Insurance Regulatory Update November 2020 – Insurance


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This is the November 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: Brexit Bill 2020; Central Bank publishes
update on prudential regulatory flexibility measures; Central
Bank’s NCID Report; EIOPA’s call on insurers to prepare
for end of UK transition period; and EIOPA guidelines on
information and communications technology security and
governance.

Domestic News

Government Publishes Brexit Bill

On 27 October the Withdrawal
of the United Kingdom from the European Union (Consequential
Provisions) Bill 2020
 was brought before Dáil
Éireann and is now at second stage. It is expected that the
Bill will complete the remaining stages in both the Dáil and
Seanad and be signed into law before 31 December 2020. The Bill
deals with certain matters consequent on the UK leaving the
transition period without a deal and the possibility of a serious
disturbance in the economy of the State. Part 10 of the Bill
extends the three year temporary run-off regime for UK and
Gibraltar based insurers and intermediaries, (which had been
provided for in the Withdrawal of the United Kingdom from the EU
(Consequential Provisions) Act 2019) to 15 years.

COVID-19 – Central Bank Publishes Update on Prudential
Regulatory Flexibility Measures

On 5 November, the Central Bank published an 
update
 regarding the regulatory flexibility measures that
were introduced in March 2020 to reduce the regulatory burden on
insurers in the immediate aftermath of the Covid-19 crisis.

The regulatory flexibility measures set out in the Central
Bank’s 
correspondence
 to insurers in March 2020 will be kept
under review and updated as necessary. However, the Central Bank
now requires additional targeted information to be submitted by
(re)insurers to assess the effects of Covid-19 on the financial
sector. In this regard the Central Bank expects (re)insures to
engage constructively with it and respond to such requests for
information in an expedient manner.

The Central Bank had previously applied a level of supervisory
flexibility in relation to the deadlines for risk mitigation
programs (“RMP”) to accommodate
regulated firms in taking the necessary steps to deal with
significantly changed operational demands as a result of Covid-19.
It now considers that firms should have now adapted to the current
operating environment, and as such, expects firms to meet specific
RMP submission dates. Firms are encouraged to engage in a timely
manner with their usual supervisors if they have concerns in
meeting any such RMP deadlines.

Central Bank Publishes Second Motor Insurance Report OF
NCID

The Central Bank has published its second annual 
Private Motor Insurance Report
 drawing on the National
Claims Information Database (“NCID”)
figures, which provides key statistics on the private motor
insurance industry in Ireland. The Report is based on NCID premium
and claims data collected from all insurers selling private motor
insurance in Ireland from 2009 to 2019. The aim of the report is to
improve transparency in the private motor claims environment,
particularly in relation to claims costs and premiums paid.

Among key points, the Report notes that over the last
decade:

  • the cost of the average motor insurance premium is now
    €653, a rise of over a third from the average in 2009, despite
    the cost of claims per policy falling 9% over the same period up to
    2019;

  • notably, the average cost per claim has increased by two thirds
    from €2,726 in 2009 to €4,487 in 2019, however the
    frequency of claims have also fallen significantly by 45%;

  • over the last four years, the majority of claims were settled
    directly between motorists. 17% settled through the State body, the
    Personal Injuries Assessment Board
    (“PIAB”), and 33% settled through
    litigation; and

  • legal costs make up more than half of the cost of settling
    claims through the courts.

Insurance Ireland has 
responded
 to the Report, citing the urgent need to address
the high and inconsistent cost of claims, and hopes that, through
Government reform, a more stable sector will deliver better value
for customers.

Cost of Insurance Working Group Publishes Final Progress
Report

The Cost of Insurance Working Group
(“CIWG”) has published its 
Eleventh and Final Progress Report
, before the residual work of
the group, as well as the Government’s reform agenda, will be
brought in under the newly established Cabinet Committee on
Economic Recovery and Investment’s sub-Group on Insurance
Reform. In particular, the sub-group will be responsible for
implementing outstanding recommendations of the CIWG including the
establishment of an insurance fraud database.

The Report outlines the many positive reforms made by the CIWG
in relation to two key areas: the cost of motor insurance and the
cost of public liability insurance. The CIWG acted on a number of
recommendations, the cumulative impact of which has helped reduce
the costs of insurance premiums over the last number of years
though, as noted above in relation to the private motor insurance
report, they remain significantly higher than they were ten years
ago.

Report on the Cost of Motor Insurance

The CIWG implemented the following changes in order to meet its
objectives:

Objective 1- Protecting the
consumer:
 a protocol for insurers to explain the
basis for large increases in premiums and provide additional
information on premium breakdowns was implemented, and renewal
notification periods were extended from 15 to 20 working days to
enable policyholders to make informed decisions at renewal.

