European Union: Insurance Quarterly Legal And Regulatory Update 1 July To 30 September 2016

Last Updated: 17 October 2016
Article by Dillon Eustace

INSURANCE QUARTERLY LEGAL AND REGULATORY UPDATE

Solvency II

(i) European Commission requests technical advice from EIOPA on the review of the Solvency II Delegated Regulation

On 18 July 2016, the European Commission issued a formal request to EIOPA for technical advice on the review of specific items in the Solvency II Delegated Regulation ((EU) 2015/35) (the "Call for Advice").

The Call for Advice follows on from the European Commission's public consultation on the EU regulatory framework for financial services which identified the following areas of the Solvency II framework as requiring further work:

Proportionate and simplified application of the requirements: Even though there are numerous provisions on proportionality in the Solvency II Delegated Regulation, the public consultation indicated that further work could be done to ensure that all requirements are proportionate to risk.

Removal of unintended technical inconsistencies:

The review due to take place in 2018 of the methods, assumptions and standard parameters used when calculating the Solvency Capital Requirement with the standard formula could address significant weaknesses experienced by stakeholders such as the non-life risk calibrations. The review could also consider more consistency across sectoral rules to the extent possible, taking into account the unavoidable differences between the business models of the financial institutions. EIOPA is invited to provide information on current use of certain existing simplifications and suggest improvements and refinements to such simplifications.

Removal of unjustified constraints to financing: It was highlighted in the public consultation that the Solvency II framework may create unintended barriers to long-term investment. The review provides an opportunity to consider additional initiatives in the context of the Capital Markets Union which means additional work to identify investments creating growth and jobs and offering sufficient transparency and credit quality to justify improved risk sensitiveness in the standard formula.

In the Call for Advice, the Commission requests technical advice from EIOPA on topics relating to proportionate and simplified application of the requirements and the removal of unintended technical inconsistencies only. The European Commission is not requesting technical advice from EIOPA on the removal of unjustified constraints to financing at this stage but may at a later date.

A review of specific items of the Solvency II standard formula is expected before December 2018 and in preparation of this review, the European Commission requests EIOPA to provide its final technical advice, including a cost-benefit analysis, by 31 October 2017.

A copy of the Call for Advice can be found at the following link:

http://ec.europa.eu/finance/insurance/docs/news/call-for-advice-to-eiopa_en.pdf

(ii) Solvency II Commission Implementing Regulation (EU) (2016/1376) published in the Official Journal of the EU

On 18 August 2016, Commission Implementing Regulation (EU) (2016/1376) of 8 August 2016 laying down technical information for the calculation of technical provisions and basic own funds for reporting with reference dates from 30 June 2016 until 29 September 2016 in accordance with the Solvency II Directive (2009/138/EC) (the "Implementing Regulation") was published in the Official Journal of the EU.

For prudential reasons, it is necessary for (re)insurance companies to use the same technical information for the calculation of technical provisions and basic own funds for reporting irrespective of the date on which they report to their competent authorities. The Implementing Regulation provides that (re)insurance companies must use the technical information on relevant risk-free interest rate term structures, fundamental spreads for the calculation of the matching adjustment and volatility adjustments referred to in Article 1 (2) of the Implementing Regulation when calculating technical provisions and basic own funds for reporting with reference dates from 30 June 2016 until 29 September 2016.

In order to ensure uniform conditions for the calculation of technical provisions and basic own funds by (re)insurance undertakings, the Implementing Regulation states in the recitals that this technical information should be laid down for every reference date.

The Implementing Regulation, which entered into force on 19 August 2016, applies from 30 June 2016 and is binding in its entirety and directly applicable in all Member States.

This Implementing Regulation can be accessed via the following link:

http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv%3AOJ.L_.2016.224.01.0001.01.ENG

(iii) Central Bank issues Guideline for Solvency II (Re)Insurance Undertakings on Directors' Certifications

On 18 August 2016, the Central Bank published its Guideline for Solvency II (Re)Insurance Undertakings on Directors' Certifications (the "Guideline"). The Guideline addresses the format of the directors' certifications required from Solvency II undertakings.

