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