Objectives 2 & 3- improving data
availability and the personal claims environment
 by
establishing a national claims information database
(“NCID”).

Objective 4- reducing costs in the
claims process
: the Personal Injuries Assessment Board
(Amendment) Act 2019 was enacted and commenced and the Judicial
Council was established, which will have a formal role in future
reviews and the frequency of future updates of the book of
quantum.

Objectives 5 & 6- reducing insurance fraud and
protecting road safety
: the CIWG’s changes made it
easier for businesses to challenge fraudulent claims due to the
improved cooperation between the insurance sector and an Garda
Síochána in relation to fraud investigation and
promoting compliance with road safety legislation.

Report on the cost of employer and public liability
insurance

Objective 1- increasing
transparency:
 feasibility studies in relation to
collecting price information data and employer and public liability
insurance claims data were conducted, and the NCID was extended to
include employer and public liability claims.

Objective 2 reviewing the level of
damages in personal injury cases
, in an attempt to bring
the levels of personal injury damages awarded in Ireland more in
line with other jurisdictions, the Law Reform Commission is
undertaking a detailed analysis of the possibility of developing
constitutionally sound legislation to delimit or cap damages.

Objective 3 improving the personal injuries litigation
framework
 Insurance Ireland and business
organisations representing various sectors of the economy are
agreeing a set of guidelines in respect of notifying and engaging
with policyholders and legislative amendments are also being
considered to ensure that defendants are notified of claims having
been lodged against their policies. The Consumer Insurance Contract
Act 2019 was partially commenced on 1 September 2020, section 16 of
which ensures consumers are notified of claims being made against
their policy where those claims have not been made by the consumer
themselves and have an opportunity to submit relevant evidence to
the insurer in regard to such a claim.

Joint Oireachtas Committee on Finance, Public Expenditure and
Reform, and Taoiseach

Governor of the Central Bank of Ireland, Gabriel Makhlouf, made
an 
introductory statement
 at the Joint Oireachtas Committee
on Finance, Public Expenditure and Reform, and Taoiseach earlier
this month.

The Governor spoke about the effects of COVID-19 on both the
economy and the financial system, and gave a brief overview of the
economic outlook, payment breaks, issues in the insurance sector,
the Tracker Mortgage Examination and the credit union sector.

Differential pricing review:  On the
issues in the insurance sector, the Governor noted that the Central
Bank has now concluded its review of differential pricing in the
private car and home insurance markets. The purpose of the review
was to identify the extent to which differential pricing is used
and, where it does exist, to determine how firms are using the
practices and whether it is in line with the Consumer Protection
Code. Phase one of the review identified weaknesses with some
insurance pricing practices, which were sufficiently concerning to
merit communication with insurance firms. The Central Bank intends
on releasing the interim results by the end of the year and hopes
to complete all phases by the middle of next year.

Business interruption insurance:  the
Governor stated that the Central Bank hopes to identify and resolve
all business interruption related issues which have the potential
to cause customer harm as quickly as possible. In the wake of
recent business interruption litigation, the Central Bank has noted
that some policies provide cover for COVID-19-related business
interruption, some policies clearly do not provide cover, and in
some cases, the position is unclear. The Central Bank’s
business interruption supervisory framework, which was published in
August, aims to identify and monitor insurers’ approaches to
the policies which are unclear, and to set out the Central
Bank’s expectations in relation to these policies. For more
information on the key features of the Central Bank’s
supervisory framework see our August briefing, which is
available 
here
.

Central Bank’s Opening Remarks at Insurance Industry
Briefing

Director of Insurance Supervision at the Central Bank, Domhnall
Cullinan, delivered his 
opening remarks
 at the 2020 Insurance Industry Briefing
this week. After a turbulent year of unprecedented events, Cullinan
focused on three main issues facing the insurance industry:

The role of insurance:  As
the pandemic unfolds and risks become more acute in the insurance
industry, a constant, well-functioning and resilient insurance
market will play an important role in Ireland’s recovery and
in protecting consumers. Cullinan made note of the sector’s
role as an employer, with 185 insurance firms currently authorised
in Ireland and 205 firms writing business in Ireland from other EU
member states. On top of that, companies supervised by the Central
Bank paid out more than €54 billion in claims in 2019.

