News

Insurance regulatory news, 14 December 2020

FIG Bulletin

14 December 2020

Recent regulatory developments of interest to insurers and their intermediaries, including a number of EIOPA updates. See also our General regulatory news in the Related Materials links.

Several important issues were raised in relation to Part VII transfers in the recent hearing before the Court of Appeal relating to the proposed transfer of annuity business from The Prudential Assurance Company Limited to Rothesay Life Plc. This is the first time that the Court of Appeal has considered the approach that the Court should adopt in dealing with applications to sanction Part VII transfers of insurance business; and the judgment provides a very helpful summary of the approach to be taken. Read more in our summary: Court of Appeal delivers its verdict on the Prudential/Rothesay Part VII transfer.

Natural catastrophes: EIOPA's pilot dashboard on insurance protection gap

The European Insurance and Occupational Pensions Authority (EIOPA) has published its first pilot dashboard, the main purpose of which is to monitor the risks related to the insurance protection gap for natural catastrophes (Nat Cat) in Europe. EIOPA has also published "The pilot dashboard on insurance protection gap for natural catastrophes in a nutshell" and "Technical description: the pilot dashboard on insurance protection gap for natural catastrophes", both of which provide information on the pilot dashboard.

In the light of climate change, EIOPA is concerned that affordability and insurability of Nat Cat insurance cover is likely to become an increasing concern. Currently, only 35% of the total losses caused by extreme weather and climate-related events across the EU are insured. This shows that there is a protection gap. Climate projections provide evidence that future climate change will increase climate-related extremes in many EU regions. To address the protection gap, EIOPA explains that increasing insurance penetration is not enough as, due to the increasing frequency or intensity of some events, some risks may become uninsurable. Proactive measures on buildings' vulnerability, localisation of exposure and optimised insurance coverages will be important elements of a resilient society. Therefore, it is important to understand the current insurance protection gap and identify where it comes from.

EIOPA acknowledges its limitations of the pilot dashboard which was developed based on publicly available data and expert judgment. However, the aim of the dashboard is to establish a framework for identifying key risk drivers for the Nat Cat insurance protection gap and collecting relevant evidence and data. EIOPA states that the methodology for deriving the relevant scoring, as well as the existence of data gaps will be subject to review and will be updated based on further evidence and discussion in the future.

EIOPA welcomes views from stakeholders on the methodology and data used in the dashboard by 31 March 2020 using the EU survey. Questions on the dashboard are also welcome to be sent to [email protected].

Collaboration of insurance supervisory authorities: EIOPA peer review report

EIOPA has published the findings of a peer review analysing supervisory practices relating to its decision on the collaboration of the insurance supervisory authorities in relation to insurance cross-border activities, data storage and portfolio transfer. The peer review focuses on how national supervisory authorities (NSAs) approach cross-border insurance activities, how they exchange supervisory information and collaborate, how data is stored, and practices relating to portfolio transfers.

EIOPA found differences in NSAs' approaches and practices, and as a result has issued 60 recommended actions to 26 NSAs with the aim of achieving greater supervisory convergence. EIOPA expects NSAs to implement the recommended actions by Q4 of 2022 at the latest. As a follow-up, it will start to assess by the end of 2022 how NSAs have implemented the recommended actions.

Non-life underwriting and pricing in light of climate change: EIOPA discussion paper

EIOPA has published a discussion paper on non-life underwriting and pricing in the light of climate change. The discussion paper is follow-up work on EIOPA's September 2019 opinion on sustainability within Solvency II, where EIOPA noted that a common argument for non-life undertakings not to include climate change-related risks in their pricing methodology is because many non-life insurance business have short-term duration of contracts (typically 12-month contracts) which allow them to re-price annually. This also means that they may be able to adjust the price if the risk changes.

However, in its discussion paper, EIOPA explains that there are commercial and societal limits to non-life insurance re-pricing. In the context of climate change, climate-related losses are expected to grow. To reflect increasing climate-related risk, the premium would therefore also have to increase. Over the medium to long term, EIOPA considers that this might lead to the risk of the insurance coverage becoming unaffordable for the policyholder, as well as the industry crowding itself out of certain risks. To address the protection gap in the context of climate change, EIOPA believes that the insurance sector has the chance to play a key role by not only transferring and pooling the risk, but also by contributing to climate change mitigation and adaptation. EIOPA has therefore introduced the concept of Impact Underwriting.

In its discussion paper, EIOPA aims to highlight the challenges associated with short-term non-life contracts and annual re-pricing using past Nat Cat events, and the impact of climate change on the premium, affordability and protection gap. EIOPA also identifies how insurers could address the protection gap issues in the context of climate change and contribute to climate change mitigation and adaptation.

EIOPA invites comments on its discussion paper by 26 February 2021. It will consider the feedback received and expects to publish its final report in spring 2021, together with a feedback statement.

IAIS summarises future activities

The International Association of Insurance Supervisors (IAIS) has published a press release following its AGM and 27th annual conference. In the press release, the IAIS summarises discussions at these events, which focused on the impact of COVID-19 on the insurance sector and setting the direction for the IAIS' 2021 activities. The IAIS intends to publish its consolidated 2021-22 roadmap early in 2021.