Friday, 11 January 2019

Result of ECON vote on ESAs review largely positive, but concerns remain about proposed governance changes

Following the vote yesterday in the European Parliament’s Economics and Finance Committee (ECON) on its report on the review of the European supervisory authorities (ESAs), Olav Jones, deputy director general of Insurance Europe, commented:
“We welcome several of the proposals in the report, which could make the European Insurance and Occupational Pensions Authority (EIOPA) more accountable and give it a clearer mandate. The proposals also maintain the power of local supervisors to do their job, while enabling EIOPA to make better use of its existing powers.
“In particular, the proposal to link EIOPA’s budget more closely to its actions, with increased scrutiny from the European Parliament and the Council of the EU, can help ensure EIOPA’s accountability. The proposal to maintain a minimum of 35% of EIOPA’s funding from the European Commission is also welcome.
“It is also positive that national supervisors, rather than EIOPA, remain responsible for the oversight of internal models. The close links between an insurer’s model and its risk profile mean that such oversight must remain with the lead supervisor. However, Insurance Europe recognises that EIOPA could, if requested by a supervisor, provide its advice and help resolve disagreements.
“The report’s proposals on EIOPA’s mandate are also welcome. Given that several of EIOPA’s previous own initiatives have raised questions over its prioritisation of resources, it is important that EIOPA’s work — including guidelines and recommendations — are strongly tied to its legislative mandate.
“Insurance Europe welcomes the proposals aiming to better coordinate the supervision of cross border insurance business. These will allow EIOPA to play its role in ensuring a safe and competitive market for insurers who operate across borders.
“On governance, however, it is doubtful that the quality of EIOPA’s decision-making and preparation will be improved without the involvement of national supervisors in the proposed new executive board. Insurance Europe believes EIOPA’s current management board benefits greatly from the involvement of national supervisors, who have real day to day experience of company oversight and knowledge of the different products that are available in Europe.”

Wednesday, 9 January 2019

Europe’s largest reinsurers explain the supervisory benefits of using internal models

A group of Europe’s largest reinsurers, the Insurance Europe Reinsurance Advisory Board (RAB), has published an overview of the benefits of insurers’ use of internal models, titled Internal models: a reinsurance perspective.
The benefits include:
  • Making the risk profile of insurers more transparent.
  • Analysing risk in more detail, so that the output of the models more closely reflects insurers’ risk profiles.
  • Enriching insurers’ discussions with supervisors.
Ulrich Wallin, CEO of Hannover Re and chair of the RAB, commented: “This publication addresses criticisms that have been levelled against internal models by supervisors and explains why, for insurers, internal models remain the most accurate measure of their risks, the best driver of good risk management and the most appropriate basis for comparing risks between companies.”

Tuesday, 8 January 2019

ESAs publish joint report on regulatory sandboxes and innovation hubs

The European Supervisory Authorities (ESAs) published today a joint report on innovation facilitators (regulatory sandboxes and innovation hubs). The report sets out a comparative analysis of the innovation facilitators established to date within the EU. The ESAs also set out best practices for the design and operation of innovation facilitators.
The number of innovation facilitators in the EU has grown rapidly in recent years. As at the date of the report, 21 EU Member States and 3 EEA States have established innovation hubs and 5 EU Member States have regulatory sandboxes in operation. A comparative analysis of these national innovation facilitators is set out in the report and, based on this analysis, a set of best practices has been prepared. The best practices are intended to: (i) promote consistency across the single market in the design and operation of innovation facilitators; (ii) promote transparency of regulatory and supervisory policy outcomes from arising from interactions in the context of innovation facilitators; and (iii) facilitate cooperation between national authorities, including consumer and data protection authorities.
The ESAs also set out options, to be considered in the context of future EU-level work on innovation facilitators, to promote coordination and cooperation between innovation facilitators which would support the scaling-up of FinTech across the single market.

Wednesday, 19 December 2018

EIOPA reports on Group Supervision and Capital Management of Insurance and Reinsurance Undertakings

