REGULATION

International regulatory reform

IAIS consults on policy for global systemically important insurers

The IAIS published a consultation on 17 October 2012 on policy proposals for G-SIIs together with responses to issues raised in its May 2012 consultation on G-SIIs identification methodology.

Under IAIS proposals for enhanced supervision, G-SIIs must develop a plan to reduce their systemic importance but will nevertheless face additional capital requirements, including group level capital requirements and specific capital requirements for non traditional and non insurance business.

Supervisors, insurers and other interested parties should review the proposals. The consultation period closes on 16 December 2012. The IAIS plans to develop detailed G-SIIs supervisory policies, with the requirements for the systemic risk reduction taking effect in 2016 and higher capital requirements effective in 2019. See our Hot Topic for further details.

Other regulatory

EIOPA publishes 2013 work programme

EIOPA published its 2013 work programme on 8 October 2012. Its key task is to finalise the 53 Solvency II technical standards and guidelines defining standards for capital requirements, group supervision, supervisory transparency and accountability, reporting and disclosure and governance. The work programme annex contains a complete list of the Solvency II technical standards and guidelines.

EIOPA intends to create a supervisory handbook to promote a common Solvency II supervisory approach. The handbook will include supervisory best practices and a question and answer (Q & A) procedure. EIOPA will use the Q & A to provide on established guidelines, recommendations and standards.

EIOPA also plans to develop a centre of expertise to help insurers understand how to get approval for and use internal models under Solvency II. EIOPA has not yet announced how the anticipated delay to the Solvency II implementation will affect its plans.

Finally, EIOPA plans to conduct a pan-European insurance sector stress test in 2013. The outcome will inform EIOPA's development of financial stability supervisory activities and will be used as a measure of insurers' preparations for Solvency II.

Alongside the 2013 work programme, EIOPA published its Multi-Annual Work Programme 2012-2014. This provides an overview of EIOPA's 2012 activities in 2012 and 2013-2014 activities: regulatory tasks, supervisory tasks, consumer protection and financial innovation, common supervisory culture, financial stability, crisis prevention, management and resolution, external relations and EIOPA internal organisation. The plan also includes a outline of EIOPA's deliverables for each year.

EIOPA publishes risk dashboard

EIOPA published its most recent Risk Dashboard in October, assessing the systemic risks and vulnerabilities of the European insurance industry. The dashboard monitors risks under the following categories:

  • macroeconomic
  • credit
  • market
  • liquidity/ funding
  • profitability/solvency
  • inter-linkages/ imbalances
  • insurance.

The Dashboard shows that macroeconomic risk, market risk and insurance risks have increased since June. Macroeconomic risk increased due a decrease in demand for insurance products. The decrease was due to uncertain economic conditions, as well as to the political uncertainty around the Eurozone. Market risk increased due to the prolonged low-yield environment which dampens the profitability and solvency of the insurance sector. Insurance risk increased due to uncertainty about the sustainability of premium growth (which may result from the weak economic outlook).

However, both credit and liquidity/funding risks showed a reduction in risk. The decrease in credit risk was due to a decrease in CDS spreads. Stabilising default rates and a rising ratio of liquid over illiquid investments had a positive effect on the liquidity/funding risk.

The risk barometers for interlinkages/imbalances risk and profitability/solvency risk remained largely unchanged. The interlinkages/ imbalances risk indicates the continuing possibility that banking sector problems may spill over to insurance companies. The profitability/solvency risk benefitted from stable solvency ratios in life underwriting and positive non-life underwriting performance in Q2-2012.

EIOPA reports on knowledge and ability requirements for insurance interemediaries

EIOPA published a report looking at requirements which could fulfil knowledge and ability standards for EU insurance intermediaries, finding that

  • Knowledge and ability requirements are generally a combination of academic and professional experience. In many Members States the requirements for knowledge and ability are more stringent for insurance brokers than insurance agents. The requirements to maintain knowledge and ability through continuous professional development (CPD) and assessment practices vary considerably among Member States.
  • Member State supervisors have little experience or common standards from which they can determine the mutual recognition of knowledge and ability qualifications from other Member States.
  • Most Member States operate basic sanctions when intermediaries fail to possess adequate knowledge and ability with regulators usually refusing to register intermediaries or withdrawing their licence/authorisation.

EIOPA's findings and suggestions will inform EU legislators' work to revise IMD.

RRP

EC consults on nonbank financial institution RRP regime

The EC published a Consultation on a Possible Recovery and Resolution Framework for Financial Institutions other than Banks on 5 October 2012. The consultation defines non-bank financial institutions as systemic insurance companies, asset managers and financial market infrastructure providers, such as central counterparties and central securities depositories. The consultation considers how and when the failure of a financial institution, other than a bank, can threaten financial stability.