Negative perceptions of the
industry
: the industry in Ireland is negatively perceived
due to major corporate governance failings and a failure to
acknowledge and learn from those mistakes, as well as the recent
failure of the industry to constructively engage with stakeholders
on various issues that impact upon the cost and availability of
insurance. The Central Bank hopes that insurance reform, which is
high on the Government’s agenda, will rebuild consumer trust
in the industry. He referenced the publication of the second
Private Motor Insurance Report and the Central Bank’s
continued work to protect policyholders in accordance with the
Central Bank’s Business Interruption Insurance Framework.
Both the report and the framework will allow a more informed
discussion around the negative perspectives on the industry to take
place by providing useful and detailed datasets.

Future areas of supervisory
focus: 
will include cultural change, the viability
of business models in the face of disruptive change, and the
financial and operational resilience of firms. The Central Bank
made clear that, going forward, greater transparency and individual
accountability will play a part in building lasting cultural change
within the industry. In relation to disruptive change, the Central
Bank also hopes firms will look to the future and identify
exposures to, and mitigate against, those changes, such as climate
change and the growth of cyber risk. Finally, the Central Bank
reiterated that firms should ensure their own financial and
operational resilience and that recovery plans be integrated into
existing risk management frameworks.

He also echoes the views of EIOPA to
ensure that insurers are ready for the end of the transition period
at year end, including in relation to matters such as data
protection.

International News

EIOPA Calls on Insurers to Prepare for End Of UK Transition
Period

On 31 December 2020, the transition period currently provided
for in the Withdrawal Agreement between the EU and the UK will end.
At that time, all EU primary and secondary law, including Solvency
II and the Insurance Distribution Directive, will cease to apply in
the UK. In light of this approaching deadline, EIOPA has advised
the insurance sector to prepare for the consequences of UK and
Gibraltar insurers becoming third-country insurance
undertakings.

EIOPA previously produced an 
opinion
 in 2017 on the steps national supervisors and
insurers should take in advance of Brexit and has reminded the
sector to ensure that they have measures in place to ensure service
continuity while ceasing unauthorised insurance business. EIOPA is
monitoring contingency plans in the sector and has also asked
insurers to properly inform their customers of their preparations
for the end of the transition period.

Memoranda of Understandings were previously agreed between
EIOPA, national supervisory authorities, the Bank of England in its
capacity as Prudential Regulatory Authority, and Financial Conduct
Authority. These memoranda address cooperation and information
exchange and will come into effect at the end of the transition
period.

EIOPA’s press release is 
here
.

EIOPA Finalises Guidelines on Information and Communications
Technology Security and Governance

EIOPA has finalised guidelines to national supervisory
authorities and (re)insurers on the application of operational risk
regulations in Solvency II and the Commission Delegated Regulation
2015/35 to information and communications technology
(“ICT”) security and governance. The
purpose of the guidelines is the necessity to protect the digital
assets of (re)insurers, particularly data that is received from
policyholders and beneficiaries.

The guidelines note that while many national supervisory
authorities have already issued ICT-related guidelines, the
regulatory framework throughout the EEA is currently fragmented and
a more consistent and uniform approach is needed. In addition, the
complexity of ICT issues and the rate of cyber-security related
incidents are increasing.

(Re)insurers are expected to apply the guidelines in a way that
is proportionate to the size of their businesses and their risk
profile. Boards should ensure that a written ICT strategy is in
place for each (re)insurer. Boards are also expected to update
existing risk management frameworks to take account of ICT-related
risks. Business continuity plans and response plans should be in
place to deal with ICT incidents.

In the case of the outsourcing of critical or important
functions, (re)insurers must ensure that contractual arrangements
include appropriate and proportionate information security
objectives and measures, service level agreements ensuring ICT
service continuity, and appropriate cyber-security handling
procedures.

National supervisory authorities are expected to apply the
guidelines from 1 July 2021.

The guidelines are 
here
 and the accompanying press release is 
here
.

ESRB Responds to Consultation on Solvency II

The European Systemic Risk Board
(“ESRB”) has published its 
response
 to the Commission’s July 2020 consultation
paper on the review of the Solvency II regime.

The ESRB commends EIOPA’s central role in the success of
Solvency II regime and its positive effects on the individual
insurer, however, it emphasises that gaps in the framework remain.
The ESRB sees the upcoming review of Solvency II as an opportunity
to close these gaps, such as the need to:

  • Better reflect macro prudential considerations in
    Solvency II
     and contribute to reducing systemic risk
    in the financial sector. In order to achieve this, the ESRB has
    endorsed the following tools: (i) solvency tools to prevent
    pro-cyclical investment behaviour, (ii) liquidity tools to better
    supervise, report and manage liquidity, and (iii) tools to address
    risks stemming from the provision of credit to the economy.

