Regulatory round-up – Autumn 2017

Even though Solvency II has now been in operation for nearly two years, the Prudential Regulatory Authority (PRA) and the European Insurance and Occupational Pensions Authority (EIOPA) both continue to publish new guidance and there have been some adjustments to the rules. Meanwhile, the Financial Conduct Authority (FCA) and PRA have issued papers in relation to conduct and governance, the FCA has consulted on insurance business transfers and the Continuous Mortality Investigation (CMI) has released new material.

Solvency II

The variation analysis templates (the S.29 set of quantitative reporting templates) will be due for the first time as part of year-end 2017 reporting. These templates present an analysis of the key movements over the year in basic own funds, with more detail on the movements in certain contributors to own funds such as technical provisions. EIOPA has responded to the volume of questions being asked about these templates by consulting on draft explanatory notes and providing examples of reporting. Anyone struggling with these templates may find some help in the question and answer logs on EIOPA’s website, or in the explanatory notes either now or once they have been finalised.

Regulatory updates for the insurance industry over the last 6 months.

After a period of development, in June the European Commission proposed further amendments to the Solvency II delegated regulation in respect of investments in infrastructure. The amendments are subject to final approval by the European Parliament but, if accepted, are expected to apply before 31 December 2017. The aim is to encourage insurers to invest in infrastructure by reducing the capital requirements arising on the assets, although the delegated regulation only covers the standard formula calculation rather than the calibration of internal models. This set of amendments introduces a new category of “infrastructure corporates” which can benefit from the lower capital charges and relaxes some of the definitions and qualifying criteria brought in by the previous set of amendments.

The joint committee of the European Supervisory Authorities consulted over the summer on amendments to the implementing technical standards on the mapping of External Credit Assessment Institutions (ECAIs). The proposed amendments are simply to reflect the recognition of 5 new credit rating agencies and the deregistration of one; there are no changes to the mappings for the other 25 ECAIs and so there is likely to be little impact on most UK-based insurers.

Not long after our last round-up, EIOPA published a revised methodology for calculating the ultimate forward rate (UFR) used within the production of the basic risk-free interest rate structure. The new approach gives a rather lower UFR for the Euro, for example – 3.65% p.a. compared to the current 4.2% p.a. The annual change in UFR is limited to 15bp and so the value used in data published for 2018 month-ends will be 4.05% p.a.

The PRA’s public focus over the summer was on the matching adjustment, in particular how to treat illiquid unrated assets within the matching adjustment portfolio. A supervisory statement set out the PRA’s expectations in this respect, covering the internal credit assessment, the mapping to a credit quality step and the resulting fundamental spread used in the calculation of the matching adjustment. While the statement is relevant to illiquid unrated assets in general, it contains a number of considerations specific to equity release mortgages and the guarantees embedded within them. It also sets out the PRA’s requirements in terms of assurance over the appropriateness of the fundamental spread, which it may seek through an independent external review.

Continuing this theme, the PRA has just launched a new consultation on the matching adjustment. This has two main purposes – to summarise in a single supervisory statement the PRA’s expectations in this area, which were set out in a series of Directors’ letters and similar communications over the years leading up to Solvency II implementation, and to propose additional guidance on specific aspects of the matching adjustment calculation. The additional guidance was developed following a PRA review of effectiveness and discussions with the ABI and others. The consultation is open until 31 January 2018.

The PRA also consulted on and recently finalised reporting requirements under Solvency II of market risk sensitivities. Firms are required to submit sensitivities against a number of predetermined market stresses on a half-yearly basis, four weeks after the relevant quarterly reporting deadlines. The PRA appears to be trying not to impose an overly onerous burden on firms – the information may be based on a firm’s internal monitoring processes so that existing analyses and systems can be used to produce it, approximations may be permitted and the length of time to prepare the submission has been extended from the initial proposal of two weeks. The first submission is required for sensitivities as at end December 2017.

Finally on Solvency II, EIOPA is now publishing EU-wide statistics on a quarterly basis, harvested from the quarterly quantitative reporting templates. This is based on information aggregated at the country level covering the balance sheet, own funds, capital requirements, premiums, claims and expenses – while it is not very detailed, it is useful to know that it is there.

Conduct and governance

The FCA has issued a series of consultation papers this year on the Insurance Distribution Directive (IDD), which replaces the Insurance Mediation Directive (IMD) and with which the UK must comply by 23 February 2018. The IDD applies to insurers and reinsurers (both life and non-life) and to insurance brokers and intermediaries. It covers similar ground to the IMD in respect of authorisation and regulatory requirements for intermediaries but is of wider application and introduces requirements in new areas, for example in respect of product oversight and governance and the regulation of “insurance-based investment products” in the life market (with the aim of extending consumer protection provisions which already apply to retail investment products). The status at the time of writing is as follows:

  • feedback has been provided on the first consultation (policy statement PS17/21), with near-final rules on application of the IDD and some general business requirements;
  • the second consultation (CP17/23), covering conduct of business requirements for life business plus some areas of wider application, closes in October;
  • the third and final consultation (CP17/33), issued in September, again has some life-specific requirements among the broader considerations;
  • consultations are currently based on draft UK legislation and draft European delegated acts on the new areas, so there is the potential for further changes;
  • final rules are expected in January 2018.

The PRA and FCA are both consulting on extending the Senior Manager and Certification Regime (SM&CR), which currently applies to banks and building societies, to cover all insurers, with complementary requirements reflecting their respective prudential and conduct responsibilities. This builds on the PRA’s recently introduced Senior Insurance Managers Regime and the FCA’s revised Approved Persons Regime. The date of application of the new requirements is yet to be finalised by the Treasury.

Insurance business transfers

With Brexit preparations ramping up, the FCA released a consultation paper in May (GC17/5) setting out its approach to reviewing schemes for insurance business transfers under Part VII of the Financial Services and Markets Act 2000. It is a relatively comprehensive document and helpful in setting out the FCA’s key considerations and general expectations when reviewing a Part VII transfer. The consultation closed on 15 August 2017 and final guidance is expected in the autumn but, at the time of writing, has not been released.

Mortality and longevity

While the CMI released a revised version of its mortality projection model in the spring, that is by no means the end of discussion within the industry about trends in longevity. The Institute and Faculty of Actuaries collaborated with its counterparts in the USA and Canada on the latest longevity bulletin, as the UK is not alone in observing a slowdown, or even a reversal, in the rate of change of life expectancy. The CMI has also issued a second report on mortality at higher ages, where the relative lack of data makes analysis more challenging, and an analysis of mortality experience of pension annuities in payment between 2011 and 2014.

Contact us

Ainsley Normand

Tel: +44 (0)131 260 4233
Email

Follow us