Recent regulatory developments of interest to insurers and their intermediaries. Includes FCA updates on the COVID-19 business interruption insurance guidance and test case, and more.
Contents
- Insurance stress test 2019 and COVID-19 stress testing: FCA feedback
- COVID-19: FCA final guidance on business insurance interruption test case
- COVID-19: FCA update on business interruption insurance test case
- Solvency II: EIOPA regular supervisory report peer review findings
Insurance stress test 2019 and COVID-19 stress testing: FCA feedback
The UK Prudential Regulation Authority (PRA) has published a Dear CEO letter giving feedback to general and life insurers that participated in the 2019 insurance stress test (IST 2019) exercise and the PRA's more recent COVID-19 stress test. The detailed feedback is contained within Annexes to the letter.
- IST 2019 for general insurers: the PRA reports that the IST 2019 again suggests that the industry is resilient to natural catastrophe risks. As highlighted in the previous exercises, this is reliant on significant levels of reinsurance, particularly from Bermuda. The PRA conducted its first joint exercise with the Bermuda Monetary Authority (BMA) for natural catastrophe scenarios. This joint exercise indicated that Bermuda-based reinsurers are resilient to the stresses examined in the exercise and that they also rely heavily on reinsurance, in particular the capital markets through insurance-linked security structures. The PRA's current focus is on the impact of COVID-19, but it highlights three areas for further work by the industry in the estimation of insured losses from natural catastrophe scenarios. These relate to:
- allowance for risks not captured within standard models (typically because the product, such as contingent business interruption, or type of event, such as a secondary peril, is not captured in the model);
- allowance for secondary perils (such as inland flooding following a hurricane); and
- data quality.
- IST 2019 for life insurers: the PRA's current focus is on COVID-19, however, as the first stress test since the implementation of Solvency II, the FCA notes that the results provide valuable learning. In particular, the PRA will develop further the design and specification of its scenarios.
- IST 2019 climate scenario: the PRA found gaps in capabilities, data and tools to evaluate climate-related scenarios. These will need to be filled before firms can start aligning their strategy to specific emission transition trajectories. The PRA will also work on scenario design, specification and reporting.
- COVID-19 resilience testing: the PRA found that the sector was robust to downside stresses, with the highest uncertainty centred on certain general insurers' liabilities, particularly those arising from business interruption claims. To ensure that the sector remains robust, the PRA expects firms to closely monitor the additional risks presented by COVID-19, update their risk and capital assessments as the situation evolves and take appropriate management actions where necessary.
The next insurance stress test will occur in 2022. The PRA also intends to engage with the general insurance industry to develop a cyber-scenario in time for the 2022 insurance stress test exercise. However, the launch of the climate biennial scenario will be postponed until at least mid-2021
COVID-19: FCA final guidance on business insurance interruption test case
Following its short consultation, on 17 June 2020, the Financial Conduct Authority (FCA) published a feedback statement, FS20/8, and final guidance on its expectations for insurers and insurance intermediaries when handling claims and complaints for business insurance policies during the test case being brought by the FCA.
This guidance is effective immediately and highlights particular steps that firms should take to:
- identify the potential implications of the test case on their decisions regarding claims and complaints;
- keep policyholders informed about the test case and its implications; and
- treat policyholders fairly during the test case and when it is resolved.
The FCA amended its draft guidance in light of feedback, including to clarify that its scope is restricted to relevant non-damage business interruption policies and to extend the proposed timelines for review and communication to the FCA to three weeks, and for individual communication to policyholders who have made claims or complaints to four weeks.
In FS20/8, the FCA states that it expects:
- insurers covered by the finalised guidance to review their relevant non-damage business interruption policies to classify them as set out in the guidance and to report the outcomes of the reviews to the FCA by 8 July 2020. This will enable the FCA to publish a list of relevant non-damage business interruption policies affected by the test case;
- firms to consider what general communications they need to make to their non-damage business interruption policyholders, including updating previous statements issued to them;
- by 15 July 2020, firms should consider what communications they need to make to individual policyholders who have made a claim or complaint in light of the guidance and the review of relevant non-damage business interruption policies; and
- relevant firms to identify claims and complaints (including those already declined or where the firm has made an adjustment or deduction for general causation) that are potentially affected by the test case and to take account of this guidance when handling these claims and complaints.
The FCA will review the guidance in light of the progress of the test case and, in any event, within six months of it coming into effect to assess whether it is still needed.
COVID-19: FCA update on business interruption insurance test case
The FCA has updated its webpage on the High Court test case concerning business interruption insurance with the following:
- at the first Claims Management Conference (CMC) on 16 June 2020, the FCA's applications for expedition and admission to the Financial Markets Test Case Scheme were granted by Mr Justice Butcher;
- the second CMC on 26 June 2020 and final hearing, which starts on 20 July 2020 (and is scheduled for eight days), will be live-streamed here;
- the FCA will publish a copy of the order and transcript for the first CMC hearing once they are available; and
- third parties have until 24 June 2020 to make an application to join, or be represented in, the proceedings.
Solvency II: EIOPA regular supervisory report peer review findings
The European Insurance and Occupational Pensions Authority (EIOPA) has published the findings of its peer review of the regular supervisory report (RSR). Under the Solvency II Delegated Regulation (EU) 2015/35, undertakings are required to submit an RSR to their national competent authorities (NCAs) on a regular basis. The peer review examined how and to what extent the proportionate approach set out under the Delegated Regulation has been implemented among NCAs and whether further convergence is needed on the frequency of submission of RSRs.
EIOPA analysed legal and regulatory frameworks and national supervisory practices across 31 NCAs, from the entry into force of Solvency II to the end of March 2019, in relation to decisions on the frequency of submission of the RSR, and the communication of those decisions to undertakings.
EIOPA issued 51 recommended actions (detailed in Annex IV of the report) addressed to NCAs in 26 countries. The recommended actions are grouped into four categories:
- 36 recommended actions in the area of proportionality;
- eight recommended actions in the area of communication of material changes;
- three recommended actions in the area of the communication of the decision on the frequency of submission of the full/ summary RSR; and
- four country-specific recommended actions.
NCAs are expected to have implemented the recommended actions targeting supervisory shortcomings by 2022 when EIOPA intends to carry out a further assessment.
As a result of the findings of the peer review, EIOPA will take the following actions to further supervisory convergence in this area:
- introducing supervisory guidance by keeping the minimum requirement for submission of the full RSR as once every three years but requiring a mandatory assessment by NCAs and communication of the frequency of the RSR;
- including in its guidelines or supervisory handbook guidance on issuing exemptions from annual or biennial submission of the full RSR based on a list of events that are specific to the undertaking (e.g. mergers/acquisitions); and
- developing further guidance in relation to the communication to the group supervisor and college in the context of Guideline 23, paragraph 1.58, of the EIOPA guidelines on the supervisory review process (SRP), by either updating this guideline or including this aspect in the supervisory handbook.
The European Securities and Markets Authority (ESMA) will continue to monitor developments in this area.
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