Insurance Industry Regulatory Compliance Newsletters

EIOPA issues the first report on the application of the Insurance Distribution Directive (IDD)

On the 6 January 2022, the European Insurance and Occupational Pensions Authority (EIOPA) published its first report on the application of the IDD.

This report mainly examines:

Any changes in the insurance intermediaries’ market structure;

Any changes in the patterns of cross-border activity;

The improvement of quality of advice and selling methods and the impact of the IDD on insurance intermediaries which are small and medium-sized enterprises; and

Whether Competent Authorities are sufficiently empowered and have adequate resources to carry out their tasks.

This report may be accessed through here.

A public consultation on draft guidelines on the Insurance Distribution Directive (IDD)

EIOPA launched, on the April 2022, a public consultation on draft guidelines on integrating the customer’s sustainability preferences in the suitability assessment under the IDD. The guidelines stem from the Commission Delegated Regulation (EU) 2021/1257 which will come into force in August 2022 and aim at:

Promoting a coherent application of the Delegated regulation by insurance undertakings and insurance intermediaries across Member States and National Competent Authorities (NCAs);

Restricting the potential for the mis-selling of insurance products with regard to the sustainability preferences of consumers; and

Promoting a more convergent approach by Competent Authorities in the supervision of insurance undertakings and insurance intermediaries.

Response on the call for advice on the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation

Insurance Europe published its response to a call for advice from the European Supervisory Authorities (ESAs) on the European Commission’s upcoming review of the PRIIPs Regulation.

The review of the PRIIPs framework is to aim for results in an overall simplification to improve the clarity and usefulness of the Key Information Document (KID). Specifically, Insurance Europe made the following proposals:

The PRIIPs KID should prominently display the existence or lack of insurance covers, guarantees or other capital protection mechanisms, and allow adequate space to explain the benefits that insurance products offer;

Certain immediate annuities and funeral products – that are wrongly captured by the Level 1 definition – should be excluded from the PRIIPs scope, and the current exemptions for pension products should be retained. This is a necessary condition for providing meaningful disclosures to consumers;

The number of figures in the PRIIPs KID should be reduced. For example, the KID includes several figures on costs, charges and intermediate time periods that are not appropriate for long-term products;

The requirement to provide the PRIIPs KID on paper by default is outdated. Pre-contractual documents should be available in an electronic format by default, but on paper on request. The use of layering and cross-referencing through hyperlinks should also be promoted;

A significant number of the PRIIPs sold by insurers are multi-option products (MOPs), which provide consumers with a wider choice. The current approach for MOPs gives product manufacturers the necessary flexibility and must be retained;

Clarity on the fixed information is important, but some flexibility in the wording of the narratives would be helpful; and

Any review of the PRIIPs framework should not be rushed. Extensive technical and consumer testing in all countries and an adequate timeline for stakeholder consultation are key. To ensure consumers receive high quality information, it is vital to allow sufficient time for the implementation of any new provision.

Amendments on the Insurance Rules and Insurance Distribution Rules

On the 18 March 2022, the MFSA issued a circular with the amendments to Chapter 2 and Chapter 8 on the Insurance Rules and Chapter 7 and Chapter 8 of the Insurance Distribution Rules. The amendments relate to:

Chapter 2 of Part A of the insurance Rules on Fit and Proper Criteria, Notification and Assessment of persons who effectively run an authorised undertaking, or persons having other key functions within the authorised undertaking;

Chapter 8 of Part B of the Insurance Rules on Financial Statements and Supervisory Reporting Requirements that an authorised undertaking shall submit and adhere to;

Chapter 7 in Part B of the Insurance Distribution Rules on Continuous Professional Development to be followed by the relevant person or the relevant employees; and,

Chapter 8 in Part B of the Insurance Distribution Rules on Monies held in a Fiduciary Capacity by the enrolled employee.

The full detail of the amendments can be accessed through this link. These amendments have come into effect on the same day the circular was published. However, with respect to the written declarations which are required to be submitted in line with the requirements of Chapter 7 of the Insurance Distribution Rules, the amendments will be applicable for training attended in 2022. Therefore, the written declaration submitted in January 2023 in relation to the training attended in 2022 should include the new requirements.

Ultimate forward rate (UFR) for 2023

On the 5 April 2022 EIOPA published the calculation of the Ultimate Forward Rate (UFR) for 2023. As of 1 January 2023, the applicable UFR for the Euro will remain unchanged at 3.45%.

The details of the calculation of the UFR for 2023 are available in the report for which can be accessed through this link.

FSB publishes papers on funding and interconnectedness practices to aid resolution planning for insurers

The Financial Stability Board (FSB) published two papers on the 10 January 2022 on practices for funding in resolution; and on internal financial and operational interconnectedness designed to facilitate effective resolution planning for insurers.

The practises paper on Resolution Funding for Insurers discusses the different sources of resolution funding, including privately funded policyholder protection schemes and standalone resolution funds, and how they interact with each other when both exist. The paper also discusses temporary funding sources for resolution funds and mechanisms in place to recover funds used in resolution.

The practices paper on Internal Interconnectedness in Resolution Planning for Insurers explores ways to map and assess financial and operational interconnectedness in insurance companies. Individual insurance entities within a group or conglomerate are often linked with other entities within the group through financial exposures and receive operational services from them. These linkages may be critical for their financial and operational continuity and may, therefore, have an impact on the design and choice of the preferred resolution strategy.

The FSB will be hosting a workshop on this matter with stakeholders in Q2 2022.

