1. Motor Insurance Updates
Department of Transport updates MIBI on its plans to implement the 6th Motor Insurance Directive
The 6th Motor Insurance Directive ("Directive") EU 2021/2118 was published in the Official Journal of the European Union ("EU") on 2 December 2021 and came into effect 20 days thereafter. Pursuant to the Directive, Member States have 24 months to transpose it into national law. As a result, the necessary changes to Irish legislation must be made by 22 December 2023. The Department of Transport ("DOT") recently indicated to the Motor Insurers' Bureau of Ireland ("MIBI") that it intends to use a statutory instrument ("SI") to amend the respective sections of the Road Traffic legislation ("RTA"), to transpose the Directive, which will ensure that the December deadline is met. The DOT has sent a letter to MIBI which it requested be sent to all of its' members.
In that letter the DOT have highlighted a key elements of the Directive which will be the subject of the SI including:
- replacing the definition of 'vehicle' for insurance purposes. This will be achieved by removing the 'mechanically propelled vehicle' definition within the RTA and replacing it with the definition of 'vehicle' in the Directive;
- introduction of the term 'use of vehicle'. This will ensure uniform implementation of EU case law in national law;
- exempting motorsports events and activities from the requirements of the Directive. This will exclude vehicles which are exclusively used for motorsports events and activities from the scope of the Directive, where there is equivalent protection available via an alternative insurance or guarantee policy;
- revising the minimum amounts of cover which insurance policies must provide. The Directive revises the minimum amounts and provides for a review mechanism; and
- introducing new national derogations from the insurance obligation (as detailed in Article 3 of the Directive). The Directive permits Member States to derogate from the insurance obligation for vehicles not admitted for use on public roads (Article 5(5)). Article 5(6) also allows Member States to derogate from the insurance obligation in respect of compensation for damage caused by vehicles in areas which, due to legal or physical restrictions, are not accessible to the public. The DOT intends to apply the Article 5(5) and (6) derogations for vehicles not admitted for use on public roads.
MIBI Communication on the National Fleet Database
In a recent communication to members, the MIBI explained that under section 56A(7) of the Road Traffic and Roads Act 2023, all motor vehicles operating under fleet and motor trade insurance policies must be uploaded to the National Fleet Database ("NFD") by 30 November 2023. This data is shared with the DOT and an Garda Síochána, and will be used to identify vehicles which are being driven without insurance. Under the new legislation, fines of up to €500 may be imposed on fleet owners and motor traders who are not complying. To date over 60,000 fleet vehicles have been uploaded to the NFD.
The data that must be uploaded on the NFD includes:
- vehicle registration number or other unique identifying number for each relevant vehicle; and
- date of birth of any named driver.
Vehicles which are in the fleet for 14 days or less will not need to be registered. Further details regarding driver licence number and country of origin of the driving licence will be required at a later date, which is expected to commence mid-2024.
MIBI request that insurer members reach out to internal staff and brokers regarding the new requirements, to ensure that the 30 November deadline is achieved. Early registration will help to avoid last minute spikes and the challenges that this brings.
2. Criteria for identifying shadow banking under CRR set out in new Delegated Regulation
On 6 September 2023, the European Commission adopted a Delegated Regulation supplementing the Capital Requirements Regulation ("CRR") setting out regulatory technical standards specifying the criteria for the identification of shadow banking entities.
Under Article 394(4) of the CRR, the Commission is empowered to adopt delegated acts which set out the criteria for identifying shadow banking entities referred to in Article 394(2) of the CRR. The Delegated Regulation considers international developments and internationally agreed standards on shadow banking to ensure consistency across the regulatory framework.
The Delegated Act specifies:
- Article 1 outlines the criteria for identifying shadow banking entities and non-shadow banking entities, as well as the criteria for excluding entities established in third countries being deemed to be shadow banking entities; and
- Article 2 sets out the definitions of banking activities and services; and
The Council of European Union and the European Parliament now have an opportunity to review the Delegated Regulation. If neither party objects, the Delegated Regulation will enter into force and apply 20 days after its publication in the Official Journal.
