Clifford Chance

UK: REGULATORY REFORMS AND INITIATIVES

1. Solvency II Framework Enhancement

• The Prudential Regulation Authority (PRA) introduced CP 19/23 on 28 September. This consultation paper proposed significant changes to the Matching Adjustment (MA) under Solvency II, including the expansion of eligible assets, strengthening governance requirements, and alignment of the MA with the risk profile of underlying assets. For more details, refer to our briefing: "Solvency UK - Reforming the Matching Adjustment to support investment and growth."
• The publication of CP19/23 builds upon the earlier CP12/23 released in June 2023, which aimed to streamline and enhance the flexibility of the Solvency II framework. It proposed administrative reductions and introduced a mobilisation regime to foster the growth of new insurance start-ups. For additional information, please refer to our briefing: "The PRA Publishes Solvency UK Consultation Paper."
• The PRA continues to advance its reform agenda, with the next step expected to be a PRA consultation in early 2024 to address the transfer of remaining firm-facing Solvency II requirements from retained EU law into the PRA Rulebook and other policy materials.

2. Statutory Instruments (SIs) amending the Solvency II Framework

• On 8 December, the UK government published two statutory instruments (SIs) aimed at further refining the Solvency II framework for insurance firms. The date on which these SIs come into force reflects delivery of the overall Solvency II reform timetable. For further background and context on an earlier draft of the SIs, please refer to our briefing: "Solvency UK Draft Regulations Published".
• The first SI, The Insurance and Reinsurance Undertakings (Prudential Requirements) (Risk Margin) Regulations 2023 (SI 2023/1346), modifies Commission Delegated Regulation (EU) 2015/35 (the UK Solvency II Delegated Regulation) and the Solvency 2 Regulations 2015 (SI 2015/575). These amendments focus on risk margin and technical provisions, aiming to improve the calculation methods and alignment with international standards and the SI comes into force on December 31 2023.
• The second SI, The Insurance and Reinsurance Undertakings (Prudential Requirements) Regulations 2023 (SI 2023/1347), restates provisions in the UK Solvency II Delegated Regulation and the Solvency 2 Regulations, particularly concerning the MA. This restatement aims to simplify and clarify regulatory requirements, reducing the complexity for insurers. The SI comes into force on June 30 2024, except for specific provisions related to the PRA's rule-making powers, which take effect on April 1 2024. Relevant provisions in the UK Solvency II Delegated Regulation and the Solvency 2 Regulations 2015 are expected to be revoked by HM Treasury with effect from June 30 2024.

3. PRA Considerations for Year-End 2023

• The PRA, on 8 December, published a statement that articulated considerations for the year-end 2023 within the Solvency II regime review. The statement relates to the changes to the regime to be implemented at year-end 2023 and which have been informed by the Solvency II SIs (please see above), as well as the PRA's proposals set out in its consultation papers published in November 2022 (CP14/22) and June 2023 (CP12/23).
• The statement specifically outlines the implications of the reporting measures reforms under the Solvency II regime for firms including the elimination of the regular supervisory report (RSR) requirement, proposed deletion of specific reporting templates, recalculations of transitional measures on technical provisions (TMTP), alterations to the financial resource requirement, and adjustments to the risk margin for periodical payment orders.

4. Insurance Distribution Directive (IDD)

• The IDD was implemented in the UK in 2018 through changes to the rules in the FCA Handbook. Supplemental requirements were contained in various delegated regulations which were onshored and became retained EU law.
• As part of HM Treasury’s Smarter Regulatory Framework, there are plans to repeal the IDD delegated regulations once the requirements in each regulation have been transferred to the FCA Handbook. On 5 September, the Financial Conduct Authority (FCA) published a consultation paper (CP 23/19) which sets out the destination of each provision in the regulations within the FCA Handbook.
• The FCA intends to maintain the continuity of the IDD regulatory regime and has made no substantive changes to the rules, making only minor consequential or ‘house-style’ drafting changes. The consultation closes on 9 October 2023.

