Recent regulatory developments of interest to financial institutions.

Contents

• COVID-19: PRA Dear CEO letter to UK insurers about distribution of profits
• COVID-19: EIOPA statement on dividend distribution and variable remuneration policies
• Solvency II: PRA PS9/20 on income producing real estate loans and internal credit assessments for illiquid, unrated assets
• Solvency II Effective Value Test parameters: PRA statement
• COVID-19: FCA expectations of general insurance firms on renewals
• COVID-19: FCA updates pensions information for firms
• COVID-19: EIOPA call for insurers and intermediaries to mitigate impact on consumers
• COVID-19: EIOPA update on delays to consultations and other projects

COVID-19: PRA Dear CEO letter to UK insurers about distribution of profits

On 31 March 2020, the Prudential Regulation Authority (PRA) published a Dear CEO letter from Sam Woods, Bank of England (BoE) Deputy Governor Prudential Regulation and PRA CEO, to UK insurers about distribution of profits.

The PRA states that, when UK insurers' boards are considering any distributions to shareholders or making decisions on variable remuneration, it expects them to pay close attention to the need to protect policyholders and maintain safety and soundness, and in so doing to ensure that their firm can play its full part in supporting the real economy throughout the economic disruption arising from COVID-19. It is critical that insurers manage their financial resources prudently in order both to ensure that they are able to meet the commitments they have made to policyholders in a way that is consistent with the expectations of the Financial Conduct Authority (FCA), and to enable them to continue to invest in the economy.

Firms are also reminded, in light of COVID-19, of the PRA's existing expectation (set out in Supervisory Statement, SS 4/18) that when deciding on distributions boards should satisfy themselves that each distribution is prudent and consistent with their risk appetite.

COVID-19: EIOPA statement on dividend distribution and variable remuneration policies

On 2 April 2020, the European Insurance and Occupational Pensions Authority (EIOPA) published a statement on dividend distribution and variable remuneration policies in the context of COVID-19. EIOPA emphasises that, as mentioned in its statement of 17 March 2020, in the context of the current crisis all insurers should take measures to preserve their capital position. This means following prudent dividend and other distribution policies, including variable remuneration.

In exercising this prudence, EIOPA explains that insurers' assessment of their overall solvency needs must be forward-looking, taking due account of the current level of uncertainty on the depth, magnitude and duration of the impact of COVID-19 in financial markets and on the economy, and the repercussions of that uncertainty in their solvency and financial positions.

Against this background, EIOPA urges insurers to temporarily suspend all discretionary dividend distributions and share buy backs aimed at remunerating shareholders. This suspension should be reviewed as the financial and economic impact of COVID-19 starts to become clearer.

In addition, EIOPA urges that this prudent approach is applied by all insurance groups at the consolidated level, and also regarding significant intra-group dividend distributions or similar transactions whenever these may materially influence the solvency or liquidity position of the group or of one of the undertakings involved. The materiality of this impact should be monitored jointly by the group and solo supervisors.

This prudent approach should also be applied to variable remuneration policies. EIOPA expects insurers to review their current remuneration policies, practices and rewards to ensure they reflect prudent capital planning and are consistent with, and reflect, the current economic situation. In this context, the variable part of remuneration policies should be set at a conservative level and should be considered for postponement.

Any insurer that considers themselves legally required to pay-out dividends or large amounts of variable remuneration should explain the underlying reasons to their national competent authority (NCA).

Solvency II: PRA PS9/20 on income producing real estate loans and internal credit assessments for illiquid, unrated assets

The PRA has published a policy statement, PS9/20, on income producing real estate (IPRE) loans and internal credit assessment for illiquid, unrated assets under the Solvency II Directive. PS9/20 provides feedback to responses to CP23/19 and, in the Appendix, contains the PRA's updated SS3/17: Solvency II: Illiquid unrated assets.

PS9/29 is relevant to UK insurance and reinsurance companies holding or intending to hold IPRE loans. It is also relevant to firms investing in illiquid, unrated assets within their Solvency II matching adjustment portfolios.

In CP23/19 the PRA consulted on proposed expectations of firms in respect of their modelling of IPRE loans within their Solvency II internal models. It also proposed amendments to its expectations in respect of the use of internal credit assessments for assigning fundamental spreads for illiquid, unrated assets. Respondents generally welcomed the PRA's proposals but made a number of observations and requests for clarification. Having considered the feedback received, the PRA has maintained the expectations set out in CP23/19, but has revised the wording of SS3/17 to clarify some of these expectations.

The changes came into effect on 2 April 2020.

The PRA also reminds firms of its document outlining its approach to insurance supervision, and also refers them to the published measures aimed at alleviating operational burdens on PRA-regulated insurers during the COVID-19 outbreak.

Solvency II Effective Value Test parameters: PRA statement

The PRA has published a statement explaining that the minimum deferment rate parameter to be used in the Solvency II Effective Value Test (EVT), as set out in SS3/17, has been reviewed and updated.

The minimum deferment rate parameter set out in the December 2018 policy statement (PS31/12) was 1% per annum. This was reduced to 0.5% per annum in September 2019 following a review of movements in long-term real interest rates. For the March 2020 review, the PRA has again examined long-term real interest rates, measured using a range of swaps-based data sources, at a range of long-term tenors from 10 to 30 years. Taking into account current market conditions, the PRA has decided to retain the minimum deferment rate used in the EVT at 0.5% per annum. The PRA will keep the minimum deferment rate under review.

