Ireland: Insurance Regulatory Update, December 2015

Last Updated: 11 January 2016
Article by Elizabeth Bothwell and Jennifer McCarthy
Most Read Contributor in Ireland, October 2018

IN DOMESTIC NEWS...

CENTRAL BANK PUBLISHES THE CENTRAL BANK REFORM ACT 2010 (SECTIONS 20 AND 22) (AMENDMENT) REGULATIONS 2015 (S.I. NO. 545 OF 2015)

These Regulations amend the Central Bank Reform Act 2010 (Sections 20 and 22) Regulations 2011 (S.I. No 437 of 2011) by replacing the list of Pre-Approval Controlled Functions in Schedule 2. Under the Regulations, the roles of Chief Actuary and Signing Actuary have been removed from the list and a new PCF role of Head of Actuarial Function is introduced. The amendments take effect from 1 January 2016. The Central Bank has issued Guidance in relation to these recent amendments to the Fitness and Probity regime which is reported on below.

A link to the Regulations is here.

CENTRAL BANK ISSUES GUIDANCE FOR (RE) INSURANCE UNDERTAKINGS ON 2015 AMENDMENTS TO THE FITNESS AND PROBITY REGIME

The Central Bank has published Guidance for (re)insurers on changes to the fitness and probity regime in consequence of Solvency II. Guidance is provided on the effect of the legislation reported on above whereby the roles of Chief Actuary (PCF20) and Signing Actuary (PCF44) have been removed as PCFs and a new PCF has been included- the Head of Actuarial Function (PCF48) (HoAF).

From 1 January 2016, where an individual is appointed to the role of HoAF for the first time, approval from the Central Bank must be obtained. Further guidance on the approval process is set out in the Central Bank's Guidance on Fitness and Probity Standards 2015. Where an undertaking considers a person already fulfils the role of HoAF as at 31 December 2015, pre-approval of the Central Bank is not necessary. However, undertakings were required to provide certain information to the Central Bank regarding such in-situ function holders by 30 November 2015. Section 5 of the Guidance sets out detailed requirements for the HoAF role including the preferred nature and depth of experience. The Central Bank expects that the HoAF will be able to influence decision making at board level in relation to key areas of actuarial expertise. (Re)Insurers are reminded to conduct due diligence on the function holder and ensure the individual complies with the Fitness & Probity Standards.

Section 4 of the Guidance covers aspects of the fitness and probity regime more generally and includes direction on the outsourcing of, as well as combining, Key Functions. A useful section of frequently asked questions is included in the Guidance. The Guidance attaches two useful "Decision Trees" setting out instructions for undertakings regarding the impact of the new regime for PCF 12 – 15 and PCF 48.

A link to the Guidance is here.

CENTRAL BANK PUBLISHES SOLVENCY II NEWSLETTER

The December edition of the Newsletter notes that reporting requirements will remain a challenge for undertakings in 2016 and urges Solvency II firms to focus on regulatory reporting to ensure they are ready for the first submissions due in May 2016. The Central Bank intends to hold an industry workshop in February 2016 to provide guidance on Solvency II reporting, details of which will be published shortly.

The Central Bank reports that a draft set of conditions of authorisations were issued to Solvency II (re)insurers and the 21 day review period to submit comments had commenced. As previously reported, the Central Bank's final decision on the revised conditions is not expected until after the commencement of the Solvency II Implementing Regulations on 1 January 2016.

(Re)Insurers seeking to be excluded from the Solvency II regime are required to notify the Central Bank. Template notification forms are available on the Central Bank website for (re)insurers who are eligible for exclusion on the basis of size or because they are closing their activity.

The reporting update notes that a Public Working Draft of National Specific Template taxonomy is available on the Central Bank website. An invitation is extended to Low and Medium Low impact firms to sign up for external user testing of the Central Bank ONR system. The Central Bank also reports that EIOPA has published two new draft implementing technical standards on: (1) the submission of information to supervisory authorities; and (2) the procedures, formats and templates of the solvency and financial condition report.

