This is the November edition of the Arthur Cox Insurance Regulatory Update, the monthly bulletin of the Arthur Cox Insurance Group focused on recent developments in insurance regulation, law and practice.
This issue includes: Brexit Bill 2020; Central Bank publishes update on prudential regulatory flexibility measures; Central Bank's NCID Report; EIOPA's call on insurers to prepare for end of UK transition period; and EIOPA guidelines on information and communications technology security and governance.
Government Publishes Brexit Bill
On 27 October the Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Bill 2020 was brought before Dáil Éireann and is now at second stage. It is expected that the Bill will complete the remaining stages in both the Dáil and Seanad and be signed into law before 31 December 2020. The Bill deals with certain matters consequent on the UK leaving the transition period without a deal and the possibility of a serious disturbance in the economy of the State. Part 10 of the Bill extends the three year temporary run-off regime for UK and Gibraltar based insurers and intermediaries, (which had been provided for in the Withdrawal of the United Kingdom from the EU (Consequential Provisions) Act 2019) to 15 years.
COVID-19 – Central Bank Publishes Update on Prudential Regulatory Flexibility Measures
On 5 November, the Central Bank published an update regarding the regulatory flexibility measures that were introduced in March 2020 to reduce the regulatory burden on insurers in the immediate aftermath of the Covid-19 crisis.
The regulatory flexibility measures set out in the Central Bank's correspondence to insurers in March 2020 will be kept under review and updated as necessary. However, the Central Bank now requires additional targeted information to be submitted by (re)insurers to assess the effects of Covid-19 on the financial sector. In this regard the Central Bank expects (re)insures to engage constructively with it and respond to such requests for information in an expedient manner.
The Central Bank had previously applied a level of supervisory flexibility in relation to the deadlines for risk mitigation programs (“RMP”) to accommodate regulated firms in taking the necessary steps to deal with significantly changed operational demands as a result of Covid-19. It now considers that firms should have now adapted to the current operating environment, and as such, expects firms to meet specific RMP submission dates. Firms are encouraged to engage in a timely manner with their usual supervisors if they have concerns in meeting any such RMP deadlines.
Central Bank Publishes Second Motor Insurance Report OF NCID
The Central Bank has published its second annual Private Motor Insurance Report drawing on the National Claims Information Database (“NCID”) figures, which provides key statistics on the private motor insurance industry in Ireland. The Report is based on NCID premium and claims data collected from all insurers selling private motor insurance in Ireland from 2009 to 2019. The aim of the report is to improve transparency in the private motor claims environment, particularly in relation to claims costs and premiums paid.
Among key points, the Report notes that over the last decade:
- the cost of the average motor insurance premium is now €653, a rise of over a third from the average in 2009, despite the cost of claims per policy falling 9% over the same period up to 2019;
- notably, the average cost per claim has increased by two thirds from €2,726 in 2009 to €4,487 in 2019, however the frequency of claims have also fallen significantly by 45%;
- over the last four years, the majority of claims were settled directly between motorists. 17% settled through the State body, the Personal Injuries Assessment Board (“PIAB”), and 33% settled through litigation; and
- legal costs make up more than half of the cost of settling claims through the courts.
Insurance Ireland has responded to the Report, citing the urgent need to address the high and inconsistent cost of claims, and hopes that, through Government reform, a more stable sector will deliver better value for customers.
Cost of Insurance Working Group Publishes Final Progress Report
The Cost of Insurance Working Group (“CIWG”) has published its Eleventh and Final Progress Report, before the residual work of the group, as well as the Government's reform agenda, will be brought in under the newly established Cabinet Committee on Economic Recovery and Investment's sub-Group on Insurance Reform. In particular, the sub-group will be responsible for implementing outstanding recommendations of the CIWG including the establishment of an insurance fraud database.
The Report outlines the many positive reforms made by the CIWG in relation to two key areas: the cost of motor insurance and the cost of public liability insurance. The CIWG acted on a number of recommendations, the cumulative impact of which has helped reduce the costs of insurance premiums over the last number of years though, as noted above in relation to the private motor insurance report, they remain significantly higher than they were ten years ago.