  • Establish a harmonised recovery and resolution
    framework across the EU.
     The ESRB recommends that
    authorities’ powers be increased to include pre-emptive and
    preventative recovery and resolution powers.

  • Continue ensuring that risks are properly captured
    under Solvency II. 
    The ESRB recommends making
    adjustments to the risk-free interest rate term structure to
    reflect the low interest rate environment, so that the resilience
    of the insurance sector is not weakened in the current
    climate.

  • Analyse and take into account the lessons of the recent
    events linked to COVID-19 
    as they illustrate the
    strengths and weaknesses of the insurance sector. The ESRB has
    identified five lessons that it would like to highlight, including:

    • Insurance activities and functions play a central role in the
      good functioning of the economy, recent examples of which include
      the scope of business interruption insurance cover and health
      insurance cover for pandemic claims;

    • The importance of tools such as ex-ante capital buffers to
      provide insurers with additional resilience against losses when
      needed; and

    • The power for supervisors to block distributions and similar
      pay-outs, which was advocated for by the ESRB and EIOPA at the
      beginning of the coronavirus pandemic.

EIOPA Publishes Annual European Insurance Overview

EIOPA has published its third annual European Insurance
Overview, which is published as an extension of its statistical
services to provide an overview of the European (re)insurance
sector.

The report is based on annually reported Solvency II information
and calculated from objective and factual reported data received
from undertakings. This year’s report is based on annual
reporting for 2019 and includes UK data in EEA figures. It provides
an overview of the life and non-life markets and outlines the
distribution of, and aggregate growth of, gross written premiums
year on year. In both markets, gross written premiums have
increased for the majority of EEA countries in 2019. The European
life market remains largely dominated by Index-linked and
Unit-linked insurance. More than 50% of the European non-life
markets are made up of general and motor liability, medical
expenses insurance, fire and other property damage business
lines.

On solvency and capitalisation, the majority of EEA countries
reported a median SCR ratio of over 200% and all countries reported
a median MCR of above 250%. 26 out of 31 countries also reported
that Tier 1, unrestricted capital accounted for 90% of Own
Funds.

A link to EIOPA’s report is 
here
.

European Commission Seeking Feedback on Proposals to Modernise
VAT Rules for Insurance Services

The European Commission is seeking comments on its initiative to
review the VAT rules for financial and insurance services. The
current rules have not kept pace with the developments of new
services in the financial industry (e.g. fintech services including
services linked to cryptocurrencies and e-money) and have led to a
lack of neutrality, legal uncertainty and high administrative
costs. The rules are also interpreted and applied differently in
other Member States, which contributes to distortions within the EU
and in exchanges with third countries.

The Commission’s initiative hopes to modernise how VAT is
applied to financial services by reducing legal uncertainty and
increasing VAT neutrality across the EU. The initiative is open for
feedback, which can be provided 
here
 until 19 November, with a public consultation period
to be commenced in Q1 2021.

EIOPA Statement at the hearing of The Economic and Monetary
Affairs Committee

On 12 October, EIOPA Chairman, Gabriel Bernardino 
addressed
 members of the Economic and Monetary Affairs
Committee of the European Parliament in which he outlined the steps
taken by EIOPA to mitigate the impact of COVID-19, the broader
implications of the pandemic on its supervisory work and its role
in ensuring recovery in the insurance and pensions sector. As part
of that, EIOPA also published a 
report
 on its key achievements for the period October
2019- October 2020.

In the immediate aftermath of the outbreak of COVID-19, Mr.
Bernardino reiterated the actions taken by EIOPA to coordinate the
supervisory response across Member States including: alleviating
the burden on the industry in relation to reporting; recommending
temporary suspension of dividends and discretionary payments; and
asking insurers to assess their product offerings in light of the
pandemic and eliminate any unfair treatment of consumers.

In December, EIOPA will deliver its advice on the Solvency II
review to the Commission, which will include recommendations for
how the objectives of the review can be achieved. i.e. proposals
for adjusting the framework in light of the new interest rate risk
environment, increasing proportionality, fostering long term
investment and introduce proposals on recovery and insurance
guarantee schemes.

On the topic of recovery, Mr. Bernardino noted that EIOPA is in
process of implementing an ambitious strategic plan on
sustainability and climate change. Recovery, Mr. Bernardino noted,
is also dependent upon an effective Capital Markets Union that
delivers on objectives such as increasing future pension’s
adequacy, which can be achieved through the implementation of
occupational pensions throughout Europe.

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.

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