Regulatory round-up – May 2018

There has been a surprising amount of Solvency II activity from the Prudential Regulation Authority (PRA) over the last few months. The European Insurance and Occupational Pensions Authority (EIOPA) has also published advice as it reviews the Solvency II framework. Meanwhile, the Financial Conduct Authority (FCA) and PRA have issued papers in relation to conduct and governance and the Continuous Mortality Investigation (CMI) has released new material, not least the latest version of its mortality projection model.

Solvency II in the UK

Over the course of last year, the Treasury Committee conducted hearings to explore how the UK’s exit from the European Union could affect insurance regulation, in particular in relation to Solvency II. It published its final report in October, making a list of recommendations to reduce the burden on insurers, for example by simplifying approval processes. The PRA has undertaken a number of consultations in recent months, several of which are in direct response to these recommendations:

  • CP21/17 – proposes a new supervisory statement on the matching adjustment, which will consolidate material previously set out in a number of letters and contain additional guidance on topics such as asset eligibility and trading in the matching adjustment portfolio;
  • CP22/17 – consults on updates to supervisory statement SS23/15 on approval for the volatility adjustment, alerting firms to the risks associated with use of the volatility adjustment with the intention of assisting them to produce applications which are approved more quickly than at present;
  • CP24/17 – proposes a new supervisory statement on modelling of the matching adjustment within internal models which will bring together all of the PRA’s expectations in this area, with the intention of supporting firms making changes to their modelling or seeking approval of a model that covers the matching adjustment;
  • CP27/17 – proposes updates to two existing supervisory statements on changes to internal models (covering both processes and policies) and a new quarterly process for reporting model changes;
  • CP2/18 – consults on changes to the reporting requirements for National-Specific Templates (NSTs) to reduce the burden of completing them, for example by introducing minimum size requirements (e.g. the with-profits templates would be required only for with-profits funds with best estimate liabilities in excess of £500m), increasing alignment with Solvency II Quantitative Reporting Templates (QRTs) or simplifying the layout (in particular for certain non-life templates);
  • CP8/18 – proposes to remove the requirement for external audit of parts of the Solvency and Financial Condition Report (SFCR). The proposed removal would cover years ending on or after 15 November 2018 for smaller firms, i.e. those for which a score derived from factors applied to both gross written premium and best estimate liabilities is below a specified threshold;
  • CP9/18 – sets out a proposal to allow applications for use of a dynamic volatility adjustment within an internal model and consults on the PRA’s expectations of firms determining the risks associated with such an assumption;
  • CP10/18 – proposes changes to the reporting requirements for internal model outputs, which are largely clarifications for life business. but which remove some of the requirements for non-life business;
  • CP11/18 – consults on moving from Excel to XBRL for the submission of the NSTs and internal model outputs.

The PRA provided an update on its response to the Treasury Committee’s recommendations in January and a final report in February. These looked forward to the more recent consultations on the list above and provided updates on a couple of topics on which no consultation has yet emerged:

  • Calibration of the risk margin – while EIOPA has recently concluded that no changes are required, the PRA is still investigating whether it can make any changes here.
  • Transitional Measure on Technical Provisions – the PRA expects to consult on proposals to simplify the recalculation of this amount during 2018.

Model change and data requirements

In conjunction with CP27/17, the PRA published the findings of its review of model change processes, policies and reporting. This notes that, between 1 January 2016 and 7 December 2017, the PRA approved 26 model change applications, with all assessments completed within 6 months.

Separately from this, in December the PRA published feedback on the quality of data in the QRTs and NSTs. It set out some expectations and preferences for how data should be classified within certain templates, for example reporting unit liabilities as “technical provisions calculated as a whole” rather than as best estimate liabilities and allowing for second-order impacts when reporting the effect of each long-term guarantee measure on different balances. While this feedback does not constitute a formal requirement, the PRA has also consulted on the reporting codes used within certain QRTs and recently updated its supervisory statement on this topic. The changes to codes do not apply for year-end 2017 reporting.

Since our last round-up, the PRA has also finalised the requirements for data collection on Solvency II market risk sensitivities (SS7/17), published the findings of its General Insurance Stress Testing exercise and published a summary of three round table meetings that it held in September 2017 to discuss the usefulness of the SFCR to investors and analysts.

Solvency II more widely

EIOPA has issued two sets of advice (in October 2017 and February 2018) to the European Commission on simplifications to the standard formula calculation of the Solvency Capital Requirement (SCR). These cover simplifications to certain risk submodules (but confirmation following review that others will not change), changes to reduce the reliance on external credit ratings, simplification of the “look-through” approach in the market risk module and revised interest rate risk calculations that cater for negative interest rates. The European Commission is considering the advice before any changes are finalised.