Report on the Cost of Motor Insurance
The CIWG implemented the following changes in order to meet its objectives:
Objective 1- Protecting the consumer: a protocol for insurers to explain the basis for large increases in premiums and provide additional information on premium breakdowns was implemented, and renewal notification periods were extended from 15 to 20 working days to enable policyholders to make informed decisions at renewal.
Objectives 2 & 3- improving data availability and the personal claims environment by establishing a national claims information database (“NCID”).
Objective 4- reducing costs in the claims process: the Personal Injuries Assessment Board (Amendment) Act 2019 was enacted and commenced and the Judicial Council was established, which will have a formal role in future reviews and the frequency of future updates of the book of quantum.
Objectives 5 & 6- reducing insurance fraud and protecting road safety: the CIWG's changes made it easier for businesses to challenge fraudulent claims due to the improved cooperation between the insurance sector and an Garda Síochána in relation to fraud investigation and promoting compliance with road safety legislation.
Report on the cost of employer and public liability insurance
Objective 1- increasing transparency: feasibility studies in relation to collecting price information data and employer and public liability insurance claims data were conducted, and the NCID was extended to include employer and public liability claims.
Objective 2 reviewing the level of damages in personal injury cases, in an attempt to bring the levels of personal injury damages awarded in Ireland more in line with other jurisdictions, the Law Reform Commission is undertaking a detailed analysis of the possibility of developing constitutionally sound legislation to delimit or cap damages.
Objective 3 improving the personal injuries litigation framework Insurance Ireland and business organisations representing various sectors of the economy are agreeing a set of guidelines in respect of notifying and engaging with policyholders and legislative amendments are also being considered to ensure that defendants are notified of claims having been lodged against their policies. The Consumer Insurance Contract Act 2019 was partially commenced on 1 September 2020, section 16 of which ensures consumers are notified of claims being made against their policy where those claims have not been made by the consumer themselves and have an opportunity to submit relevant evidence to the insurer in regard to such a claim.
Joint Oireachtas Committee on Finance, Public Expenditure and Reform, and Taoiseach
Governor of the Central Bank of Ireland, Gabriel Makhlouf, made an introductory statement at the Joint Oireachtas Committee on Finance, Public Expenditure and Reform, and Taoiseach earlier this month.
The Governor spoke about the effects of COVID-19 on both the economy and the financial system, and gave a brief overview of the economic outlook, payment breaks, issues in the insurance sector, the Tracker Mortgage Examination and the credit union sector.
Differential pricing review: On the issues in the insurance sector, the Governor noted that the Central Bank has now concluded its review of differential pricing in the private car and home insurance markets. The purpose of the review was to identify the extent to which differential pricing is used and, where it does exist, to determine how firms are using the practices and whether it is in line with the Consumer Protection Code. Phase one of the review identified weaknesses with some insurance pricing practices, which were sufficiently concerning to merit communication with insurance firms. The Central Bank intends on releasing the interim results by the end of the year and hopes to complete all phases by the middle of next year.
Business interruption insurance: the Governor stated that the Central Bank hopes to identify and resolve all business interruption related issues which have the potential to cause customer harm as quickly as possible. In the wake of recent business interruption litigation, the Central Bank has noted that some policies provide cover for COVID-19-related business interruption, some policies clearly do not provide cover, and in some cases, the position is unclear. The Central Bank's business interruption supervisory framework, which was published in August, aims to identify and monitor insurers' approaches to the policies which are unclear, and to set out the Central Bank's expectations in relation to these policies. For more information on the key features of the Central Bank's supervisory framework see our August briefing, which is available here.
Central Bank's Opening Remarks at Insurance Industry Briefing
Director of Insurance Supervision at the Central Bank, Domhnall Cullinan, delivered his opening remarks at the 2020 Insurance Industry Briefing this week. After a turbulent year of unprecedented events, Cullinan focused on three main issues facing the insurance industry:
The role of insurance: As the pandemic unfolds and risks become more acute in the insurance industry, a constant, well-functioning and resilient insurance market will play an important role in Ireland's recovery and in protecting consumers. Cullinan made note of the sector's role as an employer, with 185 insurance firms currently authorised in Ireland and 205 firms writing business in Ireland from other EU member states. On top of that, companies supervised by the Central Bank paid out more than €54 billion in claims in 2019.
