INSURANCE QUARTERLY LEGAL AND REGULATORY UPDATE
(i) Central Bank publishes Guidance on the Approval and Supervision of Special Purpose Vehicles under Solvency II
On 4 April 2018, the Central Bank of Ireland (the "Central Bank") published Guidance on the Approval and Supervision of Special Purpose Vehicles ("SPVs") under Solvency II (the "Guidance").
The European Union (Insurance and Reinsurance) Regulations 2015 transposed the Solvency II Directive into Irish law. Commission Delegated Regulation 2015/35 and Commission Implementing Regulation 201/462 set out specific rules for SPVs under Solvency II related to authorisation, system of governance, supervisory reporting and solvency requirements.
The Guidance intends to assist both single and multi-arrangement SPVs comply with the requirements under the Solvency II framework. To this end, the Guidance provides detail of the expectations of the Central Bank in respect of the compliance of SPVs with the Solvency II legislation set out above.
The Guidance is available here.
(ii) European Commission publishes report on the supervision of group (re)insurance undertakings and the transitional period for IORPs
On 5 April 2018, the European Commission published a report on the application of Solvency II as regards the supervision of group insurance and reinsurance undertakings, and the transitional period for institutions for occupational retirement provision business ("IORPs"). The Commission is required under Solvency II to report to the European Parliament and the Council of the European Union on both of these topics, and this report fulfils these two (unrelated) requirements in a single document.
Regarding the group supervision regime, the report concluded that only one area required legislative amendment at this stage. The report identified divergences in the supervision and approval of group internal models between Member States and that the European Insurance and Occupational Pensions Authority ("EIOPA") requires enhanced powers to bring about convergence. However, the report noted that the introduction of a legislative proposal to amend Solvency II so as to mitigate this issue has already been introduced as part of the Commission's proposals to reform the European System of Financial Supervision. The proposal, gives EIOPA a greater role in ensuring supervisor convergence in the area of internal model applications and information sharing.
Regarding the transition period for IORPs operated by life insurers, the report concluded that the Commission may decide to extend it, however this decision would be made nearer the end of the current transition period (end 2022).
The report is available here.
(iii) Central Bank issues Dear CEO letter on Solvency II Regulatory Reporting
On 16 April 2018, the Central Bank issued a Dear CEO letter addressing regulatory reporting under Solvency II by (re)insurance undertakings. The letter sets out the concerns of the Central Bank as regards the accuracy of submissions, following their analysis of reported data by insurance firms and a thematic onsite inspection into the reporting process.
The letter noted that firms are obliged to provide complete and accurate information to the Central Bank and emphasised the importance of implementing a robust regulatory reporting framework. The letter went on to set out some of the reasons that undertakings are not Solvency II complaint, which include:
- Some undertakings failed to meet the basic requirement of having a Supervisory Reporting policy in place;
- Some Boards are signing off on only some of the annual QRTs;
- There has been minimal oversight or active engagement by the Risk and Compliance function of the regulatory reporting process;
- Key control points identified in the regulatory reporting process are not being set out in detailed process documents and evidence of control checks are not always recorded. Such documentation is important because directors must attest to the accuracy of the annual returns, and if there is a lack of evidence of the control checks working as intended the directors cannot use the assurance process as the basis for attesting to the accuracy of reporting; and
- Error management, particularly processes for identifying repeat errors, requires improvement.
Examples of good and poor practices are set out in the Appendix to the letter.
(iv) EIOPA publishes updated Solvency II Q&A
During the period 1 April 2018 to 30 June 2018, EIOPA published updated Questions and Answers ("Q&As") on the following:
- (European Union) No 2015-2450 templates for the submission of information to the supervisory authorities;
- (European Union) No 2015-2011 with regard to the lists of regional governments and local authorities;
- (European Union) No 2015-2451 with regard to internal models;
- (European Union) No 2015-2452 with regard to the procedures, formats and templates of the solvency and financial condition report;
- (European Union) 2016-97 on insurance distribution;
- Answers to Questions on Commission Delegated Regulation (European Union) 2015/35 supplementing Directive 2009/138;
- Answers to questions on Commission Delegated Regulation (European Union) 2015/35 Decisions;
- Guidelines on contract boundaries;
- Guidelines on application of outwards reinsurance;
- Answers to Questions on Guidelines on application of outwards reinsurance;
- Answers to Questions on Guidelines on contract boundaries;
- Answers to Questions on Guidelines on group solvency;
- Answers to Questions on Guidelines on Health Catastrophe Risk Sub-Module;
- Answers to Questions on Guidelines on own risk and solvency assessment;
- Answers to Questions on Guidelines on reporting and public disclosure;
- Answers to Questions on Directive 2009-138; and
- Answers to Questions on Risk-free Rate Technical Information such as VA Calculation; General Questions, Financial Market data, Extrapolation, Credit and currency adjustments.
The Q&A may be accessed here.