Finally, the Central Bank notes that the European Commission has granted equivalence to Bermuda and Japan. These decisions, if approved by the European Parliament and the Council, will enter into force 20 days after publication in the Official Journal. An update on the decision to grant provisional equivalence to the US, Canada, Brazil, Mexico, Australia and Bermuda is reported on below.

A link to the Newsletter is here.

CENTRAL BANK UPDATES WEBSITE GUIDANCE

In the November edition of the Insurance Regulatory Update, we reported that the Central Bank issued a letter to (re)insurers informing them of updates being made to certain sections of the Central Bank website in preparation for the commencement of the Implementing Regulations for Solvency II on 1 January 2016. In that letter, the Central Bank undertook to publish new Solvency II compatible versions of several key documents on or before January 2016. Updated versions of these documents have now been published by the Central Bank including the checklists for completing and submitting life assurance, non-life assurance and reinsurance applications, the Acquiring Transaction Notification Form, the Central Bank's Principles of Best Practice applicable to the distribution of Life Insurance Products on a Cross-Border basis within the EU or a Third Country and a Guidance note on withholding tax.

A link to the letter is here.

CENTRAL BANK PUBLISHES MACRO-FINANCIAL REVIEW

This second Review of 2015 summarises the current state of the macro-financial environment in Ireland by evaluating updates since June 2015.

As part of the Review, the Central Bank notes that, despite an improved macrofinancial environment, insurers in the domestic non-life sector continue to contend with a challenging operating environment. In the first half of 2015, high-impact non-life insurance firms suffered underwriting losses due to intense competition for market share. The sector has also been affected by a deteriorating claims environment as the severity and frequency of claims are increasing; the legal environment is changing which is pushing costs up. Motor and liability insurance performed particularly poorly. Investment income has been declining since 2012 and is no longer sufficient to compensate for underwriting losses.

According to the Review, the domestic life insurance sector has benefited from the improving economic environment and has a broadly positive outlook. However, the report notes that domestic life insurance firms face challenges of operating in a competitive market against firms offering similar services. Total life premium income increased by 9.3% in the first six month of 2015 compared to the same period of 2014. The retail protection segment of the market saw a decline of 5% compared with the same period of 2014. However, the investment segment of the life market saw on increase of 35% in that period.

While a figure for the first six months of 2015 has not been provided, Irish reinsurers' global market share in 2014 was 4.7%. On a global level, the reinsurance sector faces uncertainty due to reduced demand caused by primary insurers adopting more sophisticated approaches to risk management and a continuing increase in alternative reinsurance capital such as catastrophe bonds and reinsurance sidecars. Reinsurers have responded to these pressures through merger and consolidation which may cause integration risk. The Review concludes that the impact of Solvency II will clarify needs and allow firms to make decisions on how to deploy capital more efficiently.

A link to the Review is here.

IN INTERNATIONAL NEWS...

PRA GRANTS APPROVAL OF SOLVENCY II INTERNAL MODELS FOR 19 INSURERS

The PRA has announced a list of 19 insurers in the UK whose Solvency II full or partial internal models were approved ahead of the implementation of Solvency II on 1 January 2016. Whilst the approvals take effect from the implementation date, the PRA has noted that it will monitor the use of internal models going forward to ensure they remain appropriate. Rejections or withdrawals of internal model applications have not been disclosed.

A link to the list of insurers who received approval is here.

PRA RESPONDS TO INDUSTRY QUESTIONS ON SENIOR INSURANCE MANAGERS REGIME

In August 2015, the PRA published proposals for a new Senior Insurance Managers Regime (SIMR). The new regime, which will replace the current Approved Persons Regime, addresses the fitness and propriety requirements for designated Senior Insurance Managers as well as the application of Conduct Standards and allocation of responsibility to certain senior individuals within an undertaking.

