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Insurance regulatory news, 19 April 2021

FIG Bulletin

19 April 2021

This week, reports on recent UK and EU regulatory developments of interest to insurers and their intermediaries. See also our Financial institutions general regulatory news in the Related Materials links.

The Solvency 2 (Credit Risk Adjustment) Regulations 2021 (SI 463/2021) have been published, together with an explanatory memorandum and a de minimis impact assessment. The Regulations come into force on 28 May 2021. They amend Article 45 of the retained UK Solvency II Delegated Regulation (2015/35).

The new Regulations set out a new methodology for the credit risk adjustment applied in the calculation of the basic risk-free interest rate term structure used by insurance and reinsurance undertakings to discount their liabilities. Given that the London Interbank Offered Rate (LIBOR) is being phased out, these Regulations allow for an appropriate adjustment for the credit risk of other benchmarks, such as for sterling markets the Sterling Overnight Index Average (SONIA).

The Explanatory Memorandum explains that no impact assessment has been prepared as HM Treasury considers the net impact on firms will be less than £5 million a year. Therefore, a de minimis impact assessment has been carried out.

IDD single rulebook launched by EIOPA

The European Insurance and Occupational Pensions Authority (EIOPA) has announced that it has launched its Insurance Distribution Directive (IDD) single rulebook. The single rulebook is an online tool which aims to promote the consistent implementation of the Solvency II regulatory framework for insurance supervision. It covers the IDD, Delegated Regulation (EU) 2017/2358, Delegated Regulation (EU) 2017/2359, Delegated Regulation (EU) 2019/1935 and Implementing Regulation (EU) 2017/1469) as well as EIOPA guidelines and Q&As relating to the IDD. EIOPA has also published a user guide for the rulebook.

Insurance product manufacturers: EIOPA consults on framework to address value for money risk in EU unit-linked market

EIOPA has published a consultation paper on a framework to address value for money risk in the EU unit-linked market. Comments can be made on the proposals until 16 July 2021.

Unit-linked products are (in gross premium terms) the most predominant insurance-based investment product (IBIP) in the EU. EIOPA estimates that these products account for a significant portion of the total assets under management in the EU. It has published the consultation paper in response to its repeatedly highlighted concerns that, while unit-linked products can and often do offer important benefits for policyholders, costs for some of these products continue to remain too high. These concerns have been heightened by the COVID-19 crisis.

In its consultation paper, EIOPA outlines a proposed framework for insurance product manufacturers that is designed to ensure that value for money aspects are taken into account when product testing activities are performed on unit-linked (and hybrid) products. It provides further guidance on how these firms should assess value for money, and measures to be taken to mitigate risks relating to product complexity.

The framework is a first step towards a broader set of tools to assess value for money. These are expected to include more practical guidance, such as further guidance on how to group products to assess whether costs are due, and models to help with testing to assess whether products offer value for money and provide practical benchmarks.

Solvency II: EIOPA annual report on limitations and exemptions from reporting

EIOPA has published its annual report on limitations and exemptions from reporting by national competent authorities in different markets, during 2019 year-end and Q1 2020, under the Solvency II Directive. The report highlights differences with regards to last year's report.

Solvency II: EIOPA report on year-end 2019 comparative study on market and credit risk modelling

EIOPA has published a report setting out the findings from its comparative study on market and credit risk modelling under the Solvency II Directive. The report summarises the key findings from the study undertaken in 2020 based on year-end 2019 data. The study focused on euro-denominated instruments, although it included selected sterling and USD denominated instruments as well as foreign exchange rate indices. It involved 21 participants from eight member states.

The overall results show significant variations in asset model outputs, consistent with past studies, which EIOPA explains could be partly attributable to model and business specificities already known by the relevant national competent authorities, but also indicate a certain need for further supervisory scrutiny. The full results of the study and necessary supervisory actions are set out in section 5 of the report.

According to a related press release, the year-end 2020 survey was launched on 15 January 2021 and the results will be published in early 2022.

EIOPA 2021 EU-wide insurance sector stress test

EIOPA has published a webpage on the EU-wide insurance sector stress test to be held in 2021. The aim of the stress test is to assess the resilience of the participants to the adverse scenario(s) by a capital and liquidity perspective, to provide supervisors with information on whether these insurers can withstand severe but plausible shocks. Participants are asked to estimate their position under two assumptions: fixed balance sheet and constrained balance sheet. The target sample of participants covers 75% of the EU-wide market based on total assets under the Solvency II Directive.

The 2021 exercise mainly has a microprudential approach and allows EIOPA to make recommendations to the industry, and enables supervisors to ask insurance undertakings to take remedial actions, if necessary, to improve their resilience. The 2021 stress test exercise focuses on a prolonged COVID-19 pandemic scenario in a "lower for longer" interest rate environment.

On its webpage, EIOPA outlines a timeline for the stress test process.