This is the September 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: the commencement of provisions of the Consumer Insurance Contracts Act 2019, the Central Bank's Business Interruption Insurance Supervisory Framework; the Central Bank's Thematic Inspection of Data Contained in Retail Intermediary Annual Reports; and EIOPA's completed regulation of the Pan-European Personal Pension Product.
Commencement of Provisions of Consumer Insurance Contracts Act 2019
The majority of the provisions of the Consumer Insurance Contracts Act 2019 (the "Act") were commenced on 1 September 2020. As noted in our previous briefing on this legislation this introduces significant changes to consumer contracts entered into or varied after 1 September 2020.
Some significant provisions of the Act, requiring substantial changes to existing practices by insurers, have not been commenced. It is intended that they will be commenced on 1 September 2021. These provisions are:
- Section 8 - replaces the principle of utmost good faith with a requirement for insurers to ask specific questions which must be answered honestly and with reasonable care by consumers;
- Section 9 - introduces proportionate remedies for consumer misrepresentation, distinguishing between innocent, negligent and fraudulent misrepresentation;
- Section 12 -introduces new information requirements for the content of renewal notices including details of premium paid by the consumer (including mid-term adjustments) and a list of claims that have been paid in the previous five years;
- Section 14 (1) to (5) - Updated information at renewal will be required only if it is specifically requested; and
- Section 18 (4) - This amendment restricts the scope of exclusion clauses relating to damage caused by criminal or intentional acts to only exclude claimants who are responsible for the acts or omissions that caused the damage.
Central Bank publishes Business Interruption Insurance Supervisory Framework
The Central Bank has published a Business Interruption Insurance Supervisory Framework made up of four modules running concurrently, which sets out the Bank's expectations of insurers in dealing with COVID-19 business interruption claims. We have prepared a detailed overview of the Framework, which is available here.
The Central Bank set out a number of expectations, to be followed by insurers and other regulated firms. These expectations build on the theme of the Central Bank's prior communication regarding Business Interruption claims through its "Dear CEO" letter in March this year:
- Accountability rests with senior management and the Board of the regulated firm for compliance with all legal and regulatory obligations when dealing with a business interruption policy/COVID-19 claim;
- Regulated firms must comply with legal and regulatory obligations to act honestly, fairly and professionally in the best interests of customers and to adopt a customer first approach to resolution of disputes coming within the Framework;
- The Government's March communication to close business should be treated as a Government order insofar as is relevant to coverage under a policy. The Bank strongly warns against the avoidance of an obligation under a business interruption insurance policy by narrowly interpreting wording in policies. Any attempt to do so will be a "matter of serious and immediate concern";
- Unclear wording in policies must be interpreted in a manner most favourable to the customer where there is any doubt; and
- Customers should be assisted in making claims and in legal actions, including highlighting to the customer any terms and conditions which might assist them.
The Central Bank also expects insurers to cover the legal costs of customer plaintiffs in agreed test case litigation and to take immediate remedial action where the final outcome of such cases indicates a wider beneficial impact for other similarly impacted customers.
A link to the Central Bank press release is available here.
Central Bank Thematic Review of Retail Intermediaries Annual Returns
The Central Bank has published the findings of the Thematic Review: Verification of data submitted in Retail Intermediaries' Annual Returns ("RIAR"), which forms part of a multi-year supervision programme undertaken by the Central Bank to regulate the compliance of firms with annual reporting requirements.
