News

Insurance regulatory news, 7 December 2020

FIG Bulletin

07 December 2020

Recent regulatory developments of interest to insurers and their intermediaries. Among other things, includes updates from the UK PRA and EIOPA. See also our General regulatory news in the Related Materials links.

UK Solvency II review: HM Treasury extends response deadline

HM Treasury has extended the deadline for responding to its call for evidence relating to its review of the Solvency II prudential regulatory regime for insurance firms by one month to 19 February 2021.

Publishing Solvency II technical information after transition period: PRA PS24/20

Following its consultation in CP5/20, the Prudential Regulation Authority (PRA) has published a policy statement, PS24/20, on its approach to publishing Solvency II technical information after the end of the Brexit transition period. The PRA has made minor changes to the draft policy it consulted on. It has clarified its approach to determining the PRA relevant currencies and updated the timing of publication of the volatility adjustment (VA) representative portfolios (RPs). The PRA advises that the changes do not result in any additional requirements on firms.

The PRA's final policy in this area, explaining how it will fulfil its obligation to publish technical information, is contained in a Statement of Policy (SoP), The PRA's approach to the publication of Solvency II technical information, which is set out in Appendix 1 to PS24/20. Generally, the PRA has retained the methodologies and judgments that EIOPA incorporates in its technical information, with some exceptions set out in chapter 3 of the SoP. The SoP is effective from 2 December 2020.

The implementation date for the final policy in this area, and the reference date for the PRA's first publication of technical information, is the end of the transition period. This means that UK firms are required to use the PRA's published technical information for their regulatory reporting from and including 11.00 pm on 31 December 2020.

The technical information will be impacted by the PRA's proposed use of temporary transitional powers (TTP) at the end of the transition period. Use of the TTP would have the effect of maintaining the current preferential risk treatment and calculation methodologies of EU exposures and assets under the applicable capital frameworks for 15 months after the end of the transition period. As a result, the fundamental spreads for EU27 government bonds will be identical to those published by EIOPA during the 15 month transition period.

The PRA plans to consult, at the earliest practicable date (expected to be in early 2021), on its proposed approach to determining the technical information in the light of the expected transition from LIBOR to SONIA.

High risk and uncertainty: PRA speech

The PRA has published a speech, given by Charlotte Gerken, PRA Executive Director, Insurance Supervision, on the importance of insurers being prepared for a world of high risk and uncertainty on multiple and interacting fronts. Among other things, Ms Gerken talks about the impact of COVID-19, use of tech and cyber resilience, stress testing and scenario analysis.

Solvency II: EIOPA 2020 report on long-term guarantees measures and measures on equity risk

The European Insurance and Occupational Pensions Authority (EIOPA) has published its 2020 Annual Report on long-term guarantee (LTG) measures and measures on equity risk, produced under Article 77(f)(1) of the Solvency II Directive. This is EIOPA's fifth and final such report.

The analysis that EIOPA has carried out in its annual reports since 2016 has served as a basis for its opinion on an assessment of the application of the LTG measures and the measures on equity risk, which is to be delivered to the European Commission by the end of 2020. This opinion will form part of EIOPA's opinion on the 2020 Solvency II review, and will include proposals to improve the design of the LTG measures.

Taxonomy Regulation Article 8 disclosures: EIOPA consultation

EIOPA has published a consultation paper on advice to the European Commission under Article 8 of the EU Taxonomy Regulation. This follows the European Commission's call for advice from the European Supervisory Authorities (ESAs), issued in September 2020. The Commission seeks input on delegated acts under Article 8 of the Taxonomy Regulation, which amends disclosure requirements contained in the Non-Financial Reporting Directive (NFRD).

This consultation refers to the relevant ratios to be mandatorily disclosed by insurers and reinsurers falling within the scope of the NFDR as well as on the methodologies to build those ratios. EIOPA considers whether the mandatory ratios of non-financial undertakings, as set out in the Taxonomy Regulation, are relevant and appropriate to depict insurance and reinsurance activities or whether they need to be "translated" to the most appropriate and comparable key performance indicators for insurance and reinsurance businesses.

Following the public consultation, EIOPA will finalise its advice and submit to the European Commission in February 2021.

Inclusion of climate change in Solvency II natural catastrophe standard formula: EIOPA discussion paper

EIOPA has published a discussion paper on a methodology for the potential inclusion of climate change in the standard formula under the Solvency II Directive when calculating natural catastrophe underwriting risk. The discussion paper is a follow-up to EIOPA's opinion on sustainability within Solvency II issued in September 2019, which concluded that there is a need to consider if and how climate change-related perils could be better captured in the Solvency II framework under the natural catastrophe risk submodule.

EIOPA explains that the frequency and severity of natural catastrophes is expected to increase due to climate change. Improved climate projections provide evidence that weather extremes such as heat waves, heavy precipitation, droughts, top wind speeds and storm surges will rise in many European regions. To ensure the financial resilience of (re)insurers covering natural catastrophes, the solvency capital requirements for natural catastrophe underwriting risk need to remain appropriate in light of climate change.

In line with that, EIOPA proposes different methodological steps and process changes to integrate climate change in the calculation of natural catastrophe risk.

Comments are welcome on the discussion paper until 26 February 2021. EIOPA will consider the feedback received and expects to publish its final report in spring 2021, together with a feedback statement.