In response to its proposals, the PRA received questions from industry stakeholders on the application of the new regime to Solvency II insurers and has published answers to 14 questions. The PRA's Q&A document addresses a number of industry concerns, including the process for individuals already approved for a Senior Insurance Management Function (SIMF) who are moving to a new function; the impact of the SIMR on UK branches of incoming EEA insurance firms and qualification requirements for a Chief Actuary. Questions around the outsourcing of Key Functions have also been addressed and detailed guidance provided.

A link to the PRA's Q&A document is here.

EUROPEAN SYSTEMIC RISK BOARD (ESRB) PUBLISHES REPORT ON SYSTEMIC RISKS IN THE EU INSURANCE SECTOR

In light of the vital role the insurance sector plays in the economy, the ESRB has identified four main ways in which it considers the insurance sector can have systemic impact. These four scenarios, set out in section 3 of the Report, are: (i) involvement in "nontraditional and non-insurance activities", such as speculative derivatives and variable annuities; (ii) procyclicality in asset allocation or in the pricing and writing of insurance; (iii) vulnerability to a so-called "double-hit scenario" where sustained low risk-free rates are combined with a sudden drop in asset prices (which the ESRB has identified as the most pressing of the four systemic risks identified); and (iv) underpricing which, if unchecked, could lead to a lack of substitutes in certain insurance classes deemed critical to the economy, such as liability insurance.

The ESRB considers that reinsurers pose many of the same systemic risks that primary insurers do but in section 4, features specific to reinsurance are analysed which may give cause for concern in the context of systemic risks. Sections 5 and 6 cover incentives in prudential regulation and macroprudential policies and measures respectively, which look at how regulatory authorities are able to address systemic risks in (re) insurance. The Report comments on the anticipated impact of Solvency II in this regard, focusing on the tools available to regulatory authorities. However, the ESRB has questioned whether the tools available to address concerns at a macroprudential level are adequate and recommends further analysis to assess their effectiveness.

A link to the Report is here.

IAIS ADOPTS REVISIONS TO THE INSURANCE CORE PRINCIPLES

The International Association of Insurance Supervisors (IAIS), the voluntary membership organisation of insurance supervisors and regulators, has published revisions to the Insurance Core Principles (ICPs). The ICPs set out a globally accepted framework of essential elements for a financially sound system of regulatory supervision to ensure policyholder protection. There are 26 ICPs in total. The revisions relate to ICP 4 (Licensing), ICP 5 (Suitability of Persons), ICP 7 (Corporate Governance), ICP 8 (Risk Management and Internal Controls), ICP 23 (Group-wide Supervision) and ICP 25 (Supervisory Cooperation and Coordination).

The revisions are the result of a combination of Self-Assessments and Peer Reviews carried out by the IAIS and recent developments in group supervision, corporate governance and risk management.

A link to the updated ICPs is here.

EIOPA HOLDS PRESS EVENT ON THE IMPLEMENTATION OF SOLVENCY II

EIOPA has published the speaking notes and presentations from its press event on the implementation of Solvency II held on 10 December. In his opening comments, the Chairman of EIOPA, Gabriel Bernardino, reiterated the positive features of Solvency II and explained that it allows for a modern, robust and proportionate supervisory regime which facilitates the alignment of capital and risk management. He anticipates a paradigm shift in companies' risk culture as Solvency II incentivises good governance and good management. Solvency II also guarantees a common level of consumer protection across Europe. EIOPA's efforts will be focused on the consistent application of EU Regulation, guaranteeing a level playing field and preventing regulatory arbitrage in the internal market. Presentations were given by EIOPA Insurance Experts on two essential principals of Solvency II being: (i) the total balance sheet approach and the economic market consistent valuation of assets and liabilities; and (ii) the information flows in Solvency II and public disclosure.

Copies of slides of both presentations have been provided and can be accessed here.

