DECEMBER 2014 – THIS MONTH'S NEWS
- CENTRAL BANK ISSUES LETTER TO APPOINTED ACTUARIES OF LIFE INSURERS
- CENTRAL BANK'S DIRECTOR OF CONSUMER PROTECTION DELIVERS SPEECH TO INSURANCE IRELAND CUSTOMER 360° CONFERENCE
- CENTRAL BANK PUBLISHES MACROFINANCIAL REVIEW
- EIOPA PUBLISHES RESULTS OF EU-WIDE STRESS TEST 2014 AND RECOMMENDATIONS
- EIOPA LAUNCHES PUBLIC CONSULATION ON SECOND SET OF SOLVENCY II IMPLEMENTING TECHNICAL STANDARDS AND GUIDELINES
- EIOPA PUBLISHES FINAL REPORTS ON FIRST SET OF SOLVENCY II GUIDELINES
- EIOPA PUBLISHES COMMON APPLICATION PACKAGE FOR INTERNAL MODELS
- PUBLICATION OF THE OFFICAL TEXT OF THE REGULATION ON KEY INFORMATION DOCUMENTS FOR PRIIPS
- EIOPA PUBLISHES OPINION ON SOUND PRINCIPLES FOR CRISIS PREVENTION, MANAGEMENT AND RESOLUTION
- FINANCIAL CONDUCT AUTHORITY ANNOUNCES NEW STRATEGIC APPROACH FOR SUPERVISION OF AUTHORISED FIRMS
IN DOMESTIC NEWS...
CENTRAL BANK ISSUES LETTER TO APPOINTED ACTUARIES OF LIFE INSURERS
On 18 December, the Central Bank issued a letter to appointed actuaries of life insurers regarding end of year valuations for 2014. The letter sets out the Central Bank's considerations on three areas: (i) the future investment rate specified in the European Communities (Life Assurance) Framework Regulations 1994 (the 1994 Regulations) (ii) the resilience test to be applied, and (iii) the yields on variable interest investments to be used in valuing liabilities.
The letter also notes that with the implementation of Solvency II, insurers may be considering changes to their investment portfolios during 2015. The Central Bank confirms that while it does not intend to set out minimum standards for the resilience test for end 2015 valuations, there will be no relaxation of the valuation rules set out in the 1994 Regulations. Appointed actuaries will be left with discretion as to the manner in which they achieve compliance with the requirements of the 1994 Regulations and Actuarial Standard of Practice LA-3 (additional guidance on the valuation of life assurance business) in the second half of 2015.
A link to the letter is here.
CENTRAL BANK'S DIRECTOR OF CONSUMER PROTECTION DELIVERS SPEECH TO INSURANCE IRELAND CUSTOMER 360° CONFERENCE
On 3 December, the Central Bank's Director of Consumer Protection, Mr. Bernard Sheridan, delivered a speech to the Insurance Ireland Customer 360° Conference. Mr. Sheridan referred to a "5C Framework" through which the Central Bank filters its consumer protection policy: Consumer, Culture, Compliance, Confidence and Challenge. Mr. Sheridan stated that the Central Bank's primary aim is to deliver the best outcome for the consumer. He emphasised that compliance is a minimum standard and the Central Bank's expectation is that firms are not only compliant but are also able to demonstrate how they are achieving the consumer best interest principle in their practices and behaviours. He stressed the need for those occupying senior management positions to set a top-down consumer-focused ethos and welcomed the implementation and monitoring of performance metrics in some firms.
A link to the speech is here.
CENTRAL BANK PUBLISHES MACRO-FINANCIAL REVIEW
On 15 December, the Central Bank published its second Macro-Financial Review of 2014 (the Review). The Review summarises the current state of the macro-financial environment in Ireland by evaluating updates since the previous review (published in June 2014). As part of the review, the Central Bank notes that in respect of the insurance sector, "While recent improvements in the economic climate, if maintained, should serve to support the sector, the persistence of the low yield environment continues to present challenges to the profitability of both the domestic life and non-life sectors".
The Review notes that the domestic life market has continued to stabilise since the last review. Notably, the Fitch Ratings upgraded the Irish Life Insurance Financial Strength rating to A+ in August 2014. However, the Central Bank notes that there are certain weaknesses in the domestic insurance sector and that insurance companies must continue to seek out new business and retain customers.
The Review highlighted that the solvency position of most domestic nonlife insurance firms was strengthened in the first half of 2014. The Review also sets out some of the challenges faced by the non-life sector, including a cost competitive market. The Central Bank also notes that domestic non-life insurance firms experienced profits of €65 million in the first half of 2014.