Today, the European Insurance and Occupational Pensions Authority (EIOPA) published a Report on Group Supervision and Capital Management of (Re)Insurance Undertakings and on specific topics related to Freedom to Provide Services (FoS) and Freedom of Establishment (FoE) under Directive 2009/138/EC (Solvency II Directive). The European Commission is required by Article 242 (2) of the Directive 2009/138/EC to make an assessment of the benefit of enhancing group supervision and capital management under Solvency II. In this regard this report is the response to the European Commission's request of 7 June 2018 and based on the list of specific items the European Commission identified for the scope of the review.
Based on the findings presented in the report EIOPA concludes that the tools developed by EIOPA to strengthen group supervision and supervision of cross-border issues contributed to substantial progress in the convergence of practices of National Competent Authorities (NCAs), but significant challenges remain.
EIOPA's Guidelines and Supervisory Opinions, together with EIOPA's recommendations to NCAs and group supervisors following bilateral interaction and work within Colleges of Supervisors, have been instrumental steps in fostering a common supervisory culture. Another important tool for supervisory convergence was the development of EIOPA's supervisory handbook, which was supported by a training program where supervisory knowledge and experiences were exchanged.
Furthermore, the setting up of cooperation platforms following the Decision on the Collaboration of the Insurance Supervisory Authorities has been very successful in increasing the exchange of information between home and host supervisors and in helping home supervisors take the necessary actions to protect policyholders. Still, the current framework has clear limitations and in this area EIOPA's powers should be reinforced.
EIOPA finds a number of gaps in the regulatory framework that lead to divergent supervisory practices, such as:
  • In the definition of intra-group transactions
  • In the assessment of availability of eligible own funds at group level
  • In the treatment of Insurance Holding Companies and Mixed Activity Insurance Holding Companies in the scope of group supervision
  • In the inclusion of holding companies, which are not licensed insurance undertakings in the scope of group supervision
  • In the adequate application of the combination of methods to calculate the group solvency requirements
  • In referencing from the Solvency II framework to other financial sectors
  • In the application of the mutatis mutandis to groups that fall under the scope of the Solvency II framework
In the report EIOPA also identifies that effective supervision of insurance groups will benefit from a harmonised approach in a number of areas, for example as regards early intervention, recovery and resolution and the assessment of group own funds.

Saturday, 15 December 2018

EIOPA’s stress test confirms strength of the European insurance industry

In response to the results of the 2018 insurance stress test carried out by the European Insurance and Occupational Pensions Authority (EIOPA), Olav Jones, deputy director general of Insurance Europe, commented:
“Insurance Europe is pleased to see that the 2018 stress test exercise confirms the strength of Europe’s insurance industry with a baseline SCR coverage over 200% and Assets over Liabilities (AoL) ratio of 109%. The purpose of this test is to provide information on financial stability under adverse market developments. EIOPA chose in fact very extreme scenarios, for example the yield curve down scenario includes an interest rate which is equivalent to assuming zero European growth for the next 100 years. The results confirm that, even under the very extreme scenarios applied, the industry would pose no concerns over their ability to pay claims, with the overall AoL ratio remaining above 106% for even the worst scenario.”

It is important to recognise that the regulatory framework for the insurance sector, Solvency II, is already a comprehensive risk-based system which sets conservative capital requirements by covering all the risks that insurers are exposed to. These capital requirements are based on stress scenarios applied to assets/liabilities and calibrated with extreme 1-in-200 year type events and are publicly reported. Therefore, the post-stress SCR ratios reported in the stress test represent the impact of an extreme stress on an extreme stress. Even on this basis the industry is shown to be very resilient.

Friday, 14 December 2018

EIOPA announces results of the 2018 Insurance Stress Test

The European Insurance and Occupational Pensions Authority (EIOPA) published today the results of its 2018 and fourth Stress Test for the European insurance sector. This year's exercise assessed the participating insurers' resilience to the following three severe but plausible scenarios:

  • A yield curve up shock combined with lapse and provisions deficiency shocks, which means there is a sudden and sizeable repricing of risk premia and a significant increase in claims inflation.
  • A yield curve down shock combined with longevity stress, which means there is a protracted period of extremely low interest rates accompanied by an increase in the life expectancy.
  • A series of natural catastrophes where European countries are hit in a quick succession of four windstorms, two floods and two earthquakes.
In this year's exercise 42 European (re)insurance groups participated representing a market coverage of around 75 % based on total consolidate assets. The reference date was 31 December 2017.
The impact of the different scenarios on the balance sheet position and on the capital position of the participating groups was assessed by the excess of Assets over Liabilities and an estimation of the post-stress Solvency Capital Requirement (SCR) ratio. Given the operational and methodological challenges related to the recalculation of the group SCR, participating groups were allowed to use approximations and simplifications as long as a fair reflection of the direction and magnitude of the impact was warranted.
In the pre-stress (baseline) situation, participants reported an aggregate Assets over Liabilities (AoL) ratio of 109.5 % and a pre-stress SCR coverage of 202.4 %.
Overall, the exercise confirmed the significant sensitivity to market shocks combined with specific shocks relevant for the European insurance sector. On aggregate, the sector is adequately capitalised to absorb the prescribed shocks.
In the 'yield curve up' scenario, the excess of assets over liabilities is reduced by approximately one third (-32.2 %) and the aggregate post-stress SCR ratio drops to 145.2 %. Six groups reported a post-stress SCR ratio below 100 %.
In the 'yield curve down' scenario, the impact on the excess of assets over liabilities is of similar magnitude (-27.6 %) with an aggregate post-stress SCR ratio of 137.4 %.  Seven groups reported a post-stress SCR ratio below 100 %.
In the natural catastrophe scenario only a small decrease of 0.3 percentage points of assets over liabilities ratio was reported. Overall, the participating groups demonstrate a high resilience to the series of natural catastrophes tested, showing the importance of the risk transfer mechanisms in place, namely reinsurance, which absorbed 55 % of the losses. Consequently, the most affected groups are reinsurers and those direct insurers largely involved in reinsurance activities.
One of the objectives of this year's exercise, in line with the recent recommendations from the European Court of Auditors, was to increase transparency by requesting the voluntary disclosure of a list of individual stress test indicators by the participating groups. To date, four of the 42 participating groups provided consent to the publication of the individual results.
Gabriel Bernardino, Chairman of EIOPA said: "This stress test marks an important step forward in assessing the resilience of the European insurance sector to a set of adverse but plausible scenarios and provides a valuable basis for a continuous dialogue with the participating groups on the identified vulnerabilities and the preventive measures and potential management actions to address them, should they materialise."

Thursday, 13 December 2018

2018 Solvency II review: EC proposal lacks serious ambition to unlock investment the economy needs

Insurance Europe has raised serious concerns in its response to a consultation by the European Commission on its draft proposals for the 2018 review of the Solvency II Delegated Regulation.
While the industry welcomes the Commission’s aim of simplifying Solvency II and increasing proportionality in its application, the proposals lack ambition in several important areas. Unless the final text is improved, the Commission will miss a key opportunity to remove barriers to long-term investment and to unlock insurers’ capacity to support the growth that Europe’s economy so desperately needs.
The Commission’s proposals for the recalibration of long-term equity and the review of the risk margin – both of which have a significant impact on insurers’ capacity for long-term investments and to support the objectives of the Commission’s Capital Markets Union project – must be more ambitious. While acknowledging the Commission’s recognition that action is needed on long-term equity investments, Insurance Europe warned that the Commission’s technical proposal will not work in practice. It is therefore calling for swift action by the Commission to amend its proposal so that it has the intended impact.
Regarding the risk margin, it should first be noted that this is a conceptual element of Solvency II that, according to the European Insurance and Occupational Pensions Authority, accounts for €200 billion of insurers’ capital and is over and above the amount needed to pay customer claims. There is significant evidence that the 6% cost of capital, a key element of its calibration, is too high. This impacts, in particular, long-term products and investment. If the Commission continues to ignore this evidence and preserve the status quo, it will miss a key opportunity to reduce the current barriers to long-term investment by insurers. While a more complete review of its purpose and design can take place in the 2020 review, a first step is needed and justified now.
Insurance Europe also said the review provides the opportunity to take a first step in improving the design of the volatility adjustment, by refining the trigger mechanism for the application of the country adjustment.
It also raised other concerns, including the need to avoid unnecessary limits on the calculation of loss absorbing capacity of deferred tax (LAC DT), which can be found in its response to the consultation.

Wednesday, 5 December 2018

Insurance regulation and supervisory equality in the spotlight at AMICE / ICMIF regulatory event