EIOPA RECOMMENDS IMPROVEMENTS TO THE SALES OF MOBILE PHONE INSURANCE

On 4 December 2015, EIOPA published a Report on Consumer Protection Issues arising from the sale of Mobile Phone Insurance (MPI). The EU wide survey follows the discovery of a number of issues with the sale of MPI including high premiums, high commissions, large exclusions, long duration contracts and burdensome claims-handling processes. Country specific thematic investigations into the MPI sector also reveal that consumers are receiving insufficient information on the terms of their contract and claims/complaints processes.

The Report identifies a disparity between consumer perception of the protection they are receiving under MPI products and the protection they are actually receiving. For example, 50% of MPI products contain theft related exclusions. The Report recommends the use of plain language and adding simple and straightforward explanations of essential product features to manage consumer expectations.

Other recommendations made in the Report include improvements to the sales process of MPI products. Consumers should be adequately informed of the duration of their contract and of their cancellation rights. The need for greater transparency in the claims administration process was also highlighted.

The Report notes that many of the recommendations will be covered by the Insurance Distribution Directive (IDD), which replaces the EU Insurance Mediation Directive (2002/92/EC). The IDD introduces new enhanced regulatory standards for insurance sales in the broader context and will be transposed into national law in the next two years.

A link to the Report is here.

INSURANCE EUROPE RESPONDS TO EIOPA'S CALL FOR INFORMATION ON INFRASTRUCTURE INVESTMENT RISK CATEGORIES

EIOPA has consulted on the European Commission's call for further technical advice on the identification and calibration of infrastructure investment risk categories in Solvency II.

Insurance Europe has published a response to the consultation which sets out its position in a series of key messages on the matter. Insurance Europe is concerned that the current definition of the infrastructure asset class is too narrowly constructed and may exclude many investments by focusing on project finance. Consequently, it welcomes the inclusion of infrastructure corporates as a type of investment structure as the assessment of the eligibility of infrastructure investments should be based on the substance of the investment, such as its characteristics and risk profile, rather than its legal form. Insurance Europe also provides responses to 17 specific questions raised by EIOPA on the nature of infrastructure investments, particularly focusing on infrastructure corporates. For example, EIOPA requested information on why a corporate, rather than project, structure would be used for infrastructure investments and whether corporate structures are more prevalent in certain sectors. Insurance Europe put forward a number of reasons why the corporate might be used as the legal form and noted that corporate structures are simply more prevalent in certain sectors e.g. transport, utilities and energy.

EIOPA's call for evidence closed on 10 December 2015 and, based on feedback received, it will prepare its formal advice to the Commission, which it anticipates publishing in the first half of 2016. This may lead to amendments to the Solvency II legislation.

A link to Insurance Europe's response is here.

EUROPEAN COMMISSION DELEGATED DECISION 2015 / 2290 AS PUBLISHED IN THE OFFICIAL JOURNAL

As reported in the June edition of the Insurance Regulatory Update, the European Commission issued a decision confirming that the solvency regimes in force in Australia, Bermuda (with the exception of rules on captives), Brazil, Canada, Mexico and the United States are deemed provisionally equivalent to the Solvency II Regime for a period of ten years from 1 January 2016. After a period of scrutiny by the European Parliament, the decision was approved and was published in the Official Journal of the European Union on 9 December 2015. It entered into force twenty days thereafter, on 29 December 2015, in advance of the Solvency II Regime going live on 1 January 2016.

A link to the decision is here.

INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB) CONSULTS ON AMENDING IFRS4

The IASB has published proposals to amend the existing Insurance Contract Standard IFRS4, requesting stakeholder feedback by 8 February 2016. It is intended that IFRS4 will be replaced by the new Insurance Contracts Standards in the next couple of years. However, before those new Standards are introduced, amendments are being made to IFRS9 (which is relevant to Financial Instruments, including insurance contracts). Companies are concerned that the tension between the existing IFRS4 and the revisions to IFRS9 will lead to accounting volatility for companies that issue insurance contracts in the period before IFRS4 is replaced. The IASB proposes amendments to IFRS4 to mitigate that potential increased accounting volatility and invites comments from interested parties by comment letter.

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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