Principles for Ireland. An IMF team visited Dublin between 18 November and 5 December 2014 to conduct an assessment of Ireland's compliance with the 26 Insurance Core Principles (the ICPs) issued by the International Association of Insurance Supervisors.

Overall, the Report indicates a high level of observance of the ICPs. In relation to supervision, it was noted that the governance structure of the Central Bank is clearly defined and there are adequate accountability mechanisms for checks and balances. Similarly, the authorisation process for (re)insurers to conduct insurance business in Ireland was described as 'well-structured for robust assessment of applications and consistent decisions.'

The Report suggested that the level of observance of the ICPs in certain areas could be enhanced by fine tuning the regulatory framework and existing supervisory practices. Regulatory gaps were noted in the areas of risk management and enterprise risk management, valuation, capital adequacy and group supervision. However, the IMF appears confident that most of these gaps will be addressed by the impending implementation of Solvency II and described the Central Bank's preparation as 'well advanced.'

The IMF acknowledged that the Probability Risk Impact Supervisory System (PRISM) has significantly improved the supervision of insurers with High/Medium High Impact ratings and advised the Central Bank to review the supervisory risk appetite underpinning PRISM, including potential reputational risks. The IMF recommended a more proportional and timely risk assessment of insurers according to their risk profiles in order to enhance regulatory incentives for improving governance and risk management practices.

Finally, the Report stated that the effective implementation of Solvency II and group-wide supervision, supported by a more proportionate supervisory approach under PRISM hinges on the adequacy and quality of supervisory resources of the Central Bank. Suggestions were also made for the enhancement of the Central Bank's statutory independence.

The Central Bank indicated it will review the IMF's recommendations with a view to taking action where appropriate.

A link to the Report is here.

A link to the Detailed Assessment of Observance is here.

IN EUROPEAN AND INTERNATIONAL NEWS...

EIOPA UPDATES SOLVENCY II WEBPAGE

EIOPA has updated its Solvency II webpage in order to provide (re)insurers and other market participants with access to relevant information on the new Solvency II regime. The webpage now contains readily accessible links to the first six Implementing Technical Standards (ITS) adopted by the European Commission in March 2015, which relate to, among other items, the supervisory approval procedures for undertaking-specific parameters and ancillary own funds.

EIOPA intends to publish its feedback on comments from the public consultation on the second set of Solvency II ITS and Guidelines in the third quarter of 2015. The chairman of EIOPA, Gabriel Bernardino, has issued a statement thanking stakeholders for their input during this consultation process and reminding firms to focus their efforts on the annual reporting and the preparatory reporting for the third quarter of 2015.

Further sections of the webpage are dedicated to significant milestones in the Solvency II timeline. EIOPA plans to submit the (final) Set 2 of the ITS for endorsement to the Commission on 30 June 2015. Set 2 of the ITS will include those standards relating to harmonised regular reporting requirements under the new regime.

EIOPA is currently preparing technical advice for the Commission in respect of the identification and calibration of infrastructure investment risk categories under Solvency II. Future work will involve the review of the solvency capital requirement standard formula and the reporting on the application of long-term guarantee measures and measures on equity risk.

EIOPA REPORTS ON STAFFING AND RESOURCES NEEDED TO COMPLETE SOLVENCY II TASKS

On 7 May, EIOPA published a report assessing the staffing and financial resources needed to accomplish tasks allocated to it by Solvency II (the Report). Article 310a of Solvency II requires this Report to be prepared and submitted to the EU institutions in order to provide them with an overview of EIOPA's duties under Solvency II and the resources necessary to complete these duties.

The Report covers the period of 2013 to 2018. After 2018 EIOPA expects a 'steady state' to have been reached, after which the staffing and resource needs will not substantially change. The main emphasis of the Report is on the duties and powers that have been introduced by Omnibus II as they bring new requirements to EIOPA that were not covered by the Commission's original budget or establishment plan.

Following a lengthy analysis of priorities, efficiencies, structural demands, and the potential impacts of non-delivery and staff reallocations, the Report indicates that there is a shortfall in EIOPA's budget and human resources in 2015 of ten staff members and over €2 million. EIOPA calls for urgent action from EU institutions to provide it with the additional required resources, placing particular emphasis on the potential disruptions to the insurance sector were EIOPA unable to complete its Solvency II tasks. Among other things, EIOPA would not be in a position to declare the existence of exceptional adverse situations (which is a pre-condition to extending the recovery period for firms with deteriorating solvency positions in order to restore their financial situation), or to deal with equivalence assessments requested by market participants beyond those foreseen by the Commission as at March 2015. In light of its resource constraints, EIOPA is currently allocating resources to the time-critical tasks arising from Omnibus II.

A link to the Report is here.

BANK OF ENGLAND SAYS UK INSURERS WILL NEED MORE TIME TO MEET EU SOLVENCY RULES

Andrew Bailey, the Chief Executive Officer of the Prudential Regulation Authority (the PRA) has indicated that British insurers will need additional time to comply fully with the Solvency II capital rules which come into force on 1 January 2016.

Speaking at the Reuters Financial Regulation Summit on 13 May, Mr. Bailey suggested the issue is related to the calculation used under the new regime to determine the level of capital needed by insurers to meet future liabilities. In order to ascertain this level, insurers use a combination of real and extrapolated interest rates.

In Britain, the interest rate is based on Sterling market rates extending as far forward as 50 years. However for Eurozone insurers, reliable market rates only extend as far as 20 years ahead. After this period of 20 years, Eurozone insurers utilise an interest rate calculated by regulators (the Eurozone Interest Rate). This Eurozone Interest Rate tracks higher at an earlier stage than the Sterling rate, which potentially results in different results for Eurozone insurers and could give them an advantage over their British counterparts.

Regulators are empowered to grant transitional relief to insurers for up to 16 years to satisfy all of the Solvency II capital requirements. Mr. Bailey noted that 'as long as the risk free curves remain where they are then firms will be making greater use of the transitional capital structure in Solvency II than they thought they would.' Mr. Bailey indicated that the PRA will issue a statement in relation to the use of transitional periods before Solvency II comes into force.

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.

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