Insurance

Issue 1117 / 8 July 2021

European Insurance and Occupational Pensions Authority

Climate change, catastrophes and macroeconomic benefits of insurance - EIOPA publishes thematic article - 6 July 2021

The European Insurance and Occupational Pensions Authority (EIOPA) has published a thematic article on climate change, catastrophes and the macroeconomic benefits of insurance. The article has been produced by representatives of EIOPA and the European Central Bank (ECB), but is stated not to represent the views of EIOPA or the ECB.

The article considers the protective role that insurance can play in mitigating the negative macroeconomic and welfare impacts of catastrophes, and the interplay between climate change and insurance coverage. It outlines a new theoretical model that links insurance to macroeconomic performance in the short and long term, accounting for changes in the distribution of climatic conditions. The model provides three main conclusions:

  • insurance can help mitigate the macroeconomic and welfare impact of catastrophes;
  • climate change is likely to have an increasingly negative impact on welfare; and
  • that impact is likely to be magnified by a reduction in insurance coverage, as material climate change may widen the insurance protection gap.

The article states that the future impact of catastrophes may consequently be greater than that of similar events in the past, and economic models that fail to account for this mechanism may underestimate the full magnitude of climate change costs.

Thematic article: Climate change, catastrophes and the macroeconomic benefits of insurance

Press release

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Equity prices and systemic risk - EIOPA publishes report on impact of EU-wide insurance stress tests - 6 July 2021

The European Insurance and Occupational Pensions Authority (EIOPA) has published a report on the impact of EU-wide insurance stress tests on equity prices and systemic risk. Since the global financial crisis, stress tests have become standard tools for regulators and supervisors to assess the risks and vulnerabilities of financial sectors. To this end, EIOPA regularly performs EU-wide insurance stress tests.

The report analyses the impact of the exercises conducted in 2014, 2016 and 2018 on the equity prices of insurance companies. Using an event study framework, EIOPA only found a statistically significant impact in respect of the publication of the 2018 exercise results. Its empirical analysis further suggested that the final version of technical specifications for the 2014 exercise, the initiation of public consultation and the published stress test scenario of the 2018 exercise, contributed to a decline in systemic risk.

In addition, to the best of its knowledge, EIOPA notes that this is the first report that investigates this topic for the European insurance sector and goes on to say that its empirical results could help improve the communication and design of future stress test exercises.

Report: Impact of EU-wide insurance stress tests on equity prices and systemic risk

Press release

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(Re)insurance climate change-related risks - EIOPA publishes report on non-life underwriting and pricing in light of climate change - 9 July 2021

The European Insurance and Occupational Pensions Authority (EIOPA) has published a report addressing non-life underwriting and pricing. The report notes that the (re)insurance sector may be significantly affected by climate change as a result of: (i) underwriting natural catastrophe risks, which are increasing as a result of global warming; and (ii) the challenges associated with short-term non-life contracts and annual re-pricing in the context of climate change.

The report investigates the opportunity for (re)insurers to support the insurability of climate change-related risks and to avoid a situation where insurance for natural catastrophe risks becomes unaffordable for the policyholder. EIOPA suggests that this could be achieved by (re)insurers using their data, expertise and risk assessment capacity - including through risk-based pricing, contractual terms, and underwriting strategy – to incentivise policyholders to mitigate risks and to promote climate change adaptation and mitigation measures.

Report on non-life underwriting and pricing in light of climate change (EIOPA-BoS-21/259)

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Solvency II - EIOPA publishes methodological paper on Nat Cat standard formula - 8 July 2021

The European Insurance and Occupational Pensions Authority (EIOPA) has published a methodological paper on the potential inclusion of climate change considerations in the calibration of the Solvency Capital Requirement (SCR) for natural catastrophe underwriting risk (Nat Cat SCR) under Solvency II (2009/138/EC).