To avoid any doubt, the PRA advises that the volatility parameter to be used in the EVT has not been reviewed. It remains unchanged at 13% per annum.

The new deferment rate applies from 31 March 2020. However, firms that have elected to use a minimum deferment rate of 0% to conduct the EVT prior to 31 December 2021 may continue to do so.

When conducting the EVT, all firms should use the published volatility parameter set out in the statement, regardless of the minimum deferment rate they are using.

COVID-19: FCA expectations of general insurance firms on renewals

On 31 March 2020, the FCA updated the section on renewals on its webpage which sets out the FCA's expectations of general insurance firms in light of COVID-19.

The FCA recognises that firms may experience challenges in contacting consumers, for example if they are unwell. This may make it harder to meet key conduct requirements such as assessing consumers' demands and needs at renewal.

If this is the case, the FCA expects firms to continue to seek to meet these requirements, including the obligation to act honestly, fairly and professionally in accordance with the best interests of the customer. However, the FCA does not prescribe how firms should go about meeting these requirements.

It states that it may be reasonable for firms to rely on existing information that they already hold, for example if this information is recent, is still expected to be accurate, and there have not been significant changes to the product.

It might also be reasonable for a firm to decide that providing continuity of cover meets a customer's best interests, where there is no evidence to show the contract is inconsistent with the customer's demands and needs or wouldn't otherwise be unsuitable.

Firms will obviously also need to ensure that they comply with all relevant legal requirements in relation to their contracts. If, once the customer is better, they contact the firm to say that the policy did not meet their needs, the FCA expects firms to treat the customer fairly.

COVID-19: FCA updates pensions information for firms

On 3 April 2020, the FCA updated its webpage on pensions information for firms on their COVID-19 response to include a section on communicating certain pension information.

The FCA notes that a number of firms are facing difficulties in implementing the rules that change both the information that firms give consumers entering pension drawdown or taking an income for the first time (including uncrystallised fund pension lump sum) and the annual information given to these customers. Since these rules were finalised in January 2019, and come into effect on 6 April 2020, the FCA expects firms to have implemented them or be in the final phases of implementation.

However, the FCA understands that firms may experience operational challenges in testing and finalising processes, particularly where they rely on third parties to complete this work. It acknowledges that some firms may not be able to avoid a short delay in implementation of the rules, although it expects firms to implement as soon as reasonably practicable. If this is later than 31 May 2020, the FCA expects to be notified according to the requirements in chapter 15 of the Supervision manual (SUP).

COVID-19: EIOPA call for insurers and intermediaries to mitigate impact on consumers

On 1 April 2020, EIOPA published a statement urging insurers and intermediaries to continue to take action to mitigate the impact of COVID-19 on consumers.

EIOPA welcomes the initiatives already taken by insurers and intermediaries to support and assist consumers, and the consideration being shown towards consumers affected by COVID-19, including those who are particularly vulnerable. It states that access to and continuity of insurance services should be considered essential in the context of the outbreak. To maintain trust in the sector, it is critical that insurers and intermediaries continue focusing on ensuring business continuity and the fair treatment of consumers.

EIOPA strongly encourages insurers and intermediaries to take into consideration various practical implications of COVID-19 on consumers. For example, they may not be able to submit timely claims and may be working from home in breach of a household insurance policy.

In particular, EIOPA asks the following of insurers and intermediaries:

• provide clear and timely information to consumers on contractual rights;
• treat consumers fairly and be explicit in all communications;
• inform consumers about contingency measures that insurers and intermediaries are taking;
• continue applying product oversight and governance requirements, taking into account the impact of COVID-19 outbreak and, where necessary, carry out a product review; and
• consider the interests of consumers and exercise flexibility in how they are treated, where reasonable and practicable.

COVID-19: EIOPA update on delays to consultations and other projects

On 2 April 2020, EIOPA published a press release providing an update that the following measures are delayed by the impact by COVID-19:

• its consultation on reviewing technical implementation means for the package on supervisory reporting and public disclosure under the Solvency II Directive (2009/138/EC) is extended by six weeks from 20 April to 1 June 2020;
• the consultation on implementing technical standards (ITS) under the Regulation on a pan-European personal pension product (PEPP Regulation) is extended by four weeks from 20 May to 17 June 2020;
• the period for commenting on its discussion paper on IBOR transitions is extended by nine weeks from 30 April to 30 June 2020;
• the information request deadline for its market and credit risk comparative study is extended by 5 weeks from 31 May to 3 July;
• publication of a discussion note on value-chain/InsurTech and the second discussion paper on methodological principles of insurance stress testing are both delayed to dates to be determined;
• the information request to NCAs relating to the long-term guarantees (LTG) review under the Solvency II Directive will be postponed from the second quarter of 2020 probably to the third quarter;
• data collection for work on the impact of ultra-low yields on insurers to complement Solvency II data (planned for the first and second quarters of 2020) will be delayed. This will incorporate COVID-19 reflections if necessary; and

the planned data request relating to the 2020 climate risk sensitivity analysis is cancelled. EIOPA will produce the report with the available information.

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