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EY Malta is delighted to share another quarterly Insurance Industry Regulatory Compliance Newsletters. In this newsletter, we will be providing a snapshot of publications, updates to legislation and consultations issued in the first quarter of 2023 around the insurance regulatory compliance framework.
High returns and market rebound
On the 17th January 2023, the European Insurance and Occupational Pensions Authority (EIOPA) published its Costs and Past Performance Report, which is aimed to improve transparency in the sector, facilitate comparisons between similar products and ultimately enhance the EU’s Capital Markets Union. The report includes an overview of the returns and costs of insurance and pension products in 2021 and an analysis on the performance of cross-border products. EIOPAs analysis included 1000 insurance-based investment products (IBIPs), and the report shows that these products benefitted from the post-pandemic market recovery and offered positive returns to investors in 2021. This year’s report also and found that they operate with higher cost levels likely linked to higher distribution costs.
Strengthening oversight of third country governance arrangements
EIOPA published on the 3rd February 2023 a Supervisory Statement to strengthen the supervision and monitoring of insurance undertakings’ and intermediaries’ activities when using governance arrangements in third countries.
With EIOPA emphasizing that EU-based undertakings or intermediaries should not resemble empty-shell companies that do not have an appropriate level of corporate substance within the EU, EIOPA has decided to clarify its supervisory expectations.
To improve supervisory oversight and to ensure that similar risks are treated in a similar way regardless of the legal form of the governance arrangements, the supervisory expectations laid out in the statement follow the principle of substance over form.
EIOPA and National Competent Authorities expect that:
- undertakings and intermediaries using third country branches retain an appropriate level of corporate substance within the European Economic Area (EEA), proportionate to the nature, scale, and complexity of their business;
- third country branches serve primarily the markets in which they are established and that third country branches with the sole objective of supporting EU-based undertakings and intermediaries should be avoided;
- undertakings and intermediaries should not be disproportionately dependent on their third-country arrangements for activities in the EEA;
- undertakings appropriately oversee regulated functions and are in a position to take full responsibility for effective decision making and risk management;
- regulated functions and activities are not structured or conducted in a way that impairs the ability of supervisors to monitor compliance; and
- undertakings and intermediaries considering or operating such third-country arrangements demonstrate to supervisors that the structuring of their activities can safeguard the ability of the supervisory authority to undertake proper supervision.
EIOPA and National Competent Authorities will closely monitor market developments regarding the use of third country governance arrangements following the publication of the Supervisory Statement.
Impact Underwriting: The use of climate-related adaptation measures in non-life underwriting practices
On the 6th February 2023, EIOPA published a report on insurers’ inclusion of adaptation measures to climate change in their non-life underwriting practices. The report is the outcome of a pilot exercise on impact underwriting that EIOPA conducted with 31 volunteering insurance undertakings from 14 European countries in 2022.
Currently 23% of the total losses caused by extreme weather and climate-related events across Europe are insured, leading to a substantial insurance protection gap, which is expected to become even wider given the current climate projections.
The report assesses the industry’s current underwriting practices regarding climate change adaptation and their prudential treatment under Solvency II. Therefore, it evaluates whether the prudential framework introduces any obstacles which could hinder the widespread use of adaptation measures in non-life insurance products.
While progress is being made in how insurance undertakings are adapting their non-life underwriting practices to climate change, the report shows that the EU insurance market overall appears to be at a relatively early stage. EIOPA sees further room for improvement especially in terms of standardizing the implementation of climate-related adaptation measures in insurance contracts.
The Impact Underwriting report can be accessed here.
Changes to the minimum amount of professional indemnity insurance cover and financial capacity intermediaries need under IDD
EIOPA launched a public consultation on the 9th February 2023 on its draft amendments to the Regulatory Technical Standards (RTS) adapting the base euro amounts for the professional indemnity insurance cover and financial capacity of insurance intermediaries under the IDD.
The IDD prescribes that changes to the minimum amounts shall be based on the rate of inflation. As the Harmonized Index of Consumer Prices (HICP) rose by 20.32% between 1 January 2018 and 31 December 2022, the new base amounts would be as follows:
- The base Professional Indemnity Insurance amount applying to each claim is to increase from €1,300,380 to €1,564,610 (+ €264, 230)
- The base aggregate Professional Indemnity Insurance amount per year is to increase from €1,924,560 to €2,315,610 (+ €391, 050)
- The base financial capacity amount is to increase from €19, 510 to €23,480 (+ €3,970)
Stakeholders are invited to provide feedback to this consultation paper by responding to the questions via the online survey by 6 May 2023.