5. Financial Services Compensation Scheme (FSCS) Limits Discussion

• The PRA initiated a Discussion Paper (DP2/23) on 8 December which seeks feedback on FSCS limits for General Insurance (GI) products. Currently, the FSCS provides 90% or 100% coverage of valid claims under insurance policies, with the level of protection depending on the type of insurance. The PRA is now exploring the possibility of increasing FSCS coverage for certain GI products to align with its objective of ensuring an appropriate degree of policyholder protection and is seeking feedback on potential changes.
• The paper is relevant to UK insurers, including UK branches and those in run-off, EEA insurers in the Supervised Run-off or Contractual Run-off regimes, policyholders, as well as the FSCS as the scheme administrator. It is particularly relevant for EEA insurers with UK branches, most notably those who may be currently close to the £500m FSCS liability limit for subsidiarisation. Feedback is sought until 24 January 2024. For further information, please refer to our briefing: "Rethinking Financial Protections: PRA's Discussion Paper on FSCS Limits for General Insurance".

6. FCA Insurance Market Priorities

• On 20 September, the FCA unveiled three portfolio letters outlining its priorities for the insurance market for the next three years, with a focus on (i) embedding the Consumer Duty, (ii) improving governance and culture, (iii) enhancing operational resilience, and (iv) strengthening oversight of appointed representatives.
• In the personal and commercial lines sector, the FCA emphasises price and value, consumer support, and sales practices. Firms are expected to ensure that their products are priced fairly, provide effective customer support, and refrain from targeting vulnerable consumers.
• For life insurers, the FCA is prioritising price and value, customer support, annuity rates, sustainability-related investments and disclosures, and the use of third-party administrators. Life insurers must ensure that their products are priced competitively, provide supportive customer service, offer fair annuity rates, make clear and accurate sustainability-related claims, and manage the risks associated with employing third-party administrators effectively.
• In the wholesale market, the FCA is emphasising competitiveness, operational resilience, financial crime, governance and culture, cyber insurance, and the Consumer Duty. Wholesale insurers are expected to develop innovative and competitive products, enhance operational resilience, implement effective anti-financial crime measures, foster an inclusive culture, ensure their cyber insurance policies are comprehensive, and comply with Consumer Duty obligations even if they do not have direct contact with retail customers.
• For more information on the Consumer Duty and its implementation, please refer to our briefing: "Consumer Duty: FCA Issues Final Rules and Guidance" and "How does the Consumer Duty apply to the UK insurance sector."
  
  

EU: SOLVENCY II REFORMS AND IRRD

1. Agreement by EU Council and Parliament on insurance reforms

• On December 14, the Council of the EU and the European Parliament issued press statements confirming an agreement on revisions to the Solvency II directive, along with the introduction of a new Insurance Recovery and Resolution Directive (IRRD). Both proposals were originally put forth by the EU Commission on December 22, 2021. The amended texts have not yet been released at the time of publication.

2. Solvency II reform

• The EU's reform of the Solvency II Directive marks the first major review of the directive since its implementation in early 2016. The review was initiated following EIOPA’s final opinion to the Commission on the Solvency II review published in December 2020. In September 2022, the EU Commission published its revisions to the Solvency II Directive, encompassing several key aspects.
• The regulatory framework for smaller, lower-risk insurers will undergo significant changes, with a key element being a reduction in capital requirements. The cost-of-capital rate, which determines reserve levels, is currently 6%. However, the recent agreement reached by the Council and Parliament will lower this rate to 4.75%. This streamlining of regulatory requirements is intended to support the resilience and stability of smaller insurers, allowing them to focus on providing essential insurance services without the burden of excessive regulatory burdens.
• A strong focus will be placed on strengthening supervisory oversight. EIOPA will be granted a more prominent role, and national supervisory authorities will benefit from increased flexibility. This move aims to create a more robust and adaptable supervisory framework to ensure the stability and integrity of the insurance sector.
• Additional measures will be implemented to improve the accuracy and transparency of risk assessments. This includes modifications to the reporting framework (SFCR) and adjustments to the method for extrapolating risk-free interest rate term structures.
• Group supervision is another critical aspect of the Solvency II review. The scope of undertakings within a group will be clarified, and direct supervision of insurance holding companies and mixed financial holding companies will be introduced.
• The finalised texts of the provisional agreements by the EU Council and Parliament will be presented to representatives of EU Member States and the European Parliament for approval. Following approval, formal adoption by the Council and the Parliament will occur which is expected in early 2024. Member States will be given some time to implement the directive amendments, with the revised Solvency II framework to be fully implemented across the European Union by 2025.

