Insurance regulatory news, January 2021

Hogan Lovells

Hogan Lovells

Recent regulatory developments of interest to insurers and their intermediaries. See also our General regulatory news in the Related Materials links.


  • Solvency II: PRA CP1/21 on deep, liquid and transparent assessments, and GBP transition to SONIA
  • General insurance pricing practices: FCA Q&A
  • COVID-19: FCA information on flood and storm claims
  • COVID-19: EIOPA consults on ORSA supervisory statement
  • End of Brexit transition period: Lloyd's underwriters' trading rights
  • Cyber risk underwriting: IAIS report on challenges and supervisory considerations for sustainable market development

Solvency II: PRA CP1/21 on deep, liquid and transparent assessments, and GBP transition to SONIA

The UK Prudential Regulation Authority (PRA) has published a consultation paper, CP1/21, on deep, liquid and transparent (DLT) assessments and GBP transition to the Sterling Overnight Index Average (SONIA) under the Solvency II regime. CP1/21 is relevant to all UK Solvency II firms, including in respect of the Solvency II groups provisions, and to the Society of Lloyd's and its managing agents.

In CP1/21, the PRA sets out its proposed approach to DLT assessments and the transition of Solvency II technical information (TI) from the London Interbank Offered Rate (LIBOR) to SONIA in 2021. The proposals would result in changes to the PRA's Statement of Policy (SoP), "The PRA's approach to the publication of Solvency II technical information". Draft amendments to the SoP are set out in an Appendix to CP1/21.

From 11 pm on 31 December 2020, the PRA has been required to publish TI for each relevant currency. The TI includes the basic risk-free rates and fundamental spreads used in the calculation of the matching adjustment and volatility adjustment. The onshored Solvency II Delegated Regulation provides that RFRs must be based on financial instruments traded in a DLT financial market. From 31 December 2020 and throughout 2021, the PRA's relevant currencies are: GBP, USD, EUR, CAD, SEK, AUD, JPY, NOK and DKK.

The Solvency II TI for GBP, USD and JPY currently reference LIBOR rates. In December 2020, the administrator of LIBOR, ICE Benchmark Administration, published a consultation on its intention for the GBP, JPY and some USD LIBOR panels to cease at the end of 2021, and for the remainder of USD panels to cease at the end of June 2023. The Working Group on Sterling Risk-Free Reference Rates recommended that SONIA is used as the preferred replacement for LIBOR for sterling markets. Therefore, the PRA will transition the GBP Solvency II TI to reference SONIA swap rates before end-2021.

The PRA will also transition the JPY and USD TI references from LIBOR to an Overnight Indexed Swap rate, although the date and approach to these transitions will depend on the liquidity of swaps referencing the Tokyo Overnight Average Rate and the Secured Overnight Financing Rate.

The GBP LIBOR-based rates are currently higher than the equivalent SONIA-based rates. Should this continue to be the case at the time of the proposed transition, the PRA explains that this would generally result in an increase in technical provisions. However, this is, in part, mitigated by several proposals included in CP1/21, notably the proposals on transitional relief and the calculation of the long-term average spread.

The PRA proposes to implement the transition for GBP TI to SONIA from and including 31 July 2021.

The consultation closes on 31 March 2021.

General insurance pricing practices: FCA Q&A

The Financial Conduct Authority (FCA) has published a Q&A document on general insurance pricing practices. The document responds to questions raised during a series of webinars held in November 2020 on the FCA's proposed package of remedies following publication of the FCA's final report on its market study into the pricing of home and motor insurance.

COVID-19: FCA information on flood and storm claims

The FCA has updated its webpage on insurance and COVID-19 to include a section on claims relating to floods and storms. Following the severe flooding in parts of the UK in December 2020, the FCA reminds insurers that it is essential they have plans in place to manage the operational impact of COVID-19. This includes having sufficiently robust plans to continue to operate effectively when there is pressure on services. The FCA outlines some of the different steps insurers have taken to prepare for the impact of COVID-19 on the seasonal increase in flood and storm-related claims. These include:

  • reviewing and adjusting their operational contingency plans to address the additional operational challenges they have identified from the pandemic;
  • conducting reviews of capacity and resources of the supply chain, and of third parties who handle claims for the insurer; and
  • assessing the impact of COVID-19 on the claims process and adjusting it as necessary. This includes factors such as the impact of lockdowns and other restrictions on service providers' ability to access and carry out work in affected areas, and the availability of alternative accommodation where needed.

The FCA states that where customers require immediate assistance, it is critical they can contact their insurer quickly and speak to staff who can deal with their claim. The FCA has seen some insurers address the challenge of staff shortages by cross-training staff so that they can be deployed quickly and flexibly to respond to affected customers as claim volumes increase.