The findings of the review demonstrated an overall improvement in retail intermediaries' compliance with annual return reporting obligations, with the submission of annual returns increasing from 81% to 98% this year. However, the Central Bank did identify some instances of incorrect reporting and called for further improvement of the accuracy of data submitted, increased provision of audited accounts and voluntary revocation by some firms:
Inaccurate reporting of data was confirmed across categories including financial position, gross income/turnover, commission and fee income, and professional indemnity insurance. The Central Bank has noted that most instances of inaccurate reporting were either due to a lack of understanding of reporting requirements or human error. The Central Bank now expects firms to assess their procedures and controls to mitigate against such errors going forward;
Authorised retail intermediaries not actively trading but rather holding an authorization for use in the future "distort the true size of the retail intermediary sector and.run the risk of being in breach of a number of legislative/regulatory requirements." As such, the Central Bank has engaged with the relevant firms, whose authorisations were subsequently either put to use or voluntarily revoked; and
An absence of audited accounts was identified, as many of the firms were unaware of their obligation to produce annual audited accounts. The Central Bank has confirmed that it is engaging with those firms directly and expects them to "take all remedial actions necessary" to bring themselves into compliance with their obligations.
A copy of the Central Bank's industry letter can be read here.
Central Bank of Ireland Respond to Chris MacManus, MEP, on Insurers and Dividends
Director of Insurance Domhnall Cullinan, has responded to Sinn Féin MEP Chris MacManus' request for information on dividend policies of Irish subsidiaries and on explanations provided by firms in respect of legal obligations to pay dividends. This request arises after EIOPA's recent report on the monitoring of dividends distribution, particularly its statement last April that insurers should suspend "all discretionary dividend distributions and share buy backs", which recommendation should be "reviewed as the financial and economic impact of the COVID-19 starts to become clearer."
The Central Bank noted that EIOPA's objective is to ensure that the European financial system continues to function well and support the economy at this time, as well as contributing to a smoother economic recovery, all of which require firms to exercise extreme caution in respect of their capital distributions. The Central Bank confirmed that similar recommendations as to distributions were also issued by the EBA, the ECB, and the European Systemic Risk Board.
The Central Bank itself has taken a similar stance on the matter and has communicated to the sector and firms directly that its objective is to "ensure that the financial system can continue to provide to households and businesses". The Central Bank confirmed that firms must now notify it of any intentions to distribute capital, however, many of the insurers supervised by the Central Bank are part of larger groups, which do not fall within the ambit of the EIOPA's statement on capital redistribution. As such, the Central Bank has stated that certain intragroup dividends may, in limited circumstances, be acceptable "subject to appropriate forward looking solvency, liquidity and operational resilience positions of the firms and adherence to the objectives of EIOPA and the Central Bank as set out above."
Insurance Ireland publishes its 2019-20 Annual Report
Insurance Europe has published its 2019-20 Annual Report, which deals with the impacts of the COVID-19 pandemic, solutions to combat the virus and insuring the risks of possible future pandemics. Other topics covered in the report include climate action, sustainable finance, Solvency II, financial reporting, pensions, the EU's Packaged Retail and Insurance-based Investment Products ("PRIIPs") Regulation, distribution, insurtech, cyber risks and motor insurance.
PRIIPs Key Information Documents ("KIDs")
Chair of Insurance Europe's conduct of business committee, Jérôme Roncoroni, has stated that KIDs often fall short of providing fair, clear and accurate consumer information and that "the focus on creating a standardised PRIIPs KID has led to a concerning level of prescriptiveness that puts uniformity of appearance ahead of accuracy." A series of problems, sequential efforts to address them individually and limited testing carried out on KIDs have led to the flawed format and content of KIDs. Roncoroni welcomes a Commission study to look at the KID in its entirety and in conjunction with legislation covering consumer information to improve how digestible information can be presented to consumers to assist them when making investment decisions.
Chair of the economics and finance committee of Insurance Europe comments that despite demonstrating resilience during the current pandemic, the regulatory framework has some key shortcomings with great consequences. The effects of the pandemic should be used to inform the current Solvency II review so that the framework works as intended. He reiterates that the three main priorities from industry's perspective for the 2020 review of Solvency II include:
- improvement of long-term business so that the industry can continue to provide affordable, long-term savings products and that long-term investment in the European economy continues;
- the simplification of reporting requirements; and
- ensuring a stable and efficient supervisory system through the consistent and proportionate application of Solvency II by national supervisors.