By means of a notice served on relevant undertakings by Section 25 of the Central Bank Act 1997, undertakings are required to submit a compliance statement to the Central Bank certifying that they materially comply with the obligations and requirements set out in the Insurance Acts and both national and European Solvency II legislation and requirements. The Guideline sets out the format of the Directors' Compliance Statement for those undertakings subject to Solvency II, which includes the Directors' compliance statement on the Corporate Governance Requirements.

The Guideline also provides the format for the Directors' Accuracy Certificates required to be annexed to the annual quantitative reports, the regular supervisory report (or annual summary thereof) and the Own Risk and Solvency Assessment (the "ORSA") as required by Regulation 36 of the Solvency II Regulations.

The Guideline applies in relation to financial reporting years ending in 2016 onwards.

The Directors' Compliance Statement should be submitted to the Central Bank no later than the date by which the undertaking's annual Quantitative Reporting Templates ("QRTs") and regular supervisory report ("RSR") are due.

The Directors' Accuracy Certificates in respect of the annual QRTs, the RSR and the ORSA report should be submitted to the Central Bank at the same time as the report to which the directors' accuracy certification applies.

The Central Bank noted in its Insurance Quarterly Newsletter that for those directors' certifications which are due to be submitted in 2016, the undertakings are expected to submit them in hard copy format to the relevant supervisory team in the Central Bank. For those directors' certifications which are due to be submitted from 2017 onwards, these should be submitted via the ONR reporting system and the submission of a hard copy will not be required.

The Guideline does not apply to those (re)insurance undertakings that are not subject to Solvency II. Those (re)insurance undertakings are required to continue to comply with the Guideline for Life Insurance Undertakings, Non-Life Insurance Undertakings, and Reinsurance Undertakings – Compliance Statements which was issued in 2014.

A copy of the Guideline can be found at the following link;

http://www.centralbank.ie/regulation/industry-sectors/insurance-companies/Documents/ Guideline%20for%20Solvency%20II%20Undertakings%20on%20Directors%20Certifications%202016.pdf

The Central Bank communication on this Guideline can be found at the following link:

http://www.centralbank.ie/regulation/industry-sectors/insurance-companies/Pages/Communications.aspx

(iv) Solvency II Commission Implementing Regulation (EU) 2016/1630 on the procedures for the application of the transitional measure for the equity risk sub-module published in the Official Journal of the EU

On 10 September 2016, Commission Implementing Regulation (EU) (2016/1630) of 9 September 2016, laying down implementing technical standards with regard to the procedures for the application of the transitional measures for the equity risk sub-module in accordance with Solvency II was published in the Official Journal of the EU (the "Commission Implementing Regulation").

In order to apply the transitional measure in respect of calculating the equity risk sub-module as set out in Article 308b(13) of the Solvency II Directive 2009 and Regulation 118(2) of Irish Solvency II Regulations, (re)insurance undertakings must keep a record of certain equities (type 1 equities that were purchased on or before 1 January 2016 which are not subject to the duration-based equity risk pursuant to Article 304 of the Solvency II Directive) and the dates of their purchase.

In the case of those equities held within a collective investment undertaking or other investment packaged as a fund where the look-through approach is not possible, (re)insurance undertakings are only required to keep a record of the units or shares of the collective investment undertaking or other investment packaged as a fund to which Article 173 of the Solvency II Delegated Regulation (2015/35 (EU)) applies and the dates of their purchase.

Those records must be updated each time the (re)insurance undertaking calculates the Solvency Capital Requirement using the transitional measure set out in Article 308b(13) of the Solvency II Directive.

(Re)insurance undertakings must provide the supervisory authority with all the information necessary related to those equities, units and shares, and with documentary evidence of the date of purchase, upon request.

Where (re)insurance undertakings sell equities, units or shares as referred to above as bought on or before 1 January 2016 and then purchase equities, units or shares of the same kind after 1 January 2016, (re)insurance undertakings shall ensure that the remaining equities, units or shares bought on or before 1 January 2016 can be identified.

The Commission Implementing Regulation entered into force on 30 September 2016.

A copy of the Commission Implementing Regulation can be found at the following link:

http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32016R1630&from=EN

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