According to the Review, reinsurers continue to face operating challenges such as low reductions in premium rates which has resulted in the rating agencies Moody's and A.M. Best downgrading their outlook from stable (in June 2014) to negative (in August 2014).
The Review notes the results of EIOPA's EU wide insurance stress test announced on 1 December 2014 (see article below).
A link is here.
IN EUROPEAN AND INTERNATIONAL NEWS...
EIOPA PUBLISHES RESULTS OF EU-WIDE STRESS TEST 2014 AND RECOMMENDATIONS
On 30 November, EIOPA published the results of its EU-wide insurance stress test (the Stress Test). The Stress Test is used as a tool by EIOPA and National Supervisory Authorities (NSAs) to determine the overall resilience of the insurance sector to adverse market developments and the extent to which greater stresses increase the sectors' vulnerability to systemic risk.
Undertakings estimated a baseline scenario. The Stress Test was carried out by applying a set of severe stresses against this. The number of participants in the Stress Test exceeded EIOPA's target rate of 50% of the insurance market in each European country.
The results of the Stress Test show that the insurance sector is sufficiently capitalised within the requirements of the standard model Solvency II regime. Notwithstanding this, 14% of companies (representing 3% of total assets) which participated in the Stress Test had a Solvency Capital Requirement ratio below 100%.
The Stress Test revealed that the insurance sector is potentially vulnerable to a "double hit" stress situation in which the sector could be hit by both a decrease in the value of assets and a lower risk free rate. Despite the existence of such vulnerabilities, the Stress Test found that 56% of the participant companies would have sufficient capital reserves should a "double hit" stress scenario occur. Following the results of the Stress Test, EIOPA has issued a set of recommendations to NSAs as a means of addressing certain vulnerabilities within the sector. Undertakings can expect increased engagement with NSAs as the Solvency II deadline for transposition (1 January 2016) draws closer. EIOPA has advised NSAs to actively engage with undertakings to assess their Solvency II preparedness and ensure their understanding of vulnerabilities to stress scenarios and risk exposure, and to determine what corrective actions should be taken.
A link to the EIOPA press release is here.
A link to EIOPA's Report on the EU-wide Insurance Stress Test 2014 is here.
A link to EIOPA's Recommendations is here.
EIOPA LAUNCHES PUBLIC CONSULATION ON SECOND SET OF SOLVENCY II IMPLEMENTING TECHNICAL STANDARDS AND GUIDELINES
On 27 November, EIOPA began a public consultation on the second set of draft Implementing Technical Standards (ITS) and Guidelines for Solvency II. The ITS and Guidelines have been developed on the basis of the Solvency II Directive (as amended by Omnibus II) and the provisional Implementing Measures which were published by the European Commission on 10 October 2014. There are nine Consultation Papers covering different aspects of the ITS: Pillar I (list of regional governments and local authorities, currency shock for currencies pegged to the EURO, standard deviations for health insurance obligations subject to health risk equalisation systems and equity charge transitional); Pillar II (procedures when assessing external credit assessments, supervisory transparency and accountability, and capital add-ons); and Pillar III (templates for the submission of information to the supervisory authorities, and procedures, formats and templates of the Solvency and Financial Conditions Report).
As regards the Guidelines, there are eight Consultation Papers covering: Pillar I (valuation of assets and liabilities (other than technical provisions), and implementation of the long term guarantee measures); Pillar II (extension of the recovery period); and Pillar III (methods to determine the market share for the purpose of exemptions to supervisory reporting, reporting for financial stability purposes, reporting and disclosure, exchange of information on a systematic basis within colleges, and third country branches).
The objective of the ITS and Guidelines is to ensure a harmonised and convergent application of Solvency II implementing measures and the issuing of the second set of draft ITS and Guidelines is of significance in that EIOPA has now entered the final regulatory stage of implementing the Solvency II regime. EIOPA consulted on the first set of ITS and Guidelines between April and August 2014 (see article below).
The public consultation will end on 2 March 2015.
EIOPA has also published a separate Consultation Paper on 'recovery plan, finance scheme and supervisory powers in deteriorating financial conditions'. This Consultation Paper follows a call for advice from the Commission on 24 July 2014 to provide technical advice to assist the Commission on the possible content of the delegated acts. Comments are due by 18 February.