The launch of a new survey to map financial innovation in Insurance
EIOPA published an article on their website on the 6th March 2023, with the launch of a new Digitalisation Market Monitoring Survey to monitor the development of European insurers’ digital transformation strategies and better understand how undertakings use or plan to use innovative business models and technologies.
Digital innovation’s rapid rate changes the way businesses operate and the adoption of new business models and technologies can have a significant impact on the insurance value chain. To keep pace with these fast-moving developments and make sure that the regulatory and supervisory frameworks reflect the opportunities and risks that come with digitalization, EIOPA is launching a market monitoring survey.
The survey will gather information on the use of financial innovation in the European insurance sector, including the spread of new business models such as digital distribution and communication channels as well as insurers’ partnerships with start-ups and big techs. The survey will also assess the level of deployment of new technologies such as blockchain and artificial intelligence and the governance measures that insurers are adopting around them.
EIOPA will use the findings to strengthen its evidence- and risk-based supervisory approach to detect any emerging risks for insurers and consumers and to identify potential regulatory obstacles that keep stakeholders from harnessing the benefits of financial innovation.
The data-collection exercise will ultimately help EIOPA ensure that European consumers remain well-protected and continue receiving good outcomes as insurers embrace increasingly more digital solutions and products.
The EU survey is being distributed to insurance undertakings via the national competent authorities. However, any undertaking is welcome to complete the survey. A copy of the survey can be found here.
EIOPA supervisory statement takes aim at unfair ‘price walking’ practices
On the 16th March 2023, EIOPA published a supervisory statement on differential pricing practices with the aim of eliminating price-setting strategies which lead to the unfair treatment of customers.
The price customers pay for insurance coverage typically reflects the individual risk profile and the overall costs incurred by insurers. However, some manufacturers adjust prices based on characteristics that are related neither to the underlying risks nor the cost of service.
Of particular concern are products where premium increases take place repeatedly based on reasons that are not related to the risks or cost of service. In this respect, EIOPA’s supervisory statement clarifies supervisory expectations to pre-empt unfair differential pricing practices.
The statement underlines that those providers falling under the scope of the IDD shall always act honestly, fairly and professionally in accordance with the best interests of their customers. The statement also underlines that product oversight and governance processes should cover pricing techniques and ensure that these techniques do not adversely affect customers.
In view of the above, insurance manufacturers can continue to offer premium discounts to attract and retain customers, but they should have adequate governance and product oversight measures in place to ensure that customers are not treated unfairly. Moreover, the supervisory statement identifies certain ‘price walking’ practices that do not comply with the relevant regulation, these include, but are not limited to repeated premium increases based on the customer’s low propensity to shop around or change provider because of price increases.
Resolution planning for insurers: Summary of FSB Technical Workshop
The Financial Stability Board (FSB) published on the 27th March 2023 a summary of the technical workshop that took place on 12th July 2022, to gather the views of the industry and to discuss these questions between authorities and industry. Participants discussed different sources of funding in resolution as well as industry approaches to, and challenges associated with, mapping and assessing internal financial and operational interconnectedness, and their impact on operational continuity in resolution.
Prior to the workshop, the FSB published two practice papers to facilitate effective resolution planning for insurers: practices on funding in resolution and on internal financial and operational interconnectedness. Both papers included practical elements of resolution planning from a resolution authority’s perspective and were accompanied by several questions for public feedback to engage stakeholders in this work
Exploring nature-related risks and their impact on insurers
On the 29th March 2023, EIOPA published a staff paper on nature-related risks – such as biodiversity loss and damage to ecosystems – and their relevance to insurance.
Protecting nature’s biodiversity and ecosystems has in recent years emerged as an important aspect in the fight against climate change. The failure to account for, mitigate and adapt to the consequences of nature loss can have economic implications that may put overall financial stability at risk. In this context, EIOPA believes it is important to gain a better understanding of how nature-related risks can affect (re)insurers and to examine ways in which the insurance sector can meaningfully contribute to the conservation and restoration of nature through investments and underwriting activity.
The staff paper describes how nature-related risks can translate into risks for (re)insurers’ assets and liabilities. The paper sets out a framework to identify key areas in supervisory and regulatory activity that require attention when addressing nature-related risks and their impacts on the insurance sector.
Contact us
Karl Mercieca
EY Malta Financial Services Regulatory Compliance
Partner
karl.mercieca@mt.ey.com
Leanne Haber
EY Malta Financial Services Regulatory Compliance
Senior Consultant
leanne.haber@mt.ey.com
