Insurance in Financial Services UK
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In recent years, the effects of climate change have become more apparent, attracting attention from financial regulators globally. In a recent speech Sabine Lautenschläger, Member of the Executive Board of the ECB, stated “climate change is not an issue for next century. It’s an issue for now, and it’s a topic not only for other sectors but also for the financial sector and for central bankers and supervisors”.1
The regulatory response to a transition to a greener economy is currently accelerating rapidly. A number of EU initiatives put climate change at the forefont of the financial regulatory agenda, and it is clear that the UK regulators will take an active lead.
Against a backdrop of institutional investor pressure and industry actions, central banks and regulators are placing a greater focus on the financial risks that arise from climate change. Banks and insurers incresingly need to think about how to adapt their business models and how the transition to a low-carbon economy may affect the business models and creditworthiness of the companies to which they are exposed.
The timeline below shows this regulatory response and the expected developments. We foresee regulators will continue to clarify their approach over the course of 2019.
The PRA’s consultation paper on liquidity risk management for insurers (CP4/19), released in March 2019, represents a significant enhancement to the regulator’s expectations around the ways in which insurers should assess and manage liquidity risk. The expectations apply to firms across the UK insurance industry, whatever their business model.
Liquidity risk is already an explicit consideration which firms should evidence in their compliance with the Prudent Person Principle (PPP) section of Solvency II (article 132) which requires firms “to ensure the security, quality, [and] liquidity…of the firm as a whole”. The PRA is placing more emphasis on the PPP when engaging with firms, and the degree of compliance with CP4/19 will be an important piece of evidence.
EIOPA embraces the latest trends in European conduct regulation on value for money, firm culture and customer vulnerability
The European Insurance and Occupational Pensions Authority (EIOPA) recently published a framework to help EU national supervisors (also known as National Competent Authorities – NCAs) assess conduct risks throughout the lifecycle of insurance products. The framework is designed to foster supervisory convergence amongst EU supervisors, and to “provide input to the types of risks EIOPA and NCAs should focus on.”
Importantly, EIOPA has highlighted conduct themes that have been of growing importance and visibility across EU markets. These include the need for supervisors to assess firms’ culture; the importance of value for money as one of the key outcomes firms must deliver to consumers; and the need to protect more vulnerable groups of customers. Some of these conduct themes are already being pursued, to varying degrees, across the EU. However, EIOPA’s framework shows that they are also gathering momentum at a pan European level, and that EIOPA will, as part of its convergence remit, increasingly push for these issues to be scrutinised by supervisors across the EU.
- a consultation aimed at improving outcomes in the drawdown market including the introduction of ‘investment pathways’ to help non-advised consumers choose the best way to invest their money; and
- final rules and guidance aimed at improving the information consumers receive in the lead-up to, and after, accessing their pension savings.
Many insurance businesses are struggling with the treatment of reinsurance held under IFRS17. Much of the struggle is to understand the accounting implications, but there are a number of tax issues that businesses should be addressing at the same time. This highlights the importance for businesses of making a place for their tax team within the leadership of the IFRS 17 implementation project.
In December 2017 the Risk Transformation Regulations were passed, enabling the incorporation of Insurance Linked Securities (ILS) vehicles in the UK for the first time. So far there have been 2 issuances (a collateralised reinsurance vehicle for Neon syndicate and a cat bond for SCOR), with rumours of many more in the pipeline.
As someone who has delivered systems changes in finance and actuarial teams for insurance clients for over two decades, I have mixed feeling following the firming up of the IFRS 17 rules and deadlines.
New technologies and evolving business models have required regulators to review their capabilities and respond to new risks posed. And the UK Information Commissioner’s Office (ICO) is no exception. The new General Data Protection Regulation (GDPR) has vested considerable powers to the ICO to regulate and supervise data privacy risks. Increasing concerns about the wholesale use and processing of personal data by firms are reflected in the ICO's recently published Technology Strategy, which outlines its objectives and focus areas through eight technology goals.
The ICO strategy’s leitmotif is that technological advances “need not come at the expense of data protection and privacy rights” and that “privacy and innovation are not mutually exclusive”. Through the development of its technology strategy, the ICO’s overall aim is to remain relevant by ensuring that the monitoring and understanding of technological change, and its impact on information rights, are a core component of its work going forward.
It is no secret that technology and its impact on companies’ business models is shaking up the general market. Technology disruption isn’t limited to media, retail, or transport (to name a few industries), but this disruption is widespread, also impacting financial services. The general theme is that technology enabled companies can execute quicker, cheaper and with greater precision.