3. José Manuel Campa gives keynote speech at the EUROFI Financial Forum entitled 'Environmental risks and the role of banking regulation'
On 13 September 2023, Chairperson of the European Banking Authority ("EBA"), José Manuel Campa gave a keynote speech at the EUROFI Financial Forum entitled 'Environmental risks and the role of banking regulation'. His speech highlighted that banks have an important role to play in financing and addressing financial risks which are driven by climate change and environmental degradation particularly when considering both the Paris agreement and the EU net zero objectives. Mr Campa's speech focused on 3 key areas: the current state of environmental risks management, the relevance and challenges of climate risk stress testing and scenario analysis and ensuring an effective regulation.
1. The current state of environmental risks management
Mr Campa noted that a robust banking system is needed for sound environmental risk management to ensure that the transition to a sustainable European economy is effectively funded. While progress has been made, further advances are needed. Climate related impacts are better understood and risk management practices are moving in the right direction. This is seen where banks incorporate climate risk drivers into their credit risk management, and where they provide targeted questionnaires to their clients, and increase cooperation with their peers and supervisors.
However, banks must continue to strengthen their organisational, risk management and quantitative capabilities. Mr Campa highlighted that the incorporation of nature related physical risks and biodiversity impact into the management of risk types other than credit risks remained limited. Banks need to build their capacity and expertise to fully incorporate environmental risks across their organisation.
2. Relevance and challenges of climate risk stress testing and scenario analysis
Mr Campa noted that banks must adopt a more forward looking approach to risk management, with more reliance on scenario assessments and less on historic information. Therefore, the EBA is prioritising the coverage of climate related risk within the EU-wide stress test framework.
There are challenges ahead, particularly limitations on data availability and methodological limitations which was highlighted in the EBA 2021 pilot exercise on climate risk. Mr Campa stated that more comprehensive and forward looking models and scenarios must be developed which cover transmission channels for transition and physical risks and the potential compounding of risks.
The aim of the European Supervisory Authorities', ECB's and ESRB's 'Fit-for-55' climate risk scenario analysis is to assess the resilience of the financial sector and its capacity to support the transition to a lower carbon economy under stress conditions. Mr Campa noted that this analysis is an unprecedented cross-sectoral one which will investigate how 'stress propagates through the financial system and how financial institutions' reactions might magnify it'. The exercise is expected to be launched by the end of 2023, with results due in Q1 2025.
3. Ensuring an effective regulation
The EBA published a roadmap on sustainable finance in December 2022 which set out key objectives and timelines for delivering their mandates over the three pillars of the banking supervisory framework. Mr Campa noted that the disclosure of quantitative and qualitative information by banks under Pillar 3 will increase the availability of ESG data, and the EBA will also follow the work of other organisations to ensure coherence and consistency.
He stressed that moving forward there is an expectation that banks will continue to strengthen their risk management systems to improve the identification, management and reporting of ESG risks. While the EBA have already issued guidance on loan orientation, internal governance, remuneration policies and SREP, they will also issue further guidance on ESG risk management. This guidance is expected to include guidance on risk appetite, internal controls, ICAAP, different financial risk type management and transition plans. The EBA will also carry out a review to incorporate ESG related risk into the EBA guidelines on institutions' stress testing.
Mr Campa also stated that the EBA's approach to the prudential treatment of exposures under Pillar 1 will continue to focus on risk-based considerations, and will accelerate the integration of environmental and social risks across the Pillar 1 framework. These targeted enhancements, alongside Pillar 2 and 3 will help to ensure the ESG risks are better incorporated into the framework.
Mr Campa concluded by noting that in order to meet these milestones for the sustainable economic transition, more advanced risk management practices which use climate risk stress testing and scenario analysis are necessary to refine the prudential framework.
4. Opening Remarks by EIOPA Chairperson at Global Insurance Supervision Conference
On 6 September 2023, the Chairperson of European Insurance and Occupational Pensions Authority ("EIOPA")Petra Hielkema, gave opening remarks at the 8th Global Insurance Supervision Conference. Ms Hielkema emphasised that as insurance is rarely limited to one jurisdiction, achieving a common approach to insurance is necessary. The theme of the conference was 'Insurance Supervision in a World of Transformation' and Ms Hielkema's speech considered factors which are leading to this transformation such a global warming, technology and geopolitical upheaval. The speech focused on 3 topics – Solvency II, climate change and innovation.
From an insurance perspective, the goal is to ensure that consumers and policyholders are not left behind during this transformation. Ms Hielkema noted that a risk-based approach to supervision is key to achieving this, and that Solvency II has had a significant role in maintaining resilience within the industry against financial, pandemic and geopolitical turbulence.