EIOPA PUBLISHES FINAL REPORTS ON FIRST SET OF SOLVENCY II GUIDELINES
On 3 December, EIOPA published Final Reports on its consultation on the first set of draft Guidelines for Solvency II. The Final Reports contain Guidelines on the following areas: Pillar 1 (including Own Funds, the Standard Formula SCR and Technical Provisions), Group Solvency, Internal Models, Supervisory Review Process and Equivalence. The Final Report on Guidelines relating to Governance and the Own Risk and Solvency Assessment is due to be published in February 2015.
EIOPA intends to publish the Guidelines in all official languages of the EU during the first quarter of 2015, with the comply-or-explain procedure due to run from February until March 2015.
EIOPA PUBLISHES COMMON APPLICATION PACKAGE FOR INTERNAL MODELS
On 4 December, EIOPA published the Common Application Package for Internal Models. The publication of this package follows EIOPA's March 2014 Opinion on the use of a Common Application Package for Internal Models. The opinion noted that national supervisors should recommend insurers to use the package to organise the submission of documentation required to show compliance with requirements pertaining to the use of internal models. By publishing the package, EIOPA aims to promote consistent practices among insurers when applying for the use of internal models and consistent supervisory practices for the application processes related to internal models.
PUBLICATION OF THE OFFICAL TEXT OF THE REGULATION ON KEY INFORMATION DOCUMENTS FOR PRIIPS
On 9 December, the official text of the Regulation on Key Information Documents (KIDs) for packaged retail and insurance-based investment products (PRIIPs) (the PRIIPs Regulation) was published in the Official Journal. The PRIIPs Regulation introduces a standardised pre-contractual product disclosure document across Europe for all PRIIP manufacturers and persons advising on, or selling, PRIIPs. The PRIIPs Regulation sets out the form and content of a KID. KIDs should be clear, concise and not misleading, as well as explain the nature and main features of the products, potential risks, and cooling off periods (if applicable). The KID should be provided to retail investors in a timely manner so that they have an opportunity to review the information before being bound by its terms.
The PRIIPs Regulation came into force on 29 December 2014 – 20 days after publication in the Official Journal. The requirements set out in the PRIIPs Regulation will be applicable in member states from 31 December 2016.
A link to the official text of the PRIIPs Regulation is here.
EIOPA PUBLISHES OPINION ON SOUND PRINCIPLES FOR CRISIS PREVENTION, MANAGEMENT AND RESOLUTION
On 1 December, EIOPA published an Opinion on Sound Principles for Crisis Prevention, Management and Resolution (CPMR) (dated 24 November 2014).
The Opinion is addressed to National Competent Authorities (NCAs) in the insurance sector that are represented on EIOPA's Board of Supervisors. The Opinion was issued as a result of a survey and follow-up report, carried out by EIOPA in 2013, on the CPMR practices of NCAs across Europe. The Opinion details 14 Sound Principles which are to be used by NCAs as a reference and assessment tool when reviewing and formulating their CPMR Frameworks and will ensure greater consistency on a pan-European basis. The sound principles provide guidance on a multitude of issues, among them emergency plans for crisis prevention, recovery and resolution plans, early warning systems and communication strategies.
A link to the Opinion is here.
A link to the press release is here.
FINANCIAL CONDUCT AUTHORITY ANNOUNCES NEW STRATEGIC APPROACH FOR SUPERVISION OF AUTHORISED FIRMS
On 8 December, the Financial Conduct Authority (FCA) announced the results of a review of its strategic and operational objectives. As the FCA has experienced an increase in the scope of its functions, it has determined that it will be necessary to make some major changes to the manner in which it supervises authorised firms. The changes will begin to take effect on 5 January 2015, and will be fully in force by April 2015.
Currently, the FCA has a system in place whereby regulated firms are deemed to fall into one of four classes (C1, C2, C3 or C4). Furthermore, there is a three pillar approach to supervision. Most regulated firms fall into the latter two categories (C3/C4). The C1 and C2 firms receive much closer scrutiny in respect of each of the three pillars of supervision.
The FCA has indicated that it is going to make a change to this classification system and remove the distinction between C3 and C4 firms. The FCA plans to sharpen its focus on the supervision of smaller firms using a more risk-based approach which will have a greater emphasis on the types of activities which firms carry out. Furthermore, the FCA is going to create a new Risk Division by combining the Risk and Supervisory Oversight functions.
The FCA has noted that it expects to continue to introduce changes in the future as trends continue to emerge in respect of the challenges faced by various consumers due to age, debt, and technological innovations.
A link to the FCA's strategy is here .
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.