EIOPA: Supervisory statement on inflation
On 22 December 2022, EIOPA published a supervisory statement (the "Supervisory Statement") addressed to national competent authorities which appertains to the higher rates of inflation throughout 2022 and its impact on insurance and reinsurance undertakings.
The Supervisory Statement sets out EIOPA's supervisory expectations in the following areas:
1. Impact on undertakings' technical provisions
Insurance and reinsurance undertakings are expected to:
- consider inflation depending on the nature, scale and complexity of the risks, so that the level of technical provisions remains appropriate; and
- assess whether their inflation expectations in the technical provisions are still realistic given current market circumstances.
2. Impact on investments
Undertakings using alternative valuation methods for investments exposed to inflation should assess whether the valuation methods and their parameters should be adjusted to reflect the current inflation level.
3. Impact on solvency capital requirement (SCR)
Undertakings using internal models to calculate the SCR should assess:
- the need to adjust any inflation-related parameters of their internal model to ensure it still provides the level of protection required;
- whether the SCR calculation does not significantly deviate from their risk profile.
EIOPA expects national competent authorities to monitor undertakings' assessment of the above impacts and any measures taken as a follow-up.
The Supervisory Statement can be accessed here.
Council of the EU: text on its approach on the proposed Insurance Recovery and Resolution Directive (IRRD)
By way of background, the Commission adopted a proposal for an IRRD in September 2021, as part of a comprehensive review package of Solvency II rules. The proposal sought to harmonise national laws on recovery and resolution of insurance and reinsurance undertakings, similar to those for the banking sector, to ensure that insurers and reinsurers in the EU keep investing and supporting the political priorities of the EU.
On 16 December 2022, the Council of the EU published the text of the Council's general approach on the proposed IRRD. In its position, the Council welcomes the value of introducing a harmonised minimum European framework for the recovery and resolution of insurance undertakings, provided that this framework is proportionate, adapted to the insurance sector and contributes adequately to the protection of policyholders and the maintenance of financial stability in the European Union's single market.
The Council intends to enter into negotiations with the European Parliament in 2023 to reach political agreement on the final text.
This can be accessed here.
EIOPA: third annual report on sanctions
On 20 December 2022, EIOPA published its third annual report on the administrative sanctions and other measures imposed throughout 2021 by national competent authorities under the Insurance Distribution Directive (IDD).
The report provides an overview of the sanctions issued in 2021, as well as information on the sanctions and the provisions of the IDD that were breached. The findings highlighted the following:
1. The vast majority of sanctions were for breaches of the professional and organisational requirements in Article 10 of the IDD.
2. The number of breaches of the rules concerning:
- information requirements and conduct of business rules have increased; and
- additional requirements for insurance-based investments products have decreased.
3. The most frequently used sanctioning measures were:
- administrative pecuniary sanctions, and
- the withdrawal of the registration of the intermediary.
This annual report can be accessed here.
?MFSA: Circular on the proposed changes to the Companies Act (Cell Companies Carrying on Business of Insurance) Regulations
On 22 December 2022, the MFSA issued a circular on the Proposed Changes to the Companies Act (Cell Companies Carrying on Business of Insurance) Regulations (Subsidiary Legislation 386.10) (the "PCC Regulations").
Regulation 15 of the PCC Regulations currently provides for the possibility of non-recourse, where the cell is carrying out exclusively business of affiliated (captive) insurance or business of reinsurance. However, the MFSA intends to review the PCC Regulations and remove the provisions of regulation 15, thereby eliminating the possibility of non-recourse to the core.
The MFSA has indicated that it expects that all cell applications are to include recourse to the non- cellular assets of the PCC and are to be adequately capitalised at the level of their notional solvency capital requirements as from the date of the Circular.
The MFSA will launch a consultation process in due course to effect these changes.
This Circular can be accessed here.
EIOPA: speech on AI governance
On 15 December 2022, EIOPA published a speech given by Petra Hielkema, EIOPA Chair, on artificial intelligence (AI) governance. In her speech, Ms. Hielkema addressed:
- Opportunities and risks of the use of AI
The benefits of the use of AI within the sector include prediction accuracy, automation, efficiency and speed. However, AI also brings relevant challenges and risks for consumers, including the issues of explainability of AI systems, AI fairness and how to address algorithmic biases. - AI governance and regulation
AI has unique characteristics which should be incorporated into existing governance frameworks, especially when there is a potential high impact on consumers and firms. The creation of ethical and trustworthy AI systems requires a combination of:
- governance measures such as explainability, human oversight and record keeping;
- existing legislation as a basis of AI governance framework; and
- an extensive approach towards the ethical use of AI which goes beyond the legal requirements.
This speech can be accessed here.
Financial Stability Board: monitoring systematic risk in the insurance sector
On 9 December 2022, the Financial Stability Board (FSB) published a press release on monitoring systemic risk in the insurance sector. Rather than continuing its annual identification of global systemically important insurers (G-SIIs), the FSB will instead use assessments available through the International Association of Insurance Supervisors' holistic framework for the assessment and mitigation of systemic risk in the insurance sector to inform its considerations of systemic risk in the insurance sector.
The FSB may, if it deems appropriate, publicly express its views on whether any individual insurer is systemically important in the global context and the appropriate application of the holistic framework policy measures that it considers necessary to address such systemic importance.
This press release can be accessed here.
EIOPA: dashboard on insurance protection gap for natural catastrophes
On 6 December 2022, EIOPA launched its dashboard on the insurance protection gap for natural catastrophes. EIOPA is particularly concerned about the affordability and insurability of natural catastrophes insurance coverage in light of climate change. EIOPA identified an insurance protection gap, owing to the fact that only a quarter of the total losses caused by extreme weather and climate-related events across Europe are insured.
EIOPA aims to monitor the risks related to the insurance protection gap on the Dashboard by consolidating data on economic and insured losses, risk estimations as well as insurance coverage from EEA member states.
This Dashboard can be accessed here.
Malta and PCCs - What does the future hold?
A Protected Cell Company is a single legal entity that acts as an insurance vehicle consisting of two essential parts - the 'Core', being the non-cellular part, and the 'Cell/s'. The core comprises the core assets which include the company's core share capital, investments, assets and liabilities. The core sits as the Company's backbone for most of the PCC's business transactions.
Proposed amendments to the MFSA Insurance Distribution Rules
In a webinar held on the 18th January 2023, the Malta Financial Services Authority launched its consultation process to amend the Insurance Distribution Rules.
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