Recent regulatory developments of interest to insurers and their intermediaries. Includes updates relating to COVID-19 and publications from the PRA and EIOPA. See also our General regulatory news in the Related Materials links.

Contents

• COVID-19: HM Treasury letter on insurance companies' deductions of government grants from BI insurance claims
• COVID-19: FCA BI insurance test case updates
• COVID-19: FCA Dear CEO letter to general insurance intermediaries on client money arrangements
• Solvency II EVT parameters: PRA review statement
• EIOPA launches study on diversification in internal models
• EIOPA single programming document 2021-23 including annual work programme 2021

COVID-19: HM Treasury letter on insurance companies' deductions of government grants from BI insurance claims

On 25 September 2020, HM Treasury published a letter from John Glen, Economic Secretary to HM Treasury, to Huw Evans, Director General of the Association of British Insurers (ABI). Mr Glen’s letter is in response to a letter from Mr Evans (also dated 25 September 2020) in which Mr Evans confirms that 12 insurance firms will not make deductions from COVID-19 related business interruption (BI) insurance claims payments to account for the Coronavirus Small Business Grant Fund, the Retail, Hospitality and Leisure Grant Fund, the Local Authority Discretionary Grant Fund (and their equivalents in the devolved nations).

Mr Glen notes that the practice of making these deductions "would mean that taxpayer funds are being channelled into savings for insurers, rather than supporting businesses to ride out the disruption brought on by this pandemic". Therefore, Mr Glen commends the 12 insurance companies for their commitment not to make these deductions and to review settlements where they have already been made. However, he expresses disappointment that not all insurers have signed up to this approach, when the deductions are clearly not in line with the intention of the support schemes. He strongly encourages those insurers to respect the spirit of the government support schemes and to consider the difficulties being faced by businesses during this time.

Mr Glen also notes that the FCA has recently written to relevant insurers asking them to consider very carefully the appropriateness of any deductions in the context of individual insurance policies and providing clarification on how government support should be treated in claim calculations. Mr Glen states that the government supports the FCA's role in regulating the conduct of UK insurance providers and in ensuring customers are treated fairly throughout the COVID-19 pandemic.

Mr Glen says that if grant deductions continue to be made, the government will consider further action to protect the financial support being issued to businesses.

Mr Glen also welcomes Mr Evans' suggestion that the ABI and HM Treasury officials meet to consider the treatment of future government grants in insurance claim settlements.

COVID-19: FCA BI insurance test case updates

The FCA has updated its webpage on its BI insurance test case. Among other things, it has published the skeleton arguments and leapfrog applications of the defendants. On its webpage, the FCA provides:

• information on the consequentials hearing on 2 October 2020;
• its skeleton argument for the consequentials hearing. It has also published the skeleton arguments for Arch Insurance (UK) Ltd, Argenta Syndicate Management Ltd, Ecclesiastical Insurance Office plc and MS Amlin Underwriting Ltd, Hiscox Insurance Company Ltd, QBE UK Ltd, Royal & Sun Alliance Insurance plc, Zurich Insurance plc, Hiscox Action Group and Hospitality Insurance Group Action; and
• the leapfrog applications for the FCA, Arch Insurance (UK) Ltd, Argenta Syndicate Management Ltd, Ecclesiastical Insurance Office plc, MS Amlin Underwriting Ltd, Hiscox Insurance Company Ltd, QBE UK Ltd, Royal & Sun Alliance Insurance plc and Hiscox Action Group. In addition, the FCA has published the grounds and witness statement for the Hiscox Action Group.

COVID-19: FCA Dear CEO letter to general insurance intermediaries on client money arrangements

On 30 September 2020, the FCA published a Dear CEO letter on adequate client money arrangements, sent to the CEOs of general insurance intermediary firms.

In the letter, the FCA highlights a number of areas that are particularly important to maintaining adequate client money arrangements in the current pandemic environment. It also reminds firms of their obligations to continue to oversee those arrangements and notify the FCA if they identify any material concerns.

The FCA will continue to assess firms' client money arrangements and review the annual independent external auditors' client assets reports. If the FCA contacts firms in the future, they should be prepared to explain the actions taken in response to this Dear CEO letter.

Solvency II EVT parameters: PRA review statement

The Prudential Regulation Authority (PRA) has published a statement setting out the findings from its review of the Solvency II Directive’s effective value test (EVT) parameters, as set out in the PRA’s supervisory statement, SS3/17. The updated parameters set out in the statement apply from 30 September 2020.

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

In brief, the PRA retains the minimum deferment rate parameter used in the EVT at 0.5% per annum and the value for the volatility parameter to be used in the EVT of 13%.

EIOPA launches study on diversification in internal models

The European Insurance and Occupational Pensions Authority (EIOPA) has launched a study on diversification in internal models under the Solvency II Directive.

EIOPA notes that, in general, the modelling of dependencies and aggregation, an effect typically called diversification, within internal models has a significant impact to the overall solvency capital requirement (SCR) of insurance undertakings. Therefore, the objectives of this study are to:

• gain an overview of the current approaches in the market and, on best effort basis, analyse and compare the levels of diversification;
• facilitate a better understanding of modelling dependencies, aggregation and resulting diversification benefits; and
• enhance quality and convergence of supervision on diversification in internal models.

As part of the study, EIOPA has published a technical specification providing instructions to participants, a qualitative questionnaire and a quantitative reporting template.

Insurance undertakings must submit the results to their group national supervisory authority by 15 January 2021. National supervisory authorities must report back to EIOPA by 22 January 2021.

EIOPA single programming document 2021-23 including annual work programme 2021

EIOPA has published a single programming document 2021-23 (SPD), setting out the activities EIOPA will undertake during 2021-23 to deliver on its strategic objectives, including its annual work programme for 2021.

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