Welcome to our insurance updater. We will highlight key legislative and regulatory developments. We will also review court judgments and insurance market publications that are likely to be of interest to you.
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Another day, another delay
EIOPA indicates Solvency II implementation date of 2016
Recent developments suggest that implementation of the Solvency II Directive could be delayed until 2016. Gabriel Bernardino, Chairman of the European Insurance and Occupational Pensions Authority (EIOPA) has given an interview to the Wall Street Journal suggesting that full implementation of Solvency II could be delayed by up to two years. Bernardino states that the 1 January 2014 start date is now "completely out of reach", confirming industry speculation that the current timetable will not be achieved. According to Bernardino, Solvency II could start to be implemented in either 2015 or 2016, but indicates that 2016 is more likely. It is anticipated that some elements of Solvency II, such as risk management, could be applied before the official start date which Bernardino states should be made clear in the new timetable.
The decision to delay implementation will be made by the trialogue (the European Parliament, the European Commission and the Council of the EU) but an amended timetable is yet to be confirmed. Meanwhile, EU Commissioner Michel Barnier has reportedly proposed that implementation be delayed until 1 January 2015. In the absence of any official announcement, insurers have welcomed Bernardino’s comments. For those firms that have already invested significant resources to meet the 1 January 2014 deadline, however, further delays are not only frustrating but could prove very costly.
FSA delays IMAP submissions
Addressing the growing uncertainty, Julian Adams, FSA Director of Insurance, has also stated that recent events render the current timetable as "completely unrealistic", and a 2015 date is likely to be "very challenging". Commenting on the vast amount of time, effort and money already expended by the industry and the regulator, Adams echoes Bernardino’s call for a new timetable to be produced at the earliest opportunity. Adams notes that alternative dates range from 2015 to 2017 and possibly later, however, the Prudential Regulation Authority (PRA) proposes adopting its own “sensible planning period”. The new approach allows firms in the internal model approval process to choose a date up to a maximum of 31 December 2015 to submit their internal models to the regulator. The PRA believes this reflects the most pragmatic way forward and allows firms more time to complete the work they need to do for their submissions. Should a credible official timetable emerge, the PRA will reconsider its timeline.
The PRA's proposals
In the light of the ongoing delays to the new regime, the PRA has been exploring an approach to Solvency II that is consistent with the regulator's approach to supervision, builds on firms’ existing preparations for the new regime and allows firms to use this work to meet current requirements where possible. Adams therefore proposes an optional two-phase process allowing firms to use their Solvency II models to meet their existing Individual Capital Adequacy Standards (ICAS) requirements. The first phase requires firms to provide a reconciliation between the calculations performed to take account of the differences in the two regimes. In the second phase, the PRA will allow firms to use their Solvency II balance sheet and model for ICAS purposes without any further reconciliation. The PRA is also considering the possibility that firms with relatively advanced Own Risk and Solvency Assessments may be able to utilise parts of it to satisfy current requirements. A further area of concern for the PRA is reporting. In order to achieve its objectives, the regulator will require “enhanced information”, and will therefore look into supplementing the existing data it receives from firms.
Adams is keen to point out that the PRA does not intend to implement Solvency II earlier than the rest of Europe or 'gold plate' any requirements, and instead aims to deal effectively with the ongoing delays. Adams concludes that the PRA has had constructive discussions with the industry regarding its new approach and will continue to do develop these proposals in the coming weeks.
For further information:
Gabriel Bernardino interview
Julian Adams - the PRA's approach to insurance regulation
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The PRA’s approach to insurance supervision
The Bank of England and the Financial Services Authority (FSA) have published a joint paper concerning the PRA’s approach to insurance supervision. The paper covers the following issues:
- The PRA’s objectives and its approach to advancing them. The paper explains that the PRA will have two statutory objectives in its supervision of insurers: promoting the safety and soundness of firms; and securing an appropriate degree of protection for policyholders. Whilst the Financial Conduct Authority (FCA) will seek to ensure insurers are treating consumers fairly, the PRA will focus on ensuring that policyholders have an appropriate degree of continuity of cover for the risks they are insured against. The PRA will aim to ensure that there is a reasonably high probability that an insurer is able to meet claims from policyholders as they fall due and, where claims cannot be met, ensuring that an insurer fails in orderly manner, therefore minimising adverse consequences for policyholders. In relation to promoting resilience against failure, the PRA makes it clear that it is not its role to ensure that no insurer fails. Rather, the PRA will seek to ensure that insurer failures do not result in significant disruption to the financial system.
- Identifying risks to the PRA’s objectives. The PRA will assess the significance of an insurer in terms of its potential to adversely affect the PRA’s objectives by failing, coming under stress, or by the way it carries on its business. An insurers’ potential impact on the stability of the financial system will depend on its size, complexity, business type and interconnectedness with the rest of the system. Insurers will fall into one of five categories of impact ranging from category 1 (insurers with capacity to cause very significant disruption to the UK financial system) to category 5 (insurers with almost no capacity individually to cause disruption to the UK financial system). A firm will be assessed in comparison to other firms in its peer group. Comparing insurers in this way marks a significant shift from FSA supervision, however, the PRA believes that categorising insurers according to risk will help to determine the intensity of supervision and focus the supervisory strategy.
