Insurance regulatory news, 19 July 2021

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Insurance regulatory news, 19 July 2021

FIG Bulletin

19 July 2021

Reports on recent UK and EU regulatory developments of interest to insurers and their intermediaries. See also our Financial institutions general regulatory news in the Related Materials links.

The Financial Conduct Authority (FCA) has updated the webpage on its business interruption (BI) insurance test case. The FCA has published the Supreme Court order varying the High Court declarations made in the test case. These declarations are the culmination of the test case judgment (FCA v Arch Insurance (UK) Ltd and others [2020] EWHC 2448 (Comm)), and declare how, and to what extent, the policies in the representative sample respond to BI losses arising from the COVID-19 pandemic. The FCA has also published:

a table on the declarations arranged by policy type. It is intended to help policyholders navigate the declarations by highlighting the most relevant declarations by policy type. The FCA encourages policyholders to speak to their insurance intermediaries or their advisers in the first instance for questions arising from the declarations; and
a table setting out the outcome of the test case and key paragraphs of the High Court and Supreme Court judgments according to policy type in the representative sample of 21 policy wordings. It is intended to provide a starting point to highlight the overall conclusions on coverage, causation and "trends" or "other circumstances" clauses and certain key paragraphs of the judgments by policy type.

The FCA indicates that the Supreme Court order marks the final resolution of the test case. It repeats its view that insurers should not include the period between 17 June 2020 and the final resolution of the test case when relying on any time limits within which policyholders must make claims that were potentially affected by the test case or take any other step under the terms of their policies.

The FCA also states that insurance intermediaries acting for policyholders should seek to support them progress their claims quickly with their insurer. They should also consider whether it is fair, and in the policyholders' best interests, to notify the policyholder if the intermediary reasonably considers that they may have a claim under their policy.

Part VII insurance business transfers: FCA GC21/3 on proposed changes to its approach

The FCA has published a guidance consultation, GC21/3, on proposed changes to the guidance on its approach to the review of Part VII insurance business transfers.

In GC21/3, the FCA sets out its plan to update its finalised guidance, FG18/4: The FCA's approach to the review of Part VII insurance business transfers. Since May 2018, when FG18/4 was originally published, the regulatory landscape has changed following the UK's withdrawal from the EU. The FCA also proposes to amend FG18/4 following its experience of the guidance on a diverse range of insurance business transfers and stakeholder feedback, to clarify its expectations on Part VII transfers. The text of the amended version of FG18/4 (marked up to show the changes proposed) is set out in Annex 1 to GC21/3.

The FCA considers that the updated guidance will maintain, and enhance, the savings and efficiency delivered by the original FG18/4 (which it estimated could be up to £50,000 per affected insurance business transfer). It goes on to explain that the updated guidance is consistent with information it would currently communicate directly to an individual firm or practitioner. As a result, the updated guidance has the benefit of confirming the FCA's position more widely. Many of the proposed changes are points of clarification designed to give firms more precise guidance where questions have been raised before.

The FCA does not expect the updated guidance to increase the burden on firms. Rather, it expects them to benefit from a reduction in the number of FCA queries. The FCA believes that the updated guidance will help to reduce the need for its comments, feedback and occasional rejection of documents that do not satisfy its approach. In turn, this should reduce the need for additional work for practitioners, if they fully apply the proposed guidance.

The FCA points out that FG18/4 does not aim to explain all aspects of its role in the Part IIV process or all of the issues that firms may need to consider, as there are many variations within each insurance business transfer. It also explains that it will not always insist that the approach set out in FG18/4 must be used, but it will expect firms to explain why they are diverging from the guidance, where relevant.

Comments can be made on the FCA's proposals until 31 August 2021.

Solvency II: EIOPA supervisory statement on SCR breach

The European Insurance and Occupational Pensions Authority (EIOPA) has published a supervisory statement on supervisory practices and expectations in case of breach of the solvency capital requirement (SCR) under the Solvency II Directive.

