FR1197 / 9 March 2023

International Association of Insurance Supervisors

Aggregation Method - IAIS publishes report on finalised criteria - 9 March 2023

The International Association of Insurance Supervisors (IAIS) has finalised criteria that will be used to assess whether the US’s aggregation method (AM) provides comparable outcomes to the Insurance Capital Standard (ICS), alongside an explanatory note. The IAIS began developing the draft comparability criteria in April 2021 and published a Consultation Paper on the criteria in June 2022.

The criteria expand on, and supplement six high-level principles previously developed by the IAIS for its assessment of the AM. The IAIS intends to commence its assessment of whether the AM provides comparable outcomes to the ICS in Q3 2023 and to publish a report on its conclusions in Q3 2024. If the AM is found to provide comparable outcomes to the ICS, it will be considered an ‘outcome-equivalent approach’ for implementation of the ICS as a prescribed capital requirement (PCR). The report flags that the US is in the only interested jurisdiction for the purposes of the upcoming assessment.

Final comparability criteria that will be used to assess when the Aggregation Method provides comparable outcomes to the Insurance Capital Standard

Explanatory statement

Press release

European Insurance and Occupational Pensions Authority

Digital transformation - EIOPA launches survey - 7 March 2023

The European Insurance and Occupational Pensions Authority (EIOPA) has launched 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.

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.

The EU survey will be distributed to insurance undertakings via national competent authorities, and any undertaking within the EU is welcome to complete the survey.

EIOPA Digitalisation Market Monitoring Survey

Press release

Treasury Committee

Reform of UK Solvency II - Treasury Committee publishes correspondence on financial stability - 6 March 2023

The House of Commons’ Treasury Committee (the Committee) has published two letters on the Solvency II reforms and the Committee’s concerns over financial stability with particular focus on the profitability of insurance firms and the potential public costs.

The first letter dated 23 January 2023, from Harriett Baldwin MP, Chair of the Treasury Committee, to Andrew Bailey, Governor of the Bank of England (the Bank) follows up on questions raised in an evidence session on financial stability on 16 January 2023. Mr Bailey’s response, dated 22 February 2023, has also been published. Publication of these letters aligns with the Committee’s preparation for the evidence session with senior leaders of the PRA and members of the Prudential Regulation Committee which took place on 7 March 2023.

Mr Bailey sets out that the parts of the package most relevant to the Committee’s concerns are the planned changes to the risk margin and the discussions about whether changes should be made to the ‘Fundamental Spread’ (FS) design. The PRA had set out a case to reform the FS to improve the way it captures risk, but the government had chosen not to take this forward.

In addition, Mr Bailey notes that the current Solvency II regime is calibrated to ensure insurers hold sufficient capital to withstand a stress level with 99.5% probability over a one-year period. In the round, the Bank thinks that, over a one-year period, it is likely that the estimated capital release of £14 billion could lead to an increase in the annual probability of failure for the life insurance sector by approximately 0.1%. This means that over a one-year period, the probability that a life insurance firm would hold sufficient capital to withstand the solvency standard stress level will be 99.4% - a relative increase in the probability of failure of around 20%. Mr Bailey states that, had the PRA’s preferred FS reforms been taken forward, it is estimated that “less than half of this increase would have occurred.”

Mr Bailey also comments on the potential cost of any increase in probability of failure on the Financial Services Compensation Scheme (FSCS) and public funds. In the first instance, the failure of a large insurer would be likely to result in compensation being payable to eligible policyholders through the FSCS and funding costs borne, at least in part, by increased FSCS levies on surviving insurance firms in subsequent years. Potential mitigation in the Solvency II package includes the government’s support for the PRA making use of additional supervisory measures to hold insurers to account in maintaining safety and soundness, and policy protection.

Letter to Bank of England

Bank of England response

Press release