The consultation defines systemic risk as the risk to financial stability and the wider market from an institution's failure and considers what this means in detail. The EC identifies high risk insurers as those undertaking insurance that is highly interconnected with the rest of the financial system, highly interconnected with the real economy and is not readily substitutable.

The consultation discusses arrangements to prevent nonbank financial institution failures from compromising financial stability. The RRP arrangements are designed to contain the wider market impact of a failure (crisis management or recovery and resolution standards), not to prevent failure (enhanced prudential or market conduct rules).

The consultation identifies the tools used by some EU countries for dealing with insurer insolvency and asks whether these tools should be developed and harmonised at EU-level. This consultation also seeks feedback on whether Member States should have a specific powers to resolve systemically relevant insurance companies and provides scenarios under which regulatory powers might be used.

This consultation closes on 28 December 2012.

Solvency II

EP reschedules Omnibus II vote

Following the EC's decision to undertake detailed analysis of the proposed requirements on long-term guarantees to be contained in Solvency II, the EP formally rescheduled its plenary vote on Omnibus II to 11 March 2013 (from 20 November 2012). Omnibus II amends the Solvency II text and must be adopted before Solvency II can be finalised. The EP's rescheduling brought home to many observers the potential impact on the overall timetable. Many, even EIOPA, are suggesting a further delay is necessary, perhaps to 1 January 2016.

The continuing uncertainty over the implementation date is causing frustration for both firms and EU national regulators. In October EIOPA wrote a letter to the EC voicing their considerable concerns over the lack of a clear and credible Solvency II implementation timetable.

EIOPA publishes part 1 update to Solvency II technical specifications

Specific scope and calibration of the long-term guarantee assessment (LTGA) are still being determined. These items will be incorporated in the annual QIS study on Solvency II requirements. To help participants prepare for the QIS, EIOPA published part 1 of its updated technical specifications for issues which are not dependent on the long term guarantees. These technical specifications reflect changes resulting from Omnibus II negotiations and also the implementing measures and technical standards that have developed since EIOPA published the most recent set of technical specifications in 2010 as part of the QIS

ACCOUNTING1

IASB

IASB Insurance Contracts Project – IFRS 4, phase II

The IASB has been working with the FASB to develop a harmonised IFRS for insurance contracts. However, differences between the IASB and FASB's decisions mean that full convergence between the two bodies' standards is unlikely to be achieved. For more information see our webpage and also the IASB's high level summary of the current status on the project.

The IASB and FASB boards met in October 2012 (see IASB podcast) and discussed:

  • Implementation date and transition – The IASB tentatively decided that the effective date will be approximately three years after the issue of the final standard. An exposure draft is due in the first half of 2013. If the final standard were to follow a year later (but no publication date has been announced) then the effective date could apply from 2018 for insurers with December year-ends. Insurers will be required to restate comparative financial statements and early adoption will be allowed. The boards reached different conclusions on the extent to which they would permit re-designation and/or reclassification of financial assets.
  • Presentation and recognition pattern of premiums /presentation and recognition pattern of acquisition costs. – The boards tentatively agreed to apply the earned premium approach. This would include premiums and claims in the statement of comprehensive income and recognise acquisition costs in the statement of comprehensive income consistent with the proposed allocation of the residual/single margin. The FASB also decided that acquisition costs should be presented as part of the margin liability and that the portion of the insurance liability relating to the policyholder obligations should be separated from the unearned margin liability on the face of the balance sheet.
  • Determination of discount rate for accretion of interest under premium allocation approach (PAA).– Under the premium allocation approach, the boards decided to use the discount rate at inception of the contract to measure the liability for remaining coverage. The discount rate will also determine the amount of claims and interest expense in profit or loss for the liability for incurred claims.
  • Participating contracts.– The discussions clarified that the mirroring decisions would take precedence over the decision to present discount rate changes in other comprehensive income (OCI). The FASB decided that for contracts where the mirroring decisions do not apply and the contractual obligation to the policyholder is directly linked to the fair value of the underlying items, changes in the insurance liability should be presented in profit or loss.
  • Investment contracts with discretionary participation features (DPF) - IASB only. – The IASB agreed some consequential amendments are needed for financial instruments with DPF that are in the scope of the insurance contract standard.

See PwC summary of the meetings and education sessions. The boards plan to meet next in November 2012.

In September, the IASB decided that the exposure draft to be issued in the first half of 2013 would seek comment on only the five most significant areas of change from the previous exposure draft. A group of industry bodies wrote a joint letter to the IASB to request the right to comment on the package of measures as a whole.

Footnotes

1. This section includes accounting developments with a direct or potential on the financial services industry only. For a complete update on accounting developments in the UK visit http://www.pwc.co.uk/eng/services/ifrs_services.html

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.