Insurance regulatory news, 9 July 2021

Contents:

• Download the full regulatory news bulletin
• UK Solvency II review: PRA CP11/21 on reporting (phase 1)
• General insurance intermediaries: FCA Dear CEO letter on adequate client money arrangements
• Non-life underwriting and pricing in light of climate change: EIOPA final report
• Solvency II Nat Cat standard formula: EIOPA report on inclusion of climate change

UK Solvency II review: PRA CP11/21 on reporting (phase 1)

The Prudential Regulation Authority (PRA) has published a consultation paper, CP11/21, on phase 1 of a review of reporting and disclosure requirements under the Solvency II regime. The PRA has developed these proposals in line with HM Treasury's review of Solvency II.

CP11/21 represents the first phase of the PRA's consultation on changes to Solvency II reporting and disclosure requirements. It focuses on proposals to reduce the volume of financial information reported to the PRA, which could potentially be implemented by both the PRA and firms relatively quickly with a low operational impact. These changes are intended to remove duplications and reduce the areas of reporting that are of less relevance to most firms.

The second phase will be a more in-depth review of all the components that make up the UK reporting and disclosure framework, considering reform proposals in other areas of the Solvency II review. This phase could result in more extensive changes in order to deliver an overall framework that can be operated more effectively by the PRA, and more efficiently applied by firms. This second phase will be undertaken over the remainder of 2021, with a view to consulting on additional proposals in 2022.

The proposals in CP11/21 are:

• removing the requirement to report a number of Solvency II Quantitative Reporting Templates for all insurance and reinsurance undertakings;
• the reduction of reporting frequency of the minimum capital requirements collected via S.28 templates from a quarterly to a semi-annual basis;
• the amendment of a reporting proportionality threshold to further exempt reinsurance undertakings from reporting template S.16.01 on annuities stemming from non-life insurance obligations;
• expanding the PRA's modification by consent to waive certain quarterly returns, to firms that the PRA designates as Category 3 under its Potential Impact Framework; and
• amendments to the PRA's supervisory statements, SS11/15, SS40/14, SS 41/15 and SS44/15, and Statement of Policy (SoP), "Interpretation of EU Guidelines and Recommendations: Bank of England and PRA approach after the UK's withdrawal from the EU", to:
  • reflect the above proposed reporting changes;
  • remove sections that are no longer required to be included in the supervisory statements; and
  • clarify references to EU based provisions following the UK's withdrawal from the EU.

The proposed implementation date for the changes would be for quarterly and annual reporting reference dates falling on and after 31 March 2022.

Comments can be made on the proposals until 8 October 2021.

General insurance intermediaries: FCA Dear CEO letter on adequate client money arrangements

The Financial Conduct Authority (FCA) has published a Dear CEO letter sent to general insurance (GI) intermediaries on maintaining adequate client money arrangements. In the letter, the FCA explains that, over the last year, firms have completed the FCA's financial resilience surveys. Based on the results, the FCA followed up with some firms it believed were at risk of failure or of not having adequate financial resources. As part of this work, the FCA reviewed certain GI intermediaries' client money arrangements and identified common shortcomings that may indicate more widespread non-compliance in the sector. In the Dear CEO letter, the FCA sets out the key issues the FCA found from its assessments and its expectations in these areas.

The FCA refers to its letter to GI intermediaries sent in September 2020 reminding them of their client money obligations. It is now again reminding firms holding or controlling client money that they must establish and maintain arrangements to ensure the funds are adequately protected.

Firms should ensure their client money arrangements are in line with the FCA's expectations set out in the Dear CEO letter. The FCA expects firms to review their client money arrangements in light of the issues highlighted in this letter, and to take "robust action", if needed, to ensure that client money is appropriately safeguarded. CEOs should discuss this letter with their firm's Board or equivalent governing body and identify what actions, if any, are needed to ensure their firm has adequate client money arrangements in place. Firms that are required to obtain client money audits should also ensure their auditor is aware of the letter and the material referenced in it.

Non-life underwriting and pricing in light of climate change: EIOPA final report

On 8 July 2021, the European Insurance and Occupational Pensions Authority (EIOPA) published a final report on non-life underwriting and pricing in the light of climate change.

The frequency and severity of natural catastrophes is expected to increase due to climate change. ESMA explains that, as underwriters of natural catastrophe risks, the (re)insurance sector can be particularly impacted by climate change. The increasing risk can lead to insurance coverage becoming unaffordable for the policyholder, widening further the insurance protection gap.

In the report, EIOPA investigates the opportunity for (re)insurers, as risk managers and underwriters, to contribute to climate adaptation and mitigation, supporting the insurability of climate change-related risks. By applying their data, expertise and risk assessment capacity they can incentivise policyholders to mitigate insured risks. Through risk-based pricing, contractual terms, and underwriting strategy, (re)insurers should promote prevention measures for climate change adaptation and/or mitigation. EIOPA calls this "impact underwriting" in light of climate change.

In terms of next steps, EIOPA states that it will:

• identify the concrete areas to further materialise impact underwriting from a prudential and product design perspective, with a focus on climate change adaptation;
• explore the potential appropriateness for a differentiated risk-based Pillar 1 treatment of insurance products related to climate change adaptation, having regard to evidence;
• further investigate the potential for long-term non-life contracts, having regard to the need to develop new products to address the challenges posed by climate change; and
• investigate the potential incorporation of the impact underwriting concept in product design requirements, including through insurance distribution and product oversight and governance requirements.

Solvency II Nat Cat standard formula: EIOPA report on inclusion of climate change

On 8 July 2021, EIOPA published a methodological paper (dated 29 June 2021) on the potential inclusion of climate change in the standard formula under the Solvency II Directive when calculating natural catastrophe (Nat Cat) underwriting risk. In the paper, EIOPA outlines the methodology used so far for the Nat Cat solvency capital requirement (SCR) calibration. It also elaborates on climate change in the EU by analysing which perils and countries are impacted by climate change. In addition, EIOPA explains how to include climate change in the Nat Cat SCR calibration in the standard formula.

EIOPA considers there is a clear need to explicitly consider climate change in the Nat Cat standard formula calibration for the perils and regions identified in the report. Also, it believes there should be a formal approach to reassessing and, where material, recalibrating the Nat Cat SCR parameters on a regular basis.

This forms part of EIOPA's work to integrate ESG risk assessment in the regulatory and supervisory framework.

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Authored by Yvonne Clapham.