Insurance regulatory round-up – Autumn 2016

The pace of regulatory change has slowed over the last few months following the implementation of Solvency II, although some loose ends are still being tied up and knock-on effects such as the impact on embedded value reporting have had to be addressed. The Continuous Mortality Investigation Bureau (CMI) has also released new material on its mortality projections model.

Solvency II – ongoing developments

Assurance

On 9 September 2016 the PRA released Policy Statement 24/16: Solvency II: external audit of the public disclosure requirement. The policy statement finalises the PRA’s rules on the audit of Solvency II public disclosure in the UK, and the associated Supervisory Statement 11/16. It provides clarity on certain elements which are out of scope, in particular any information that derives from an internal model solvency capital requirement (SCR) and any assessment of the validity of supervisory determinations (we look at how to bolster confidence in your numbers in our article ‘Real comfort: Balance sheet assurance’).The PRA also deferred the audit requirement to financial years ending on or after 15 November 2016, providing some relief for insurers with a 30 June year-end. The Financial Reporting Council is also working on Solvency II audit requirements, including consulting on the adoption of international auditing standards for this work and developing updated guidance for auditors.

Transitional measure on technical provisions

The PRA continues to issue publications setting out its expectations in respect of certain areas of Solvency II. In May, it confirmed that it expects insurers to recalculate the transitional measure on technical provisions (TMTP) every two years, with additional recalculations between these times (either requested by the insurer and agreed by the PRA or at the PRA’s request) if there is a material change in risk profile. Rather than setting out how the recalculation should be performed, the supervisory statement encourages insurers to discuss their proposed methodology with their supervisors and makes clear that the level of detail in the calculation should be “proportionate” (we look at how to demonstrate the validity of your approach to TMTP recalculation in our article ‘Risk and capital demands: How does your business compare?’).

Internal model change

There are some recent statements from the PRA that are still at the consultation stage which are relevant for internal model firms.CP19/16 addresses changes to internal models and extensions to their scope and carries the overriding message that communication between internal model insurers and the PRA is key, before and during the change process. CP22/16 sets out the PRA’s approach to monitoring “model drift” and reminds internal model insurers about the need to maintain the ability to calculate the SCR using the standard formula, and indeed to report the standard formula information annually.

Supervisory statements

In addition, the PRA has consulted on an approach to formalise the content of a number of letters published during the preparatory phase for Solvency II, either by republishing them as supervisory statements or by adding relevant material to existing supervisory statements. This is not intended to add new requirements.

Delegated acts

Following the European Parliament’s acceptance of the amendments to the Solvency II delegated acts proposed last September, which created a specific asset class of “qualifying infrastructure investments” and made some other changes to the market risk submodule within the Standard Formula calculation, EIOPA has developed consequential amendments to certain Quantitative Reporting Templates. The templates affected are S.26.01 (SCR – Market Risk) and S.06.02 (List of assets). 

Infrastructure investments

The European Insurance and Occupational Pensions Authority (EIOPA) has also published technical advice on the identification and calibration of infrastructure investments under Solvency II, which proposes extending the scope of the new asset class to include infrastructure corporates rather than just projects, subject to certain requirements on the level and management of risk. The advice also covers the proposed calibration of the standard formula stresses for equity and debt investment in infrastructure corporates.

Embedded value reporting

During the development of the Solvency II regime, there was no requirement to allow for its implementation within embedded value reporting, whether market-consistent (MCEV) or European (EEV). In advance of half-year 2016 reporting, the CFO Forum issued new MCEV/EEV principles and guidance which permit, but do not require, the use of projection methods and assumptions applied for market-consistent solvency regimes. The update also amends certain MCEV and EEV disclosure requirements. The purpose of the amendments is to align the methodology and assumptions between Solvency II and MCEV/EEV.

Market conduct

Exit charges

In the UK, the Financial Conduct Authority (FCA) has carried out the expected consultation on capping the exit charges which can be applied when policyholders access their savings in personal pensions. The proposed level of the cap, at 1% of a member’s pension pot, was lower than expected and caused some concern across the industry. At the same time, the government launched a parallel consultation on exit charges applied to occupational pension schemes, which covers the definition of exit charges applicable to both types of schemes. The proposal in this latter paper is that market value adjustments, including those levied on with-profits policies, do not form part of the exit charges, subject to certain conditions relating to their purpose and fairness.

Annuities

The FCA consulted in April 2016 on proposed rules and guidance for the secondary annuity market, which is due to start in April 2017. The consultation closed in June and we await further developments in this area.

EU unit-linked review

EIOPA is also carrying out work on the conduct agenda, with an EU-wide thematic review of conduct in the unit-linked life insurance market. The purpose of the review is to identify potential sources of consumer detriment stemming from the relationships between insurers and providers of asset management services, including issues around monetary incentives (e.g. commission) and conflicts of interest. This review appears to cover similar ground to the Retail Distribution Review in the UK.

CMI mortality projections model

The CMI has published working papers 90 and 91 and illustrative software, presenting proposed changes to the structure of the mortality projections model and seeking responses from potential model users. The proposed changes are wide-ranging and include redefining the data on which the model is calibrated, introducing new parameters and altering components of the methodology.