International Association of Insurance Supervisors
Climate change - IAIS publishes report on the impact of climate change on insurance sector financial stability - 1 October 2021
The International Association of Insurance Supervisors (IAIS) has published a special topic edition of its Global Insurance Market Report on the impact of climate change on the financial stability of the insurance sector.
The report provides the first global quantitative study of its kind focusing on insurers’ assets and their exposure to climate-related risks across economic sectors and jurisdictions and national supervisors’ views on those risks. Although not part of the report, the IAIS notes that insurers are also exposed to the consequences of climate change through the risks they underwrite.
In preparing the report, quantitative and qualitative data was gathered from 32 IAIS members covering 75% of the global insurance market and analysis carried out on the size of the insurance sector’s exposure to climate-related risks, as well as scenario analysis to assess the potential size of the risks stemming from these exposures. The report’s findings include that:
- more than 35% of insurers’ investment assets (including equities and corporate debt, loans and mortgages, sovereign bonds and real estate) could be exposed to climate risks, with the majority of exposures being in the housing and energy-intensive sectors;
- there are significant benefits to the insurance sector of an orderly transition towards internationally agreed climate targets from both a financial stability and solvency perspective; and
- national supervisory assessments of the impact of climate change on the insurance sector and individual insurers, and the development of an appropriate supervisory response, remains particularly important.
The IAIS notes that analysis on climate-related risks remains challenging, given the lack of understanding on the process of climate change and its effects; the forces that influence it and how these relate to financial sectors; and, importantly, the lack of a globally consistent framework for measuring climate risk-related financial information. It intends to build on the lessons learned from the report’s analysis, continue to improve data availability and analytical tools for monitoring financial stability risks, and support the development and sharing of good supervisory practices among IAIS members.
IAIS global insurance market report on the impact of climate change on the financial stability of the insurance sector
Webpage
Press release
European Insurance and Occupational Pensions Authority
Solvency II - EIOPA publishes comments on European Commission proposals - 1 October 2021
The European Insurance and Occupational Pensions Authority (EIOPA) has published its comments on the European Commission’s review of Solvency II (2009/138/EC).
EIOPA has stated that it welcomes the Commission’s proposals which largely share EIOPA’s approach and follow the objectives set out in EIOPA’s December 2020 Opinion. In particular, it welcomes the Commission’s proposals to develop an Insurance Recovery and Resolution Directive, to include the macro-prudential perspective in Solvency II, to enhance the proportionality principle and to give mandates for further action on sustainable finance.
That said, there are a number of aspects on which EIOPA expresses concern, including:
- the lack of consideration by the Commission of the minimum harmonisation of insurance guarantee schemes at EU level. It believes that the review presents an ideal opportunity to address the existing fragmentation, which results in policyholders receiving different levels of protection in the event of the failure of an insurer operating within the EU, depending on the originating country of the insurance policy;
- the removal of illiquidity considerations for the purpose of volatility adjustment calculations on the one hand, and relaxations regarding the calibration on the risk margin and interest risk capital charge on the other, pose potential risks. EIOPA's advice recommended a more favourable but prudent treatment of illiquid liabilities as well as a balanced update overall; and
- the importance of ensuring the proportionality principle in Solvency II is embedded in the supervisory review process and keeping proportionality as a principle instead of transforming it into a set of rules.
Press release
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EIOPA publishes single programming document 2022-24 including annual work programme 2022 - 1 October 2021
EIOPA has published its single programming document 2022-24 (SPD) which includes its annual work programme 2022. The SPD sets out the activities that EIOPA aims to undertake during 2022-24 to deliver on its strategic objectives.
EIOPA’s activities will continue to be influenced by macro-economic and political developments, in particular COVID-19, and the need to support economic recovery, built on green and digital transitions. In this regard, EIOPA’s work will assist in building more resilient insurance and pensions sectors and further strengthening a common supervisory culture.
Key priorities on which EIOPA will focus include climate change, cyber risk and digitalisation, as well as the need to address protection gaps. Its strategic activity areas for 2022 include:
- integrating sustainable finance considerations across all areas of work;
- supporting the market and supervisory community through digital transformation;
- enhancing the quality and effectiveness of supervision;
- ensuring technically sound prudential and conduct of business policy;
- identifying, assessing, monitoring and reporting on risks to the financial stability and conduct of business, and promoting preventative policies and mitigating actions; and
- ensuring good governance, agile organisation, cost-effective resource management and a strong corporate culture.
Specific legal developments that EIOPA will continue to support and help implement include the Capital Markets Union action plan, the pan-EU personal pension product and the European Commission’s digital finance package. It will also actively contribute to a range of legislative and non-legislative initiatives of the Commission, including the Retail Investment Strategy, preparatory work in anticipation of the 2024-45 review of the Insurance Distribution Directive ((EU) 2016/97) and possible implementing work resulting from revisions to the Solvency II Directive (2009/138/EC).
Revised Single Programming Document 2022-24 (EIOPA-BoS-21/419)
Webpage
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Internal models - EIOPA launches second phase of study on diversification - 5 October 2021
EIOPA has launched the second phase of its study on diversification in internal models under the Solvency II Directive (2009/138/EC).
