Insurance regulatory news, October 2020 # 3

Hogan Lovells

Hogan Lovells

Recent regulatory developments of interest to insurers and their intermediaries. Includes updates from the UK PRA, the Society of Lloyd's, EIOPA and the IAIS. See also our General regulatory news in the Related Materials links.


  • Building guarantee policies: PRA PS21/20 on extending policyholder protection
  • COVID-19: Lloyd's report on building simpler insurance products to better protect customers
  • Solvency II: EIOPA Guidelines on ICT Security and Governance
  • Brexit: EIOPA statement on preparations for end of transition period
  • Climate-related risks: IAIS consults on draft application paper on supervision

Building guarantee policies: PRA PS21/20 on extending policyholder protection

The UK Prudential Regulation Authority (PRA) has published a policy statement, PS21/20, which contains a rule change to increase protection for eligible policyholders of building guarantee policies (BGP). It makes amendments to the Policyholder Protection Part of the PRA Rulebook.

Policyholder Protection 17.2(1)(a) provides that protected policyholders are covered for 100% of any benefit under their contract of general insurance (GI) where their claims are in respect of a liability subject to compulsory insurance or professional indemnity insurance, or arise from the death or incapacity of the policyholder due to injury, sickness, or infirmity. In all other cases, protected policyholders should receive at least 90% of any benefit under their contract of GI, as set out in Policyholder Protection 17.2(1)(b).

The PRA considers that 90% coverage for protected policyholders of a BGP no longer amounts to an appropriate degree of protection for reasons discussed in PS21/20. It therefore extended protection to 100% for protected policyholders of BGPs with effect from 8 October 2020.

Given the issues raised in PS21/20, the PRA also plans to review whether there are other types of insurance policy for which additional FSCS coverage could be warranted on policyholder protection grounds. If necessary, it will consult in the future.

The PRA notes that it has not carried out its usual consultation before making this rule change. It explains that this is because it is aware that a firm with a book of BGP business has filed for administration. For protected BGP policyholders of this firm to benefit from 100% cover, the rule change had to take effect before the FSCS declared the firm to be in default.

COVID-19: Lloyd's report on building simpler insurance products to better protect customers

The Society of Lloyd's has published a report produced in response to COVID-19, on building simpler insurance products to better protect customers.

Lloyd's makes three recommendations it considers the industry should implement to respond to the challenges that COVID-19 has presented in complications and uncertainty regarding the insurance cover provided:

  • leverage and build on the application of existing leading practice, including a linguistics review of customer documentation for both simple and more complex products;
  • invest in continuous product design and delivery innovations, including data-led policies and digital contracts, as well as exploring more radical options like parametric or outcome-based insurance; and
  • involve customers directly in product design to build simpler, more relevant products for their changing needs and post-pandemic risk profiles.

The report also outlines the steps the insurance industry and regulators have already taken towards addressing issues around insurance product complexity and clarity of coverage (including regulation, guidance and codes of conduct), and explains the actions the Lloyd's market is taking to improve the way it provides products and support to its customers.

Solvency II: EIOPA Guidelines on ICT Security and Governance

The European Insurance and Occupational Pensions Authority (EIOPA) has finalised its Guidelines on Information and Communication Technology (ICT) Security and Governance.

The objective of the guidelines is to promote the increase of the operational resilience of the digital operations of insurance and reinsurance undertakings against the risks they face. In particular, the guidelines:

  • provide clarification and transparency to market participants on the minimum expected information and cyber security capabilities, i.e. security baseline;
  • avoid potential regulatory arbitrage;
  • foster supervisory convergence regarding the expectations and processes applicable in relation to ICT security and governance as a key to proper ICT and security risk management.

EIOPA consulted on the draft guidelines in December 2019 and has published its feedback to stakeholders' comments in a separate annex.

National supervisory authorities are expected to apply these guidelines from 1 July 2021.

Brexit: EIOPA statement on preparations for end of transition period

EIOPA has reminded the insurance sector to complete preparations for the end of the UK transition period on 31 December 2020.

EIOPA warns the insurance sector to be prepared for the consequences of UK and Gibraltar insurance undertakings becoming third-country undertakings and no longer benefiting from the Solvency II authorisation to provide services in the EU. There are also other legal repercussions concerning insurance contracts, insurance disclosure and group supervision.

It urges the sector to finalise preparations and implement suitable and realistic contingency plans in advance of the end of the UK transition period. In particular, EIOPA expects (re)insurance undertakings to have measures in place to prevent insurance activity without authorisation and ensure service continuity of cross-border business (as specified in its' 2017 Opinion) to minimise the detriment to policyholders and beneficiaries.

EIOPA also reminds insurance undertakings and insurance intermediaries of their duty to inform customers about the possible impact of the withdrawal of the UK from the EU on insurance contracts.

EIOPA will continue to monitor the preparations of the sector, especially the development and implementation of contingency plans.

EIOPA notes that the previously agreed memoranda of understandings on cooperation and information exchange concluded by between the PRA, FCA, EIOPA and all national competent authorities of the EEA with competencies in the insurance sector, remain valid. They will come into effect on the date the European treaties and secondary legislation cease to apply in the UK.

Climate-related risks: IAIS consults on draft application paper on supervision

The International Association of Insurance Supervisors (IAIS) has launched a consultation on a draft Application Paper on the supervision of climate-related risks in the insurance sector to support supervisors in their efforts to integrate climate-related risks into supervisory frameworks.

The draft paper provides background and guidance on how the IAIS supervisory material can be used to manage the challenges and opportunities arising from climate-related risks. The purpose of application papers is to provide additional guidance to assist implementation and provide examples of good practice, rather than establish standards or expectations. In the context of this consultation, the topics and Insurance Core Principles (ICPs) that are in scope are ICP9 on supervisory review and reporting, ICP 7 on corporate governance, ICP 8 and 16 on risk management, ICP 15 on investments, and ICP 20 on disclosures.

The IAIS explains that several ICPs not in scope for this paper do have relevance for assessing and mitigating climate-related risks (for example ICPs on valuation and capital requirements, conduct of business and macroprudential supervision) but may be covered in future work.

The consultation closes on 12 January 2021.

[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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