Insurance Europe supports the transition to a carbon-neutral, resource-efficient and more inclusive EU economy and the European Green Deal objective of making the EU a net-zero greenhouse gas emissions economy by 2050. However, for the industry to become greener, the responsibility for sustainability should be shared across all sectors rather than just the financial services sector. The insurance industry has also called for an increase in sustainable assets, investments and projects in which insurers can invest, as well as an increase in sustainability data and environmental, social and governance ("ESG") data for all investments, so that investors can appropriately manage their sustainability risks.
See annual report here.
Central Bank of Ireland concludes its inquiry into two former directors of Quinn Inisurance Limited (Under Administration)
The Central Bank has published a statement announcing the conclusion of its five-year inquiry into two former directors of Quinn Insurance Limited (Under Administration) ("QIL"), Liam McCaffrey and Kevin Lunney.
The CBI reached a settlement agreement under its Administrative Sanctions Procedure with Liam Mc Caffrey late 2019 and Kevin Lunney in July 2020 regarding their suspected participation in breaches relating to the soundness and adequacy of QIL's administrative and accounting procedures and internal control mechanisms during the period 6 October 2005 to 9 July 2008, where QIL subsidiaries' assets backed QIL's technical reserves while also providing guarantees in respect of finance facilities extended to Quinn Group Limited. The settlement agreement brings the inquiry into the two former directors to a close. The Central Bank has published a statement of conclusion.
See press release and link to the Central Bank statement here.
EIOPA finalises the regulation of the Pan-European Personal Pension Product ("PEPP")
The PEPP is a voluntary pension product that complements existing national and private pension schemes, offering better and more competitive pension options to EU residents. EIOPA's proposals aim to encourage increased participation in retirement financing and the creation of future efficient savings products and pension schemes.
In order to ensure that savers make well-informed decisions before entering into binding retirement financing plans, EIOPA has developed two mandatory consumer information documents: the PEPP Key Information Document ("PEPP KID") and PEPP Benefit Statement, both of which provide an analysis of the PEPP's risk-reward profiles. The PEPP KID provides savers with comparative information so they can balance the riskiness of different PEPP investment options against expected future benefits. EIOPA has also committed to the online distribution of consumer information to ensure PEPP opportunities are accessible and attractive to savers.
EIOPA have noted that the success of PEPP strongly depends on effective supervision and cooperation between national competent authorities. Regular reporting and monitoring of both the PEPP products and market at a local and European level is necessary in order to meet EIOPA's objectives of designing the PEPP as a simple, safe and reliable retirement savings option for the European citizens and to provide a powerful tool to close the pension savings gap.
A link to EIOPA's press release is here.
Insurance Ireland contributes to the European Commission's Inception Impact Assessment on Solvency II
In July 2020, the European Commission ("EC") launched an Inception Impact Assessment regarding the upcoming review of Solvency II. Insurance Ireland ("II") recently submitted its comments on the assessment, urging further efforts to achieve "an integrated, innovative and sustainable EU single market." II highlighted the following points in line with its identified objectives:
Establish efficient governance for cross-border supervision: II expressed its appreciation of the EC's efforts to increase regulatory and supervisory convergence and strongly encouraged amendments to Solvency II, which would work to close the gaps in the enforcement of rules across the EU and prevent supervisory and regulatory arbitrage. II strongly encourages national supervisory authorities to take a collaborative approach to the governance of cross-border supervision.
Review of capital requirements: II supports the EC's proposal to review capital requirements, as it believes the current calibration of essential factors is both excessive and overly cautious. II believes that the miscalibration of essential factors, which underestimates (re)insurers' own funds by more than ?100 billion, is exposing (re)insurers to "systematic pro-cyclicality" and discouraging long-term investment.
Proportionate application of Solvency II: II agrees with EIOPA's assessment of the proportionate application of Solvency II as being "highly inconsistent" across the EU. II is in favour of an EU-wide system rather than leaving it to member state discretion, which would facilitate a more proportionate and uniform application of the framework across the EU.