The purpose of the study overall is for EIOPA to gain an understanding of modelling dependencies, aggregation and diversification benefits with a view, ultimately, to enhancing the quality and convergence of supervision. Phase 1 of the study, launched in October 2020, focused on top-level risk dependencies between market, credit, life, non-life, health and operational risks. Phase 2 is focusing on lower level risk dependencies to complete the understanding of diversification effects.
EIOPA has published a technical specification providing instructions to participants, together with a qualitative questionnaire, and quantitative reporting and validation templates. Insurance undertakings must complete and submit these to their group national supervisory authority by 10 January 2022 and national supervisory authorities must report back to EIOPA by 22 January 2022.
Webpage: Study on Diversification in Internal Models – phase 2
Technical specifications
Qualitative questionnaire
Quantitative reporting and validation templates
Prudential Regulation Authority
Mutual insurance sector - PRA publishes speech on adaptability and resilience - 4 October 2021
The PRA has published a speech by PRA Executive Director, Insurance Supervision, Charlotte Gerken, on adaptability and resilience in the mutual insurance sector. Among other things, in her speech, Ms Gerken sets out her views on three challenges mutual insurers face: (i) technological change; (ii) diversity and inclusion; and (iii) climate change risk. Points of interest in the speech include:
- recovery from the COVID-19 pandemic and the transition to net zero will drive substantial restructuring of the economy, which will, in turn, lead to decline in some sectors, growth in other sectors and the emergence of new sectors. New or growing enterprises need insurance products to operate. The ability to eliminate any protection gaps is a clear opportunity for the insurance sector. Mutual insurers can play an important role in providing specialist cover and operating in markets under-served by other firms, such as sickness benefits or professional liability cover, but also need to take account of the exposure risks that such specialism can generate;
- the nature and speed of change pose opportunities for smaller firms that are not weighed down by significant infrastructure and can make quick decisions. However, there are risks associated with investment choices, the costs of investment and the ongoing need to adapt. Mutual insurers face particularly difficult decisions given they are investing member funds and will be highly aware of the potential damage caused by delays and cost overruns;
- gaining relevant technical expertise at Board and senior management level is an option that some firms, determined to make the most of technological advances, take. Pooling expertise or outsourcing, subject to tight and expert oversight, are other options;
- firms have been recently contacted about participating in a pilot survey on diversity and inclusion. The PRA appreciates that firms are at different stages in the development of their diversity and inclusion data strategy. The aim of the survey is to better understand the data firms currently collect about their workforces and the challenges they face in collecting that data; and
- organisational transformation projects are always difficult to achieve in a fast-paced environment. Firms faced with a declining demand for their current services and lacking the resources to invest in new services may merge or make a managed exit from the market.
Speech: Adaptability and resilience in the mutuals sector
Financial Conduct Authority
General insurance pricing practices - FCA publishes updated Q&As - 1 October 2021
The FCA has updated its general insurance pricing practices Q&As to include further questions on incentives. They were first published to address some of the questions the FCA had received since the publication of its policy statement introducing new Handbook rules to improve competition and protect home and motor insurance customers from ‘loyalty penalties’ (PS21/5).
Updated Q&As: General Insurance Pricing Practices: Q&As on the published rules
Updated webpage
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Workplace pension schemes - FCA publishes policy statement on assessing value for money - 4 October 2021
The FCA has published a policy statement on assessing value for money in workplace pension scheme and pathway investments (PS21/12). In the policy statement, the FCA sets out its final rules on how Independent Governance Committees (IGCs) and Governance Advisory Arrangements (GAAs) should compare the value of pension products and services, and promote the best value for pension scheme members.
The FCA consulted on the proposals in June 2020 (CP20/9), which focused on targeted measures specifying a definition of ‘value for money’ (VFM) and the three key elements that a pension provider’s IGC or GAA should take into account when assessing VFM, namely: (i) costs and charges; (ii) investment performance; and (iii) quality of services. The proposals also included a requirement that IGCs should compare their provider’s offerings with other similar propositions on the market as part of the VFM assessment. The most significant issue raised in feedback to CP20/9 was the level at which the comparison should be conducted. In response to this, the FCA’s final rules allow IGCs with some flexibility to decide how best to conduct the comparison.
The text of the new rules, set out in the Conduct of Business Sourcebook (Assessing Value for Money in Workplace Pension Schemes and Investment Pathways: Requirements for IGCs and GAAs) Instrument 2021, is contained in Appendix 1 to PS21/2. The new rules came into force on 4 October 2021. Firms and IGCs have until the end of September 2022 to carry out VFM assessments and publish their next VFM report.
The FCA considers that the new rules are a step towards a more systematic and transparent framework for assessing value for money in pensions, which will enhance IGCs’ ability to compare pension products and drive value for money on behalf of the consumers they represent. That said, the regulator also recognises that assessing value for money in pensions is complex and, therefore, although the new rules will provide greater consistency and clarity, further work is needed to improve the comparability of value for money across the pensions market.
Policy statement: Assessing value for money in workplace pension schemes and pathway investments: requirements for IGCs and GAA (PS21/12)
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