EIOPA’s work programme for 2022-2024

On 28 February 2022, EIOPA published its work programme for 2022 to 2024. Amongst other areas the top priorities include:

• Integrating sustainable finance considerations across all areas of work, including promotion of sustainability disclosures and a sustainable conduct of business framework and addressing protection gaps;
• Supporting the market and supervisory community through digital transformation, including the preparation of Regulatory and Implementing Technical Standards from the digital operational resilience act (DORA), and continuous implementation of the cyber underwriting strategy;
• Enhancing the quality and effectiveness of supervision, including the provision of training on Solvency II to national authorities in cooperation with the European Commission’s Directorate General for Structural Reform Support (DG REFORM), the definition of Union-wide strategic priorities;
• Ensuring technically sound prudential and conduct of business policy, including follow-up to the Solvency II review and the provision of technical advice on the scheduled review of the IORP II Directive;
• Identifying, assessing, monitoring and reporting on risks to the financial stability and conduct of business and promoting preventative policies and mitigating actions, including the provision of timely and accurate financial stability analyses and risk assessments; and
• Providing effective recruitment, management and development of EIOPA’s human capital.

Full report may be accessed through this link.

Third paper on methodological principles of insurance stress testing climate risks

On 27 January 2022, the EIOPA published its third paper in a series of papers on the methodological principles of insurance stress testing. The methodological paper focuses on the climate change component and is a further step in enhancing EIOPA’s stress testing framework.

In particular, the paper sets out methodological principles that can be used to design bottom-up stress test exercises that aim to assess the vulnerability of insurers to climate risks. Although the emergence of climate risks is relatively recent compared to other insurance-specific and financial risks, incorporating them has rapidly become a priority for policymakers and supervisors alike.

Hence, any climate change stress test at this stage should be considered as part of a learning curve for industry and supervisors that is bound to evolve in the future. Already now, climate stress testing is an important tool to:

• raise awareness of climate-related risks;
• understand how insurers assess such risks;
• enhance risk management capabilities; and
• evaluate potential spill over effects to other parts of the financial sector and to the real economy.

Amid the increasing consideration given to climate risks by the insurance industry and by supervisors at a European and global level, and in the absence of a commonly adopted climate stress testing framework for the insurance sector in the European Union, the paper presents conceptual approaches to the assessment of the climate risks for insurers under adverse scenarios.

The full paper can be accessed through here.

The risk dashboard presents EIOPA’s quarterly risk assessment of the European Union insurance industry

The key observations EIOPA identified in the risk assessment are based on the Solvency II data from the third quarter of 2021. The results show that insurers’ exposures to macro risks remain at a high level while all other risk categories, such as insurance as well as profitability and solvency risks stay at medium levels.

With regards to macro risks, inflation forecasts have been revised upwards and the 10-year swap rates have increased across main currencies. Unemployment rates are still elevated. Financial markets stay broadly stable. Monetary policies remain accommodative although asset purchases continue at a slower pace and are expected to decelerate further.

After six quarters of increasing trend, solvency position for groups decreased, but still remained above year end 2020 level. SCR ratio for solo life undertakings slightly improved. Profitability indicators reported a slight deterioration, with a rise in the net combined ratio for non-life business.

Interlinkages and imbalances risks remain at a medium level. Insurance groups’ exposure to banks decreased, while the median investments in insurances and other financial institutions rose slightly. Insurance risks remain at a medium level with year-on-year premium growth for life insurance showing a slight deterioration.

Environmental, social and governance (ESG) related risks are at a medium level. The catastrophe loss ratio decreased slightly compared to the previous quarter, albeit it may not yet reflect the potential negative impact of the European floods events in summer 2021.

Digitalisation and cyber risks are at medium level. The materiality of these risks for insurers as assessed by supervisors remains contained. The frequency of cyber incidents impacting all sectors of activity, as measured by available data, decreased since the same quarter of last year, but it is still high compared to the long term average. The indicators in this risk category are exploratory and will be further developed as new data becomes available.

The full risk dashboard can be accessed through this link.

The pandemic has fast-forwarded digitalisation, raising opportunities but also risks for consumers

On the 24 January 2022 EIOPA published its Consumer Trends Report which identifies an acceleration in digitalisation as a clear trend emerging from the COVID-19 pandemic.

Amidst the continued shocks caused by the global pandemic, insurers, intermediaries, and pension funds have nonetheless continued to serve consumers in an efficient manner, showing overall strong operational resilience. However, a number of new challenges emerged linked to an increase in natural catastrophe risks.

EIOPA identified a number of key issues in the consumer trends which mainly include:

• Existing concerns around unit-linked products persist due to product complexity resulting in a lack of clarity around costs and benefits. Reliably putting consumer outcomes at the heart of product design, distribution and monitoring processes is critical for tackling value for money issues and possible mis-selling and to overall improve consumer’s financial health;
• More and more products being marketed as ‘sustainable’ have been observed, raising concerns over the potential for so-called ‘greenwashing’, but also showing a sector moving to meet consumers’ ESG preferences, contributing thereby to a more sustainable recovery;
• While digital innovation has improved efficiency and user-friendliness of claims handling particularly for low value and high volume claims, issues persists in some markets;
• Emerging risks have raised new concerns around exclusions and possible increases in protection gaps. A lack of clarity in terms and conditions and limited consumer understanding of exclusions can be detrimental for consumers. In addition, an observed growth in uninsurable risks widens protection gaps; and
• Greater use of price optimization practices, relying on improved artificial intelligence techniques and on more consumer data being available, can lead to unfair treatment and possible financial exclusion, and increase the risk of indirect discrimination.

The full report can be accessed through this link.

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