Negative perceptions of the industry: the industry in Ireland is negatively perceived due to major corporate governance failings and a failure to acknowledge and learn from those mistakes, as well as the recent failure of the industry to constructively engage with stakeholders on various issues that impact upon the cost and availability of insurance. The Central Bank hopes that insurance reform, which is high on the Government's agenda, will rebuild consumer trust in the industry. He referenced the publication of the second Private Motor Insurance Report and the Central Bank's continued work to protect policyholders in accordance with the Central Bank's Business Interruption Insurance Framework. Both the report and the framework will allow a more informed discussion around the negative perspectives on the industry to take place by providing useful and detailed datasets.
Future areas of supervisory focus: will include cultural change, the viability of business models in the face of disruptive change, and the financial and operational resilience of firms. The Central Bank made clear that, going forward, greater transparency and individual accountability will play a part in building lasting cultural change within the industry. In relation to disruptive change, the Central Bank also hopes firms will look to the future and identify exposures to, and mitigate against, those changes, such as climate change and the growth of cyber risk. Finally, the Central Bank reiterated that firms should ensure their own financial and operational resilience and that recovery plans be integrated into existing risk management frameworks.
He also echoes the views of EIOPA to ensure that insurers are ready for the end of the transition period at year end, including in relation to matters such as data protection.
EIOPA Calls on Insurers to Prepare for End Of UK Transition Period
On 31 December 2020, the transition period currently provided for in the Withdrawal Agreement between the EU and the UK will end. At that time, all EU primary and secondary law, including Solvency II and the Insurance Distribution Directive, will cease to apply in the UK. In light of this approaching deadline, EIOPA has advised the insurance sector to prepare for the consequences of UK and Gibraltar insurers becoming third-country insurance undertakings.
EIOPA previously produced an opinion in 2017 on the steps national supervisors and insurers should take in advance of Brexit and has reminded the sector to ensure that they have measures in place to ensure service continuity while ceasing unauthorised insurance business. EIOPA is monitoring contingency plans in the sector and has also asked insurers to properly inform their customers of their preparations for the end of the transition period.
Memoranda of Understandings were previously agreed between EIOPA, national supervisory authorities, the Bank of England in its capacity as Prudential Regulatory Authority, and Financial Conduct Authority. These memoranda address cooperation and information exchange and will come into effect at the end of the transition period.
EIOPA's press release is here.
EIOPA Finalises Guidelines on Information and Communications Technology Security and Governance
EIOPA has finalised guidelines to national supervisory authorities and (re)insurers on the application of operational risk regulations in Solvency II and the Commission Delegated Regulation 2015/35 to information and communications technology (“ICT”) security and governance. The purpose of the guidelines is the necessity to protect the digital assets of (re)insurers, particularly data that is received from policyholders and beneficiaries.
The guidelines note that while many national supervisory authorities have already issued ICT-related guidelines, the regulatory framework throughout the EEA is currently fragmented and a more consistent and uniform approach is needed. In addition, the complexity of ICT issues and the rate of cyber-security related incidents are increasing.
(Re)insurers are expected to apply the guidelines in a way that is proportionate to the size of their businesses and their risk profile. Boards should ensure that a written ICT strategy is in place for each (re)insurer. Boards are also expected to update existing risk management frameworks to take account of ICT-related risks. Business continuity plans and response plans should be in place to deal with ICT incidents.
In the case of the outsourcing of critical or important functions, (re)insurers must ensure that contractual arrangements include appropriate and proportionate information security objectives and measures, service level agreements ensuring ICT service continuity, and appropriate cyber-security handling procedures.
National supervisory authorities are expected to apply the guidelines from 1 July 2021.
ESRB Responds to Consultation on Solvency II
The European Systemic Risk Board (“ESRB”) has published its response to the Commission's July 2020 consultation paper on the review of the Solvency II regime.
The ESRB commends EIOPA's central role in the success of Solvency II regime and its positive effects on the individual insurer, however, it emphasises that gaps in the framework remain. The ESRB sees the upcoming review of Solvency II as an opportunity to close these gaps, such as the need to:
- Better reflect macro prudential considerations in Solvency II and contribute to reducing systemic risk in the financial sector. In order to achieve this, the ESRB has endorsed the following tools: (i) solvency tools to prevent pro-cyclical investment behaviour, (ii) liquidity tools to better supervise, report and manage liquidity, and (iii) tools to address risks stemming from the provision of credit to the economy.