The paper explores the impact of the increased frequency and severity of natural catastrophes as a result of climate change and discusses how, for the purposes of policyholder protection and insurance sector stability, calibration of the Nat Cat SCR could be amended to include considerations reflecting the expected impact of climate change.

The methodology paper also discusses the current methodology used for Nat Car SCR calibration, and analyses the perils/countries in Europe affected by climate change.

Methodological Paper on potential inclusion of climate change in the Nat Cat standard formula

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Bank of England

Solvency II Review - BoE publishes consultation paper on reporting requirements - 8 July 2021

The Bank of England (BoE) has published a consultation paper setting out the PRA’s proposed changes to reporting requirements under the UK’s Solvency II (2009/138/EC) regime.

The paper sets out proposals intended to remove duplication and reduce less generally relevant areas of reporting for firms. The proposals include:

  • removing the requirement for insurance and reinsurance undertakings to report a number of Solvency II Quantitative Reporting Templates (QRTs);
  • the reduction of reporting frequency of the minimum capital requirement (MCR) collected via S.28 templates, from a quarterly to a semi-annual basis;
  • the amendment of a reporting proportionality threshold to further exempt reinsurance undertakings from reporting template S.16.01 on annuities stemming from non-life insurance obligations; and
  • expanding the PRA’s modification by consent to waive certain quarterly returns, to firms that the PRA designates as Category 3 under its Potential Impact Framework.

The proposed implementation date for the proposals set out in the consultation paper is for quarterly and annual reporting reference dates falling on and after 31 March 2022.

Responses to the consultation paper must be submitted by 8 October 2021.

Consultation Paper: CP11/21 Review of Solvency II: Reporting (Phase 1)

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Financial Conduct Authority

Adequate client money arrangements - FCA publishes Dear CEO letter to general insurance intermediaries - 2 July 2021

The FCA has published a Dear CEO letter sent to general insurance intermediaries on maintaining adequate client money arrangements. The FCA explains that, as part of its work on firms’ financial resilience, the FCA has reviewed certain general insurance intermediaries’ client money arrangements and identified common shortcomings that may indicate more widespread non-compliance in the sector.

The letter reminds firms holding or controlling client money that they must establish and maintain arrangements to ensure that such funds are adequately protected. It sets out the key issues that the FCA found from its assessments, as well as the FCA’s expectations in these areas, which include:

  • client money calculation: over half the firms assessed did not appear to have client money calculations that aligned with the FCA’s rules and expectations;
  • appropriate withdrawal of commission: the FCA saw many instances where firms had withdrawn commission from client money accounts before a client money calculation was completed;
  • segregation of client money: the FCA notes that it is essential that firms segregate client money by paying it into a client bank account and that this account remains a trust account at all times; and
  • co-mingling risk transfer money with client money: risk transfer money held in a client money account is subject to the client money rules. Co-mingling requires the relevant insurer’s agreement, and if there is no valid risk transfer agreement in place, the client funds received by the firm will be subject to the client money rules.

The FCA intends to continue to assess firms’ client money arrangements. Firms are expected to review their arrangements in light of the issues highlighted in the letter and to take robust action, if needed, to ensure that client money is appropriately safeguarded. Firms that are required to obtain client money audits should also ensure that their auditor is aware of the FCA’s letter and the material referenced in it.

Dear CEO letter: Maintaining adequate client money arrangements – general insurance intermediaries

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Part VII insurance business transfer schemes - FCA consulting on proposed changes to its guidance - 8 July 2021

The FCA has launched a consultation on its proposed update to its finalised guidance regarding its approach to the review of Part VII insurance business transfer schemes. The FCA proposes to amend the guidance, initially published in May 2018, to account for changes in the regulatory landscape as a result of the UK’s exit from the EU and to incorporate the FCA’s experience with Part VII transfers and feedback from stakeholders. 

Feedback should be submitted to the FCA by 31 August 2021.

Guidance consultation: GC 21/3: Proposed changes to guidance on the FCA’s approach to the review of Part VII insurance business transfers

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