Recent regulatory developments of interest to insurers and their intermediaries. Includes recent COVID-19 updates and IAIS recommendations on LIBOR transition.

Contents

• COVID-19: PRA statement to insurers on application of matching adjustment
• EIOPA Guidelines on outsourcing to cloud service providers and FCA response
• COVID-19: FCA update on business interruption insurance test case
• COVID-19: EIOPA expectations on application of product oversight and governance requirements
• LIBOR transition in the insurance sector: IAIS recommendations

COVID-19: PRA statement to insurers on application of matching adjustment

On 7 July 2020, the UK Prudential Regulation Authority (PRA) published a statement to insurers on the application of the matching adjustment (MA) during the COVID-19 pandemic.

The PRA considers that, so far, the MA has functioned as intended throughout the COVID-19 crisis. However, the PRA has identified some areas where it may be useful to provide clarifications to ensure consistency in firms' interpretation of the PRA's policy.

While the focus of the statement is on the MA, the PRA points out that COVID-19 may affect firms' views of prospective risks. Where this requires a change in firms' internal models, they should refer to supervisory statement, SS12/16: Solvency II: changes to internal models used by UK insurance firms, particularly paragraph 2.8.

In the statement, the PRA covers:

• management of the MA portfolio;
• eligibility;
• MA calculation; and
• reflection of the MA in the solvency capital requirement.

The PRA advises that the statement should be read in conjunction with its expectations set out in supervisory statement, SS3/17: Solvency II: illiquid and unrated assets, SS7/18: Solvency II: matching adjustment, SS8/18: Solvency II: internal models - modelling of the matching adjustment and SS1/10: Solvency II: prudent person principle.

EIOPA Guidelines on outsourcing to cloud service providers and FCA response

The European Insurance and Occupational Pensions Authority (EIOPA) has published its final Guidelines on outsourcing to cloud service providers for insurance and reinsurance undertakings.

The UK Financial Conduct Authority (FCA) has notified EIOPA that the Guidelines are not applicable to regulated activities within the UK’s jurisdiction, as they will enter into force on 1 January 2021, after the EU withdrawal transition period is expected to end.

The FCA states that it will continue to apply its own guidance for firms on outsourcing to the cloud and other third-party IT services, FG16/5 , last updated in September 2019. The FCA says it will keep this guidance under review and, where appropriate, consult to update the guidance to ensure it remains consistent with relevant international standards.

COVID-19: FCA update on business interruption insurance test case

On 3 July 2020, the FCA updated its webpage on the High Court test case concerning business interruption (BI) insurance. Among other things, the FCA has published:

• its reply to the insurers' defences;
• an amended version of its particulars of claim;
• the amended defences of Royal & Sun Alliance Insurance Plc; and
• the court's ruling from the first case management conference, which was held on 16 June 2020.

COVID-19: EIOPA expectations on application of product oversight and governance requirements

Building on its 1 April 2020 statement on mitigating the impact of COVID-19 on consumers, on 8 July 2020, EIOPA published a statement clarifying its expectations on the application of product oversight and governance (POG) requirements during the COVID-19 pandemic, to ensure fair and consistent consumer outcomes through an insurance product's lifecycle.

EIOPA expects insurance manufacturers to systematically identify insurance products for which their main features, risk coverage or guarantees have been materially affected by COVID-19. In this assessment, insurance manufacturers should take into account the extent of lockdowns and other ongoing measures in different member states and their impact on consumers' habits and behaviours, including mobility, liability risks, travel and access to services (for example, non-essential medical services).

Where products have been materially affected, insurance manufacturers should assess whether and how they continue to offer value to the target market, taking into account its needs, characteristics and objectives. This assessment should include looking at risk coverage, exclusions and key benefits, as well as carrying out a yearly assessment of product-related indicators (such as claims ratios) to establish if they are materially different to what was envisaged during product development and, where relevant, testing. Minor temporary fluctuations should not be considered material.

EIOPA recommends that the assessment takes a medium-to-longer term perspective reflecting the product's lifecycles, rather than risk reacting too soon to temporary changes. It also states that it should be an assessment for the target market in general, rather than for individual customers.

If manufacturers identify products that are no longer sufficiently aligned with the target market, they should assess whether this can result in possible unfair treatment, looking at whether the reductions in risks being covered mean that products no longer provide sufficient utility to the target market. Where potential unfair treatment is identified, EIPOA expects measures to be taken, proportionate to the unfair treatment, also taking into account relevant legal requirements.

In taking remedial measures, EIOPA explains that insurance manufacturers should aim at both mitigating the situation and preventing further occurrences of detriment. They should consider a broad range of possible measures. Examples given include adjustments to coverage and benefits, extensions of existing guarantees, higher no-claims bonuses and the offer of additional services and coverage, as well as proportionate rebates or premium repayments. Measures taken should also consider a broader perspective ensuring the fair treatment of all policyholders, including possible solvency-related risks.

LIBOR transition in the insurance sector: IAIS recommendations

The International Association of Insurance Supervisors (IAIS) has published a report on supervisory issues associated with benchmark transition from an insurance perspective. The report shares findings and recommendations from a survey conducted among IAIS members. The report focuses primarily on LIBOR transition.

The IAIS notes that a distinct feature of benchmark transition risk in the insurance sector is that insurers may be exposed on both sides of their balance sheet, for instance, on the asset side through investments linked to LIBOR or, on the liability side, through regulatory valuation methodologies that reference benchmark rates.

The IAIS encourages insurance supervisors to strengthen their efforts in facilitating insurers' transition away from LIBOR. It sets out supervisory recommendations for supporting LIBOR transition, consistent with those contained in a report also published by the Financial Stability Board and Basel Committee on Banking Supervision on the same day:

• enhancing identification of transition exposure and remaining transition challenges;
• supporting facilitation of LIBOR transition; and
• stepping up supervisory cooperation and coordination.

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