The aim of the supervisory statement is to promote supervisory convergence in situations where (re)insurance undertakings breach their SCR. In particular, it addresses the recovery plan required. The supervisory practices in such situations need to be flexible and should consider the specific situation of the (re)insurance undertaking.

Alongside the supervisory statement, EIOPA has published a resolution of comments, a feedback statement in which it addresses the main comments it received in response to its earlier consultation on a draft supervisory statement, and an impact assessment that takes into account stakeholder feedback.

Solvency II: EIOPA opinion on use of risk mitigation techniques by (re)insurers

EIOPA has published an opinion (addressed to national competent authorities (NCAs)) on the use of risk mitigation techniques by insurers and reinsurers under the Solvency II Directive. Alongside the opinion, EIOPA has published an impact assessment and a feedback statement addressing the comments received to its September 2020 consultation. Among other things, EIOPA explains that the comments led it to reconsider the legal form of the document, which was publicly consulted on as a supervisory statement and has been finally published as an opinion.

The opinion is designed to ensure convergent application of the Solvency II regime to new risk mitigation techniques, such as new reinsurance structures, that have started to appear or gain relevance in the EU market. EIOPA explains that risk mitigation techniques, in particular reinsurance, are efficient tools for insurers and reinsurers to manage their risks. The sound mitigation of risks is recognised in the SCR calculation.

In the opinion, EIPA aims to raise awareness about the importance to have a proper balance between the risk effectively transferred and the capital relief in the SCR. This balance is to be assessed following a case-by-case analysis to take into account the particularities of each reinsurance structure and its specific interaction with the risk profile of the undertaking.

NCAs are expected to coordinate and cooperate in the assessment of such structures going beyond a single member state to ensure a convergent approach.

Solvency II: EIOPA consults on revision of guidelines on contract boundaries and on valuation of technical provisions

EIOPA has published the following consultations papers:

Revision of the Solvency II guidelines on contract boundaries of insurance and reinsurance contracts: in the paper, EIOPA explains that during its 2020 review of the Solvency II regime, it identified several divergent practices relating to contract boundaries assessment. EIOPA is consulting on new guidelines and amendments to its current guidelines on issues relevant to determining contract boundaries to ensure a more convergent application of existing regulation. The paper focuses on the unbundling of an insurance and reinsurance contract and the assessment whether a financial guarantee or a cover has a discernible effect on the economics of the contract. In particular, the new guidance addresses the aim of unbundling, ensuring that one contract has the same treatment irrespective of whether it is sold as one contract or as two independent contracts where both are equivalent in terms of risk; and
Revision of the guidelines on valuation of technical provisions: also during its 2020 review of the Solvency II regime, EIOPA identified several divergent practices relating to the valuation of best estimate, as set out in the analysis background document to its opinion on the 2020 Solvency II review. EIOPA is consulting on new guidelines and amendments to its current guidelines on topics that are relevant for the valuation of best estimate, including the use of future management actions and expert judgment, the modelling of expenses and the valuation of options and guarantees by economic scenarios generators and modelling of policyholder behaviour. EIOPA has also identified the need for clarification in the calculation of expected profits in future premiums.

Both consultation papers close to comments on 12 November 2021. EIOPA will consider the feedback received, publish a final report on the consultations and submit the guidelines for adoption by its Board of Supervisors.

Nat Cat insurance protection gap: EIOPA feedback statement on pilot dashboard

EIOPA has published a feedback statement on comments received on the first pilot dashboard, which depicts the insurance protection gap for natural catastrophes (Nat Cat) in the EU. The pilot dashboard was published in December 2020. Its main purpose is to monitor the risks related to the insurance protection gap for Nat Cat in the EU.

In the feedback statement, EIOPA summarises the responses received on the pilot dashboard and explains how it will address the responses in its work, which will lead to the publication of the final dashboard. Stakeholders generally welcomed the initiative but suggested some adjustments. EIOPA plans to publish a revised version in 2022.

This forms part of EIOPA's sustainability work to integrate environmental, social and governance (ESG) risk assessment in the regulatory and supervisory framework.