- Establish a harmonised recovery and resolution framework across the EU. The ESRB recommends that authorities' powers be increased to include pre-emptive and preventative recovery and resolution powers.
- Continue ensuring that risks are properly captured under Solvency II. The ESRB recommends making adjustments to the risk-free interest rate term structure to reflect the low interest rate environment, so that the resilience of the insurance sector is not weakened in the current climate.
- Analyse and take into account the lessons of the recent
events linked to COVID-19 as they illustrate the
strengths and weaknesses of the insurance sector. The ESRB has
identified five lessons that it would like to highlight, including:
- Insurance activities and functions play a central role in the good functioning of the economy, recent examples of which include the scope of business interruption insurance cover and health insurance cover for pandemic claims;
- The importance of tools such as ex-ante capital buffers to provide insurers with additional resilience against losses when needed; and
- The power for supervisors to block distributions and similar pay-outs, which was advocated for by the ESRB and EIOPA at the beginning of the coronavirus pandemic.
EIOPA Publishes Annual European Insurance Overview
EIOPA has published its third annual European Insurance Overview, which is published as an extension of its statistical services to provide an overview of the European (re)insurance sector.
The report is based on annually reported Solvency II information and calculated from objective and factual reported data received from undertakings. This year's report is based on annual reporting for 2019 and includes UK data in EEA figures. It provides an overview of the life and non-life markets and outlines the distribution of, and aggregate growth of, gross written premiums year on year. In both markets, gross written premiums have increased for the majority of EEA countries in 2019. The European life market remains largely dominated by Index-linked and Unit-linked insurance. More than 50% of the European non-life markets are made up of general and motor liability, medical expenses insurance, fire and other property damage business lines.
On solvency and capitalisation, the majority of EEA countries reported a median SCR ratio of over 200% and all countries reported a median MCR of above 250%. 26 out of 31 countries also reported that Tier 1, unrestricted capital accounted for 90% of Own Funds.
A link to EIOPA's report is here.
European Commission Seeking Feedback on Proposals to Modernise VAT Rules for Insurance Services
The European Commission is seeking comments on its initiative to review the VAT rules for financial and insurance services. The current rules have not kept pace with the developments of new services in the financial industry (e.g. fintech services including services linked to cryptocurrencies and e-money) and have led to a lack of neutrality, legal uncertainty and high administrative costs. The rules are also interpreted and applied differently in other Member States, which contributes to distortions within the EU and in exchanges with third countries.
The Commission's initiative hopes to modernise how VAT is applied to financial services by reducing legal uncertainty and increasing VAT neutrality across the EU. The initiative is open for feedback, which can be provided here until 19 November, with a public consultation period to be commenced in Q1 2021.
EIOPA Statement at the hearing of The Economic and Monetary Affairs Committee
On 12 October, EIOPA Chairman, Gabriel Bernardino addressed members of the Economic and Monetary Affairs Committee of the European Parliament in which he outlined the steps taken by EIOPA to mitigate the impact of COVID-19, the broader implications of the pandemic on its supervisory work and its role in ensuring recovery in the insurance and pensions sector. As part of that, EIOPA also published a report on its key achievements for the period October 2019- October 2020.
In the immediate aftermath of the outbreak of COVID-19, Mr. Bernardino reiterated the actions taken by EIOPA to coordinate the supervisory response across Member States including: alleviating the burden on the industry in relation to reporting; recommending temporary suspension of dividends and discretionary payments; and asking insurers to assess their product offerings in light of the pandemic and eliminate any unfair treatment of consumers.
In December, EIOPA will deliver its advice on the Solvency II review to the Commission, which will include recommendations for how the objectives of the review can be achieved. i.e. proposals for adjusting the framework in light of the new interest rate risk environment, increasing proportionality, fostering long term investment and introduce proposals on recovery and insurance guarantee schemes.
On the topic of recovery, Mr. Bernardino noted that EIOPA is in process of implementing an ambitious strategic plan on sustainability and climate change. Recovery, Mr. Bernardino noted, is also dependent upon an effective Capital Markets Union that delivers on objectives such as increasing future pension's adequacy, which can be achieved through the implementation of occupational pensions throughout Europe.
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.