European Union: EU Regulator To Focus On Insurance Conduct Of Business Harmonisation

Last Updated: 30 April 2018
Article by Iain Sawers

Originally published by Out-Law.com

The EU insurance regulator will focus its harmonisation efforts this year on conduct of business issues and supervision, according to a new report.

The European Insurance and Occupational Pensions Authority (EIOPA) is backing supervisory convergence as a way of ensuring a high, effective and consistent level of supervision throughout the EU by granting a similar level of protection to all EU policyholders and beneficiaries, according to its 2018/19 supervisory convergence plan.

EIOPA also intends to prioritise the implementation of a common EU supervisory culture under the maximum harmonisation 'Solvency II' directive as part of its convergence work this year. However, it said that there was "further to go and a different starting point" in terms of developing a more consistent conduct regime across member states, as there has traditionally been less harmonisation in this area and a less consistent emphasis on conduct issues.

The regulator has developed a separate strategy to address supervisory convergence from the conduct perspective (8-page / 258KB PDF), which it published to coincide with its broader convergence plan. The strategy sets out how EIOPA intends to improve market monitoring and risk identification and mitigation, and sets out additional activities EIPOA intends to carry out over the coming year.

Unlike its prudential regulation work, EIOPA's work on conduct supervision is not based on maximum harmonisation but rather on "ensuring consistent and fair outcomes for consumers by ensuring supervisory capacities are always proportionate to and effective in regards consumer protection and conduct risks". For some member states in particular, this will require "enhanced supervisory resources" focused on conduct issues and the implementation of the enhanced requirements of the Insurance Distribution Directive (IDD), EIOPA said.

EIOPA intends to begin a programme of one and two-day visits to various national conduct authorities (NCAs) in the coming year, in order to better understand their own approaches to conduct supervision, both in the context of IDD and beyond. It also intends to offer bespoke workshops and other opportunities to allow NCAs to share their practical experiences of conduct supervision, addressing topics such as the use of data in identifying potential consumer detriment, prioritising areas of interest and experiences of supervision of insurance intermediaries.

The aim of these activities is to help NCAs share their experiences on practical supervisory challenges, and to provide them with additional perspectives based on best practice from other jurisdictions, EIOPA said. However, it does not expect NCAs to all begin using the same supervisory tools as a result due to the differences in national markets and national legal frameworks. This would be inconsistent with "smart risk-based and preventative supervision", it said.

EIOPA will also begin preparing to integrate conduct themes into its supervisory handbook in the coming year, according to the plan. This will include publication of a report on "conduct risk through the lifecycle" in the third quarter of the year, which it expects will provide a "useful starting point" for future conduct supervisory handbook work.

"The strategy is a multi-pronged and incremental one, moving towards increasing convergence in access to and use of conduct data and market intelligence for supervisory purposes," the regulator said in its plan. "EIOPA will increasingly integrate conduct aspects into existing data tools, and as a long term objective, EIOPA will work towards the establishment of a conduct reporting and risk assessment framework."

"However, data analytics can never take the place of supervisory judgement, so improving available data and market intelligence must go hand-in-hand with improving the capacity of conduct supervisors to act in practice on data and intelligence in a proportionate and preventative manner," it said.

The convergence plan also sets out EIOPA's intentions to develop common benchmarks for the supervision of internal models, carry out thematic reviews of travel insurance and insurers' use of big data, and to develop good practices around IT security, governance and cyber security practices over the coming year. It also intends to review how technical provisions, particularly for non-life products, are calculated both in general and in a cross-border context, in order to "address risks to the internal market and to the level playing field", according to the plan.

EIOPA will also continue to monitor the potential consequences of the UK's withdrawal from the EU and its likely impact on consistent supervision, according to the plan. It will publish a progress report, along with an update to the plan, at the beginning of 2019.

Insurance law expert Iain Sawers of Pinsent Masons, the law firm behind Out-Law.com, said that firms would welcome EIOPA's prioritisation of conduct of business issues as part of its plans to increase supervisory harmonisation and consistency.

"EIOPA's plan to develop a common supervisory tool box and culture and to encourage the widespread sharing of supervisory good practices will greatly assist insurance companies grappling with different regulatory frameworks in the EU," he said. "It is also encouraging to see the concrete steps EIOPA is preparing to take over the next year or two including visits to local regulators, running a programme of practice exchanges through bespoke workshops and integrating conduct themes into its supervisory handbook."

"Notwithstanding the fact that the UK's regulatory framework may soon be outside of its remit, EIOPA's activities continue to remain of huge importance to any insurer operating within the EU. We will continue, therefore, to closely monitor its conduct of business supervisory activities in the coming months," he said.

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