(v) Commission Implementing Regulations on mapping credit assessments of external credit assessment institutions under Solvency II published in the Official Journal of the European Union
On 25 April 2018, two Commission Implementing Regulations were published in the Official Journal of the European Union:
- The Commission Implementing Regulation (EU) 2018/634 will amend Implementing Regulation (EU) 2016/1799 by updating the mapping tables which specify the correspondence between the credit risk assessments of external credit assessment institutions ("ECAIs") and the credit quality steps set out in Article 136(1) of the Capital Requirements Regulation. It will come into force on 15 May 2018 and is available here; and
- The Commission Implementing Regulation (EU) 2018/633 will amend Implementing Regulation (EU) 2016/1800 which lays down implementing technical standards ("ITS") relating to the allocation of ECAIs to an objective scale of credit quality steps in accordance with Article 109(a)(1) of the Solvency II Directive and updates the Annex by allocating the credit assessments of five newly registered or certified ECAIs the scale of credit quality steps and removed the credit assessment of one of the ECAIs which was de-registered. It too will come into force on the 15 May 2018 and is available here.
(vi) The European Working Group issues updated Solvency II Tripartite Data Exchange template
On 7 May 2018, the European Working Group ("EWG") issued a new standard Solvency II Tripartite Data Exchange template (the "TPT V4.0") to facilitate the exchange of information between Insurers and Asset Managers.
The first version of the template TPT V3, was formally issued in October 2015 and has been widely adopted across Europe with a review of TPT V3 completed in April.
The accompanying press release and the new version TPT V4.0 can be accessed here.
(vii) The European Commission requests information from EIOPA on long-term insurance and reinsurance activities under Solvency II
On 17 May 2018, the European Commission published a letter it sent to EIOPA requesting information on the impact of Solvency II on long-term insurance and reinsurance activities. The Solvency II Directive sets out two review clauses for 2020 covering the standard formula for capital requirements and the long-term guarantee ("LGTs") measures.
EIOPA submitted annual reports on the LGT measures to the European Commission in 2016 and 2017. In addition to the information already provided the European Commission identified other areas it would like further information on, to help it assess the appropriateness of the Solvency II Directive by 2020. Its request for information covers the use of LTG measures by insurance and reinsurance undertakings, the characteristics and valuation of insurers' liabilities and evidence on insurers' behaviour as long-term investors.
In the letter the European Commission invites EIOPA to provide the information requested by 16 December 2019 and asks EIOPA to share its timetable for the work and will follow up with a call for advice closer to the 1 January 2021 review deadline.
(viii) ECB publishes opinion on a proposal for a Regulation amending the ESMA Regulation and on a proposal for a Directive amending Solvency II and MiFID II
On 17 May 2018, the European Central Bank ("ECB") published an opinion, dated 11 May 2018, on a proposed Regulation amending the ESMA Regulation and related legal acts and a proposed Directive amending Solvency II and MiFID II (the "Opinion"). The proposed legislation forms part of a package of proposals set out by the European Commission to reform the European System of Financial Supervision.
The ECB expressed its support of the proposed Regulation's aim to contribute to the development of the Capital Markets Union ("CMU"), noting the single supervision of at least specific market segments needs to be envisaged in order to ensure consistent enforcement across the European Union. Furthermore, the ECB recommended that consideration be given to the role of the ECB as supervisor of credit institutions under the Single Supervisory Mechanism Regulation.
The ECB went on to make a number of specific observations regarding the role of the ECB in central counterparty ("CCP") matters, including support of the revision of ESMA's governance structure and the inclusion of an ECB representative as a permanent non-voting member of ESMA's Board of Supervisors.
The Opinion is available here.
ESMA advises that the opinion be read in conjunction with the ECB Opinion of 2 March 2018 on the proposed Regulation amending the ESRB Regulation and the ECB Opinion of 11 April 2018 on the proposed Regulation amending the EBA Regulation, available here and here respectively.
(ix) Implementing Regulation on technical information for calculation of technical provisions and basic own funds for the second quarter of 2018 reporting under Solvency II published in Official Journal of the European Union
On 18 May 2018, the Commission Implementing Regulation that lays down technical information for the calculation of technical provisions and basic own funds for reporting for the second quarter of 2018 under the Solvency II Directive was published in the Official Journal of the European Union.
The European Commission adopted the Implementing Regulation on 4 May 2018 which entered into force on 19 May 2018 and applies from 31 March 2018.
A copy of the Commission Implementing Regulation (EU) 2018/730 can be viewed here.
(x) EIOPA publish report regarding comparative study on market and credit risk modelling under Solvency II
On 22 May 2018, EIOPA published a report detailing the findings of its first comparative study on market and credit risk modelling.
The comparative study of market and credit risk in internal models was undertaken between 2016 and 2017. The aim of the study was to develop supervisory tools and foster common supervisory practices. This report summarises the key findings from this study and sets out the supervisory initiatives being taken following the conclusions of this study.
The overall results show significant variations in asset model outputs. This may be attributable to model specificities of which national competent authorities are already aware, however it may also indicate a certain need for further supervisory scrutiny. EIOPA notes that this study is a first step in an ongoing process of monitoring and comparing internal market and credit risk models, and to this end EIOPA has decided to perform regular annual studies to further develop supervisory tools and foster consistency of supervisory approaches.
The report can be accessed here.
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