- Safeguarding safety and soundness and policyholder protection. The PRA recognises that due to the nature of the insurance business model, insurance supervision will require a different approach than supervision of banks. The PRA’s new threshold conditions set out the minimum standards that insurers must meet and will be crucial to the operation of the new regime. Insurers will be required to have appropriate financial resources, monitor and manage risk, to be fit and proper, to conduct their business prudently, and be capable of being effectively supervised by the PRA. Firms should familiarise themselves with the new threshold conditions to understand what additional requirements will be expected of them. Boards and senior management will be responsible for upholding the PRA’s objectives and embedding a culture of safety and soundness within their firms. The paper sets out the PRA’s expectations in terms of management and governance, approved persons, risk management and controls, financial resources and resolvability.
- Supervisory activity. The PRA will adopt a forward-looking approach to supervision, relying significantly on judgement. Insurers will be assessed not only in terms of current risks, but also those risks that could plausibly arise in the future. The PRA will aim to develop a rounded, robust and comprehensive view of an insurer, in order to judge whether it is being run in a safe and sound manner. In supervising insurers the PRA will consider a firm’s proximity to failure captured within the Proactive Intervention Framework (PIF). The PIF identifies five stages, each denoting a different proximity of failure. In allocating insurers to a particular stage within the PIF, the PRA will be able to identify and respond to emerging risks, in line with its policy of early intervention.
- Making policy to support the PRA’s general approach. The PRA will aim to establish and maintain published policy material which is consistent with its objectives, clear in intent, straightforward in its presentation and as concise as possible, so that it is usable by the senior management of firms.
It is noted throughout the paper that various EU and international regulatory developments are closely aligned with the PRA’s objectives. One example is the work of the International Association of Insurance Supervisors in identifying global systemically important insurers based on factors such as size, market importance, and global interconnectedness. Significantly, in a number of areas, the PRA’s aims are reflected in the Solvency II requirements. The PRA’s method of categorising insurers according to risk, for example, is consistent with the central principle of Solvency II that actions taken by supervisors should be proportionate to the risk inherent in the insurers’ business. Furthermore, various threshold conditions are supported by features of Solvency II such as the Prudent Person Principle and the Own Risk and Solvency Assessment. Given this overlap, firms may find that their work for Solvency II is useful when preparing for PRA regulation.
In terms of next steps, the PRA invites comments on its proposed approach. The PRA Board will approve a final version of the paper, to be published ahead of legal cutover in April 2013. It is intended that the document will be revised when significant legislative and other developments require the PRA to review its approach.
For further information: The PRA's approach to insurance supervision
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FSA publishes Journey to the FCA paper
On 16 October 2012, the FSA published a paper entitled Journey to the FCA. The paper sets out the FSA’s current thinking on the transition to the FCA and how the FCA will operate once it is established in April 2013. Under the Financial Services Bill, the FCA will have three operational objectives that focus on the integrity of the UK financial market, consumer protection and promoting competition. The key issues covered in the paper include:
- The FCA's new powers and responsibilities in relation to product intervention, financial promotions, markets regulation and super-complaints.
- Regulatory processes, including authorisations and threshold conditions, approved persons, changes in control, waivers and passporting.
- Its competition objective and duty, including the steps it will take to promote competition and to embed competition in its regulatory approach.
- Supervisory approach and strategy for intervening to ensure the fair treatment of customers.
The FSA is also consulting on specific questions relating to the FCA’s new competition role and gathering and receiving information. The deadline for comments is 14 December 2012, with the FSA expected to publish feedback in early 2013.
For further information: Journey to the FCA
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IAIS consults on policy measures for global systemically important insurers
The International Association of Insurance Supervisors (IAIS) is participating in a global initiative which seeks to identify global systemically important insurers (G-SIIs). G-SIIs are insurers whose distress or disorderly failure would cause significant disruption to the global financial system and economic activity. On 17 October 2012, the IAIS published a consultation document on proposed policy measures for G-SIIs. The consultation focuses on three kinds of policy measures:
- Enhanced supervision. This measure builds on the existing IAIS Insurance Core Principles and provides for supervisors to have powers over holding companies so that a direct approach to consolidated group-wide supervision can be applied. G-SIIs are most likely to take the form of a group and therefore special focus should be given to group-wide supervision.
- Effective resolution. These requirements are established in the Financial Stability Board’s international standard for resolution and include: the establishment of crisis management groups; the elaboration of recovery and resolution plans; the conduct of resolvability assessments; and the adoption of institution-specific cross-border cooperation agreements.
- Higher loss absorption (HLA) capacity. The IAIS proposes a cascading approach, looking at whether, and to what extent, the G-SII has demonstrated effective separation of non-traditional and non-insurance activities. It will also be considered whether an overall assessment of group-wide HLA is needed.
The first set of G-SIIs will be designated and subsequently published in the first half of 2013. The enhanced supervision and effective resolution measures should be implemented immediately after this. The list of designated G-SIIs will be updated annually, with insurers expected to disclose the relevant data when the policy is implemented. The IAIS has published an updated list of frequently asked questions on the G-SII project and invites comments on the consultation until 16 December 2012.
For further information:
G-SIIs: Proposed policy measures
Frequently asked questions
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