The Solvency II review will likely see a number of changes such as:
- a reduction in reporting requirements for smaller and lower-risk insurers; and
- easing of capital requirements.
In the context of long-term investments, the easing of capital requirements should be approached with caution, and capital relief should be closely tied to moving the green transition along.
Ms Hielkema also noted that the narrative around 'over-regulation' needs to change to one about 'good regulation'. She stressed the importance of consultation periods to ensure that all stakeholders have an input and also to ensure that a situation where a large number of new requirements must be complied with at the same time does not arise.
Ms Hielkema stated that climate change is 'the most pressing risk of our time' and Europe is the fastest warming continent. At present 75% of climate related catastrophe losses in Europe are not insured. Ms Hielkema highlighted that to combat this, natural catastrophe insurance must be accessible and affordable for everyone. At present, many insurance policies are excluding more natural catastrophe risks, meaning that public authorities are left to pay. More analysis into the reasons behind the low take up of natural catastrophe insurance must be done to understand consumer reluctance in purchasing existing products.
Ms Hielkema noted that the question is no longer centred around how to avoid these events, but rather, how as a society, we can deal with these events in an effective way that enables speedy recovery. As previously discussed in the FIG Top 5 at 5, to help achieve this, EIOPA and European Central Bank ("ECB") are advocating for a comprehensive solution with 4 pillars:
- policies designed with adaptation and mitigation measures;
- enhancing the capacity of the insurance market, by involving the entire financial system;
- as well as public-private partnerships at the national levels to cover losses that may be difficult to insure against purely via market-based solutions; and
- public-private partnershipsat EU levels to cover losses that may be difficult to insure against purely via market-based solutions.
Ms Hielkema noted that while supervisors are 'technological neutral and open to innovation', they must also be cautious about both intended and unintended consequences. The key challenge for supervisors is how to establish effective regulatory frameworks which support innovation without sacrificing consumer protection. In addition ensuring that cross-sectorial legislation reflects the specificities of the insurance sector is vital.
The pace of change also raises a significant challenge. To combat this, cooperation and sharing market developments and responses is key. Ms Hielkema highlighted AI as an example of such an area where increased coordination of international supervision is required.
Both the scale and scope of transformation emphasise just how important global cooperation is. Ms Hielkema concluded by stating that open dialogue across the EU and internationally is crucial to promote mutual understanding and to build trust.
5. Central Bank Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, endorses initiatives in response to recent banking events and reaffirms priority to implement Basel III
On 11 September 2023, the Group of Central Bank Governors and Heads of Supervision ("GHOS"), the oversight body of the Basel Committee on Banking Supervision ("Committee"), met and assessed the lessons to be learned following the recent banking events between March and May 2023, and reviewed the implementation status of outstanding Basel III standards.
Banking Events March – May 2023
The GHOS have described the banking events between March and May 2023 as 'the most substantial system-wide banking stress since the Great Financial Crisis', but maintain that increased resilience within the global banking system, as well as prompt intervention by public authorities helped to mitigate the impact of those events. The GHOS also endorsed the Committee's report on the regulatory and supervisory lessons that can be learned from this time ("Report"). The Report outlined:
- that the most important source of financial and operational resilience is banks' risk management practice and governance arrangements;
- strong and effective supervision plays an important role in overseeing the safety and soundness of banks, and it is vital that supervisors act early and effectively to identify and correct weaknesses in banking practice; and
- in safeguarding financial stability, a prudent and robust regulatory framework is crucial.
The Committee also set out a series of follow-up initiatives which were also endorsed by the GHOS including:
- prioritise work to strengthen supervisory effectiveness and identify issues which could benefit from more guidance at a global level; and
- use empirical evidence to carry out more follow up work on whether certain features of the Basel Framework, such as liquidity and interest rate risk performed as intended.
Basel III Implementation
The GHOS maintains that the already implemented Basel III reforms greatly assisted in shielding the banking sector from a more significant banking crisis.
GHOS noted that in terms of the implementation of Basel III, many members had made good progress, with a third having fully or the majority of the standards implemented. Two thirds plan to have them implemented by 2024, and the remaining jurisdictions by 2025. GHOS reiterated that it will continue to monitor Basel III implementation and that it expects members to achieve full, consistent implementation as soon as possible.
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