Introduction of Insurance Guarantee Schemes ("IGS") and Recovery & Resolution: II welcomes this EC initiative to include IGS and Recovery & Resolution in the Solvency II review. II believes that, while the harmonization of such regimes is usually based on the host Member State principle, the application of consistent criteria across the EU is preferred.
Insurance Ireland's recent interaction with the European Commission in relation to the single market
Insurance Ireland ("II") has recently responded to the European Commission's ("EC") public consultation on the Capital Markets Union ("CMU") Action Plan to increase efforts to integrate the single market. II supports the EC's initiative to strengthen the economy and stimulate investment, however, it has warned against repeating past mistakes of applying a uniform approach across sectors and jurisdictions with different needs. As the representative body of the Irish insurance industry, II has a strong interest in the CMU action plan and has responded to the EC with the following points:
Collaborative approach to insurance supervision: II distinguishes the insurance industry from the banking industry. It calls for a collaborative approach to insurance supervision (rather than a single supervisor), and for National Competent Authorities ("NCAs") to implement complementary regulatory rules specific to their markets rather than a one-size-fits-all approach across the EU. This requires an increase in information exchange and II hopes that EIOPA will encourage NCAs to apply rules in a consistent manner and to cooperate with one another.
Regulatory certainty and freedom of capital: II is critical of EIOPA policies that empower NCAs to prohibit the provision of dividends and similar payments. II claims that for the CMU to succeed, there should be "free movement of capital and regulatory certainty", therefore prohibiting such payments, particularly cross-border transactions, could undermine "the reliability of the EU regulatory framework.
Call to embrace digitalisation: as the economy is undergoing a digital transformation, II believes that the CMU should follow suit. II has expressed the benefits of using technology and innovation to improve and enhance market access for consumers, as well as increasing cyber security against modern technological risks. II believes that the creation of a European Single Access Point would increase the exchange of data and the provision of digital services between Member States.
In addition to the foregoing, II has urged the EC to avoid applying standardized requirements across different financial services sectors, such as the Packaged Retail and Insurance Investment Products Regulation ("PRIIP"), a pan-European standardised requirement that did not operate smoothly across different jurisdictions. Although II is strongly in favour of an overall improvement of consumer protection across the EU, it warns against applying a "one-size-fits-all" approach.
Insurance Europe calls on the European Commission for increased climate change adaptation
Insurance Europe has published its response to the European Commission's ("EC") consultation on the EU's strategy for adaptation to climate change. Insurance Europe supports the EC's aim of adopting a new strategy. It has called for increased efforts to combat climate change as the current mitigation efforts alone "are not enough to address the economic, social and environmental implications of a changing climate." Insurance Europe has underlined the EU's important role in coordinating the adaptation efforts of each Member State and has recognised its own important role in identifying and pricing material climate risks.
The EC's 2013 Adaptation Strategy acted as a catalyst to combating climate change; however, Insurance Europe identified several shortcomings, such as a focus on mitigation efforts rather than looking forward to the future impacts of climate change, and an overall lack of awareness in Member States of the potential climate related implications. Mitigation efforts are no longer sufficient and Insurance Europe has called for a more proactive approach to be taken in relation to prevention, risk reduction and resilience building.
Insurance Europe has encouraged the EC share coherent, high quality data on adaptation measures. Such sharing of information can assist Member States in developing solutions that work for their markets and conditions at a regional and local level. Insurance Europe argues that a singular approach is not appropriate for the battle against climate change, as the circumstances in relation to global warming in different EU member states can vary.
Insurance Europe has called on the EU to spearhead and coordinate the efforts of each Member State and encourage public authorities to raise awareness of the actual and potential consequences of climate change, the enforcement of adaptation legislation and the need to move towards preventative behaviour, such as constructing flood defences in high-risk zones for storms and earthquakes, etc. In terms of Insurance Europe's own role in identifying and pricing climate risks, it has called for the provision of better data on how such risks can materialise and affect the economy.
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.