3. Insurance Recovery and Resolution Directive (IRRD)

• Running parallel to the Solvency II reforms, the IRRD aims to establish a harmonised framework for the recovery and resolution of insurance and reinsurance undertakings in the EU. Along with the Solvency II Directive reforms, the EU Commission published a proposal for the IRRD in September 2021.
• Following the agreement of the EU Council and Parliament, EU Member States will have to set up national insurance resolution authorities, either within existing competent authorities (but as independent departments separate from the supervisory functions) or as standalone legal entities. The resolution authorities will have a range of tools to deploy when faced with insurers that are failing or likely to fail (such as solvent run-off, write-down and conversion, and transfer tools).
• The application of the IRRD will be more selective, focusing on the riskier sectors of the industry, and protecting policyholders. Additionally, only 60% (down from 80% as proposed by the EU Commission) of the Member State's life and non-life insurance and reinsurance market will be subject to pre-emptive recovery planning requirements, and only 40% (down from 70% as proposed by the EU Commission) will be subject to resolution planning requirements. For more information on the EU IRRD, please refer to our briefing: The New EU Insurance Recovery and Resolution Directive.

INTERNATIONAL DEVELOPMENTS: IAIS INSURANCE CAPITAL STANDARD (ICS) CONSULTATION

1. IAIS Insurance Capital Standard (ICS)

• The International Association of Insurance Supervisors (IAIS) conducted a public consultation on the Insurance Capital Standard (ICS) from June 15 to September 21, 2023. The purpose of the consultation was to gather feedback from stakeholders on the ICS, which is being developed as a global standard for capital adequacy for insurance companies. The ICS is expected to be adopted as a prescribed capital requirement (PCR) for Internationally Active Insurance Groups (IAIGs) at the end of 2024.
  • The consultation document provided an overview of the ICS and invited stakeholders to comment on various aspects of the standard, including its valuation, qualifying capital resources, and standard method for calculating capital requirements. The consultation also sought input from stakeholders to support the IAIS's Economic Impact Assessment (EIA) of the ICS. The IAIS is now in the process of reviewing the comments received from the consultation, with the ICS being considered for adoption in December 2024.
  • The PRA has stated that, in its view, effective international collaboration remains crucial to addressing global risks, maintaining UK financial stability, the safety and soundness of internationally active firms, and reducing regulatory arbitrage. It has indicated that it intends to continue to participate actively in global standard-setting bodies such as the IAIS, with one of its specific focuses in this area being the development and monitoring of the ICS. From an EU perspective, EIOPA has stated that it is strongly committed to the ICS, which it views as a project that is of great importance to the global insurance supervisory community.
  • In that context, IAIGs should expect that the PRA in the UK and EIOPA in the EU may take further steps to implement the requirements of the ICS, once finalised, into the applicable regulatory regimes for insurers. It remains to be seen what shape any such reforms will take and (for UK/EU IAIGs) how they will interact with the wider proposed reforms to the UK and EU regulatory regime for insurers.

2. Consultation on ICPs 14 and 17

• Simultaneously with the ICS consultation, the IAIS is seeking input on revised Insurance Core Principles (ICPs) 14 (Valuation) and 17 (Capital Adequacy). These principles form part of the globally accepted framework for insurance supervision and are relevant for all insurers.
• The consultation on the revised ICPs also concluded on September 21, 2023. The IAIS is now set input to refine the ICPs before their official adoption in December 2024 alongside the ICS.