In December, EIOPA issued a supervisory statement offering some observations on the first set of published SFCRs. It includes a list of key areas for improvement, including that more company-specific information should be provided throughout the SFCR and that the writing should be clearer. It remains to be seen whether firms will have been able to reflect many of the recommendations in year-end 2017 SFCRs.

EIOPA is in the process of publishing a short series of papers on systemic risk and macroprudential policy in the insurance sector. The aim is to assess the extent to which the Solvency II framework can be used to mitigate sources of systemic risk in the sector and to analyse potential new tools which may ensure financial stability.

EIOPA now regularly publishes EU-wide statistics and reports on Solvency II, summarising quantitative information from QRTs and covering use of the long-term guarantee measures, exemptions and limitations from regular supervisory reporting, capital add-ons, etc.

Conduct and authorisations

The UK’s forthcoming exit from the European Union has, of course, triggered some regulatory activity. The PRA recently published a supervisory statement (SS2/18) setting out how it will authorise and supervise “third-country” insurance branches in the UK, i.e. those operating but not headquartered in the UK. In December, EIOPA issued an opinion on service continuity in insurance following the UK’s exit, urging insurers and supervisors to take steps to ensure continuity.

The FCA published near-final rules on the Insurance Distribution Directive in January, along with feedback on the series of consultations it carried out to develop the rules. The European Commission has delayed full implementation from 23 February to 1 October 2018 (with member states required to transpose the directive by 1 July 2018) to allow more time for insurers to prepare but no further changes are expected to the FCA’s rules.

The FCA is currently carrying out a market study into the wholesale insurance broker market. The terms of reference were published in November 2017 and set out the three main topics of the study - the market power exercised by individual broker firms, conflicts of interest and the impact of broker conduct on competition. The intention is to publish interim findings in autumn 2018, including possible remedies to identify any concerns which arise during the course of the review, with a final report to follow.

The FCA and PRA have continued work on extending the Senior Manager and Certification Regime to insurers, and the PRA’s Senior Insurance Managers Regime now has an implementation date of 10 December 2018. Following a joint consultation on the authorisation and supervision of Insurance Special Purpose Vehicles (ISPVs), the PRA issued a supervisory statement (SS8/17) setting out its expectations in this area. It is relevant to those wishing to apply for authorisation as an ISPV and to insurers seeking to use ISPVs as risk mitigation under Solvency II. The FCA has also issued a statement on this topic, which should be read in conjunction its policy statement on insurance-linked securities.

CMI activity

The CMI released the latest version of its mortality projection model (CMI_2017) in March, accompanied by working paper 105. The main change relative to CMI_2016 is the inclusion of population mortality data for 2017, which provides further evidence in support of a longer-term change in the trend rate of mortality improvements.

CMI working paper 104, published in January, presents the results of a mortality investigation carried out using data on Self-Administered Pension Schemes covering the period 2009 to 2016. It shows that mortality is generally lighter for lives with bigger pensions, but that this effect varies by age and gender. It also indicates that public sector pension schemes have demonstrated lighter mortality than private schemes, although this may be a feature of the specific schemes which submitted data or simply a reflection of the effects observed for pensions of different sizes.

Other matters of interest

Other developments that have caught our eyes over the last few months include:

  • The European Financial Reporting Advisory Group (EFRAG), which has responsibility to advise the European Commission on the endorsement of International Financial Reporting Standards in the European Union, is conducting a simplified case study on IFRS 17. It is open until 31 May 2018.
  • The Joint Forum on Actuarial Regulation has published its latest annual Risk Perspective, which sets out the collective view of UK regulators (covering insurance and pensions) on risks to high quality actuarial work arising from current issues.
  • The Chancellor of the Exchequer announced the freezing of the indexation allowance on Capital Gains Tax for corporate investors in the Budget in November 2017. This may affect the pricing of units in unit funds operated by life insurers.
  • The International Association of Insurance Supervisors continues development of a global Insurance Capital Standard, with field testing during 2018 and a common framework expected to be adopted in 2019.
  • The PRA has carried out a consultation on financial management and planning by insurers, setting out expectations which include a framework for the development and maintenance of a risk appetite statement by insurers and the application of this statement within the business.

Contact us

Ainsley Normand

Associate Director, PwC United Kingdom

Tel: +44 (0)7841 011242

Follow us