Insurers around the world sh alessio@alessiopisano.comould receive fair regulatory treatment, according to their nature, scale and complexity, a conference of mutual and cooperative insurers will hear at the second joint AMICE-ICMIF regulatory event taking place in Paris today. More than 100 delegates will hear from leading industry representatives, practitioners, global regulators and policymakers about regulatory developments impacting the insurance industry. Hosted by French mutual Covéa, delegates from the Americas, Europe and Asia will examine regulatory convergence activities and assess how well they ultimately serve the policyholder.
“Revisiting insurance regulation and supervision: is there an optimal model? The stakeholders’ views” will explore:
  • International Regulation: From Africa to Australia, via Latin America and Europe: is a global model the best solution? Is there a global playing field in sight?
  • European Regulation: The strengths and shortcomings of Solvency II in Europe
  • The global architecture for insurance regulation: For the first time in history, the G20 meeting in Argentina included an Insurance Forum. Analysing the interplay between the global and regional standard setting bodies.
  • Calibrating new emerging risks: From climate change to cyber, including long-term care, should emerging risks be treated equally on a global scale?
Speakers at the event include: Pervenche Berès, Member of the European Parliament; Romain Paserot, Deputy Secretary General, IAIS; Dr Mamiko Yokoi-Arai, Principal Administrator, OECD; Dr Manuela Zweimüller, Head of the Policy Department, EIOPA;  and Bertrand Labilloy, CEO, CCR.
Speaking before the event, Sarah Goddard, AMICE Secretary General said, “Since the global financial crisis, the focus has been on strengthening international regulation. While much has been achieved to benefit policyholders, complexity has increased. In the second joint ICMIF and AMICE regulatory event, we explore the divergent regulatory approaches of different insurance markets and ask whether a textbook model for insurance regulation and supervision is achievable.”
Catherine Hock, ICMIF’s Vice-President of International Relations, commented: “Mutual insurance constitutes an important element of the insurance industry, contributing to consumers’ choice, product and service innovation, fair pricing and consumers’ trust. In these troubled times we need more trust and stability. Mutuality has an important role to play in matters where stability and the ability to take a long-term view are required.”
ICMIF CEO Shaun Tarbuck said, “This year saw Argentina hold the presidency of the G20 and, thanks to the growing recognition of insurance as a social protection mechanism to promote financial and economic stability and growth, a dedicated G20 Insurance Forum took place, for the first time ever.
“Here at ICMIF, we strongly believe in the role of insurance to face global challenges, and the G20 Insurance Forum in Argentina was a historic milestone for insurance supervision, legislation and the insurance industry. Discussions relating to sustainable development, barriers for long-term investment in infrastructure, technological innovation, and financial stability were all addressed and the voice of the insurance sector was clearly heard. The industry is a key stakeholder for addressing many challenges, not only through the development of innovative products to improve economic resilience, but also as a catalyst for resources towards common goals.”
Together, AMICE and ICMIF represent 295 mutual and cooperative insurers in 74 countries. Members range from large market leaders to niche, affinity-based insurers – and most are small to medium sized.
Find details of the Revisiting insurance regulation and supervision: Is there an optimal model? The stakeholders' views event agenda and more information here.

Friday, 30 November 2018

EIOPA publishes European Insurance Overview 2018

The first annual European Insurance Overview report is now available on EIOPA's website.
The European Insurance Overview report is published by EIOPA as an extension of its statistical services in order to provide an easy-to-use and accessible overview of the European insurance sector. The report is based on annually reported Solvency II information. This ensures that the data has a high coverage in all countries and is reported in a consistent manner across the European Economic Area.
The report is objective, factual and data driven and does not contain analysis or policy messages. It provides highly-relevant and easily-accessible data at the European level.
The report is published with all charts data available for download in a separate excel file.
The new report can be found here.

EIOPA consults on the integration of sustainability risks and factors

European Insurance and Occupational Pensions Authority (EIOPA) published for consultation its draft technical advice on possible amendments to the delegated acts under Solvency II and the Insurance Distribution Directive (IDD) concerning the integration of sustainability risks and factors.
The proposed draft amendments to the Solvency II Delegated Regulation are aimed to ensure identification and assessment of sustainability risks in the areas of underwriting and investments. Insurance undertakings shall take into account the potential long-term impact of investment decisions on sustainability factors (stewardship principle) and where relevant reflect policyholders' Environmental, Social and Governance (ESG) preferences.
The proposed draft amendments under the IDD relate to the following two areas:
  • Conflicts of interest: When identifying the types of conflicts of interest which might damage the interests of a customer, insurance undertakings and insurance intermediaries should include those that potentially may arise in relation to sustainability. Insurance undertakings and insurance intermediaries should have in place appropriate arrangements to ensure that ESG considerations are included in the advisory process and do not lead to mis-selling practices.
  • Product Oversight & Governance: Customers' ESG preferences in the target market shall be considered in various stages of product lifecycle in case the insurance product is offered to customers seeking insurance products with an ESG profile.
On 1 August 2018, EIOPA received a request from the European Commission to provide technical advice on potential amendments to or introduction of delegated acts under the Solvency II Directive and IDD with regard to the integration of sustainability risks and sustainability factors. This Call for Advice refers particularly to the following areas:
  • Organisational requirements
  • Operating conditions
  • Risk management
  • Target market assessment for the IDD only
EIOPA is seeking stakeholders comments on the draft technical advice developed on the basis of the following three principles:
  • Coherence with current requirements
  • Proportionality
  • Cross-sectoral consistency
The draft technical advice can be obtained via EIOPA's Website.
Stakeholders are invited to provide their comments by Wednesday, 30 January 2019 responding to the survey questions accessible via this link.