Firms should ensure that they can respond to customers appropriately, including customers they have identified, or who identify themselves, as vulnerable. In doing so, firms should also recognise that some customers may be facing financial difficulty because of COVID-19. This may affect their ability to pay for any immediate costs while their insurance claim is being processed. The FCA reminds insurers to consider if emergency and interim payments are appropriate in the light of the customer's circumstances, and to ensure they make payments in a timely way.

Regardless of the challenges from COVID-19, the FCA expects firms to handle storm and flood claims promptly and fairly, ensuring that customers do not face barriers or delays when making a claim. Firms should provide customers with clear communications about the information they need to support their claim and keep customers informed on progress, including timeframes for any work to be carried out and settlement payments made.

The FCA reminds insurers that they hold regulatory responsibility for the claims process and outcomes, including when they delegate the handling of claims to a third party. They must maintain appropriate oversight of these arrangements to ensure that their outsourcing relationships are meeting the insurer's regulatory obligations.

COVID-19: EIOPA consults on ORSA supervisory statement

The European Insurance and Occupational Pensions Authority (EIOPA) has published a consultation on the Supervisory Statement on Own Risk Solvency Assessment (ORSA) in the context of COVID-19.

In its press release, ESMA states that the statement promotes convergence by guiding undertakings through common supervisory expectations on the ORSA in the current situation triggered by the pandemic, taking into account that the impact on each individual undertaking can differ depending on its specific risk profile. A proper balance between flexibility and acknowledgment of the ORSA as an undertaking's own exercise, and clarification of supervisory expectations in specific circumstances, should be kept.

EIOPA believes that the current situation calls for an ad-hoc/non-regular ORSA in the cases where the pandemic impacts the risk profile of the undertaking materially, in particular in those cases where the performance of the regular ORSA has not allowed the undertaking to assess and to take into account the impact of the pandemic.

Undertakings are expected to consider the uncertainty in the duration and (macroeconomic) impact of the pandemic in its ORSA and, if relevant for its risk profile, consider multiple scenarios to capture this uncertainty in an appropriate manner. In this case the scenarios are expected to include several degrees of severity for the pandemic's impact on the undertaking's solvency and capital needs considering its individual situation.

EIOPA invites responses to its survey by 15 March 2021. After considering the feedback received, EIOPA will develop impact assessment and publish a final report on the consultation, as well as submit the supervisory statement for adoption by its Board of Supervisors.

End of Brexit transition period: Lloyd's underwriters' trading rights

Lloyd's has published market bulletin Y5321, which summarises and clarifies Lloyd's underwriters' trading rights in the EEA after the end of the Brexit transition period. Points of interest include the following:

  • Lloyd's underwriters will cease to have trading rights in the EEA for insurance business from 1 January 2021. As a result, Lloyd’s underwriters' EEA Crystal reports will be updated to reflect the new regulatory position and the impact on Lloyd's underwriters' trading rights;
  • Lloyd's underwriters will continue to be able to write cross-border EEA reinsurance business post-transition period, except with respect to German cedants. For some territories, cross-border reinsurance business can only be written on a reverse solicitation basis;
  • intermediaries and entities carrying on distribution activities to EEA policyholders seeking cover for EEA risks are required to be established and registered in the EEA following the end of the transition period. This applies to both insurance and reinsurance business;
  • from 30 December 2020, when the Lloyd's insurance business transfer scheme took effect, all transferring EEA policies caught by the scheme and related assets and liabilities transferred to Lloyd's Europe. Any claims or proceedings against the members in connection with these EEA policies will be continued by or against Lloyd's Europe. The transfer will not change the terms and conditions of any policy, except that Lloyd's Europe will become the insurer and data controller for EEA policies; and
  • after the end of the transition period, Lloyd's will be deemed a third-country reinsurer for the purposes of the Solvency II Directive. Under the Directive, if the country in which the reinsurer is established is deemed equivalent, that reinsurer should be treated the same as EEA reinsurers. The EU has not confirmed whether and, if so, when it will assess the UK's equivalence for reinsurance purposes. However, if the EU does not designate the UK as being equivalent for these purposes under Solvency II, Lloyd's underwriters will be able to continue to write EEA cross-border reinsurance (except for Germany).

Cyber risk underwriting: IAIS report on challenges and supervisory considerations for sustainable market development

The International Association of Insurance Supervisors (IAIS) has published a report on the identified challenges and supervisory considerations for sustainable cyber risk underwriting. The report sets out the findings of the IAIS' cyber underwriting small group which it appointed in 2019 to prepare a report with findings and recommendations for a strategic approach to how supervisory practices can foster sustainable cyber risk underwriting. The report also sets out the findings from the IAIS' 2019 stock-take of supervisory practices regarding cyber risk underwriting.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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