Insurance Supervisory Approach January February 2018

Transcription

1 Insurance Supervisory Approach January February

2 Welcome and Introduction Evolution of our supervisory approach under Solvency II Providing clarity on our key areas of focus Setting expectations for the next months International recognition of high standards of supervision post BREXIT Collaboration 09 February

3 Agenda Insurance Regulatory Approach for the next months Q&A on Insurance Regulatory Approach Insurance Distribution Directive Q&A on Insurance Distribution Directive 09 February

4 Insurance Regulatory Approach GFSC Functions Authorisations Supervision (Prudential and Conduct) Insurance Regulatory and Supervisory Plan Enforcement 09 February

5 Insurance Supervisory Approach Overview Resolvability & Recovery plans Quality Assurance Performance of Auditors Underwriting Capital/SCR Systems and data Reserving Governance Group Contagion Investments Reinsurance Conduct Reporting Performance of Actuaries 09 February

6 Root causes of problems Corporate Governance 1. Significant root cause of failures. 2. Will be assessed as follows: - Board composition - Independent NEDs (including interviews) - Fitness and propriety - Quality of ongoing reporting - Behaviour Business model 1. Overarches key risk areas. 2. Symptoms are as follows: - Consistent losses - Groups where profits are elsewhere - Lack of liquidity - Level of group debts - Insufficient capital - Inappropriate systems and controls 09 February

7 Authorisations Access to additional funding in stressed situations Capital management policies Access to Capital Governance F&P assessments Interviews Head office assessments Does it make sense for the entity to set up in Gibraltar? What markets do they want to access? Rationale for setting up in Gibraltar Adequacy of business model How does the firm make revenue Can it sustain stressed situations Key Processes (UW, claims, etc.) 09 February

8 Risk based supervision BAU Team Prudential Team Exchange of information with other regulators Meetings Letters IST Team Super REAL s with other NCAs Regulatory Intervention Enforcement 09 February

9 Prudential supervision overview Technical leads will focus on risk areas BAU QRTs Financial Statements ORSA Reserve reports Focus areas will intersect with BAU work 09 February

10 Conduct of Business Supervision Focus areas for IDD Implement -ation Delegated Authorities Policyholder Protection Claims Handling Outsourcing Complaints Product Oversight and Governance 09 February

11 Reserving Independent Reserving Reports Actuarial reconciliations Expectations: Cover all lines live and discontinued (unless actuarially justified and documented, and with express consent of the Board) Actuaries have relevant business and jurisdictional experience Ordinarily expect reserving at least independent best estimate Clear reconciliation to financial statements and Solvency II figures Notifiable event if reserving below independent best estimate Actuarial Function Holder Reports Board / Committee minutes Report covering all the tasks of the SII actuarial function? Limitations identified? Clear recommendations. Ownership by AFH of: i. outsourcing to independent actuaries, ii. mitigating limitations AFH important, but Board has ultimate ownership Evidence of internal reserving process 09 February

12 Underwriting Prioritise prudential resource towards firms: Material improvements in forecast loss ratio High growth rates Low solvency coverage Identification supported by peer comparisons, market benchmarks, collaboration with other regulators Underwriting framework Risk selection Pricing Policy coverage Aggregation management Risk appetite statements Forecast loss ratios (SCR assumptions, ORSA) vs prior year loss ratios Actuarial justification for any improvements Actual vs Expected analysis Forward looking plans Monitoring Timely reactions to market events (e.g. Ogden rate) Ongoing appropriateness of underwriting framework Strategic impacts due to competitors, distributors, service providers 09 February

13 Capital / SCR Appropriateness Own Risk and Solvency Assessment (ORSA) Reviews Discussions of potential capital add-on proceedings where standard formula is not appropriate Risk profile analysis, Standard formula appropriateness assessment, SCR result supported by robust stress testing, Clear SCR coverage appetites (minimum and target), Clear statements on economic capital Solvency II Approvals and ongoing appropriateness reviews for: Internal Models Internal Model Change Undertaking Specific Parameters (USPs) Volatility Adjustment (VA) Ancillary Own Funds (AOF) 09 February

14 Group contagion Risk and areas of focus Key risks identified to date: RPTs Strip out profits Going concern Lack of visibility Outsourcing controls Governance How GFSC will approach: Peer group analysis Review of controls Prudent Person Principle Impairment reviews Business model analysis Quarterly reporting 09 February

15 Recovery and resolution Recovery and resolution plans Firms need to be ready to respond to challenges Minimum expectation is inclusion of recovery options and risks to resolution within ORSA. Should cover potential stress scenarios Should consider key suppliers and activities Should assess potential costs of plan RRPs will be escalated where concerns towards resolvability. What are indicators of a stress scenario What are procedures for informing Board What contingency plans are in place 09 February

16 Systems and data Expectations Data is complete, accurate, and appropriate Sufficient quality and timeliness of data for purposes: Underwriting Reserving Capital modelling Reporting Oversight of data from delegated authorities Can systems manage and validate multiple data sources Are systems appropriate for number of distributors and COB Risk indicators from. Financial Statements Auditor s Management Letters Reserving reports Uncertainty comments Actuarial Function Holder Reports Assessment of Data Quality Internal Audit Reports Regulatory reporting quality 09 February

17 Investments Risk and areas of focus Key risk identified to date: - Lack of liquidity by some licensees SII Prudent Person Principle 1. Currently being raised with firms 2. Data analytics to be used for industry wide review Liquidity and concentration concerns from: Group debtors Group investments Property investments 09 February

18 Reinsurance / Co-insurance Excess of Loss (XoL) Quota share Co-insurance ADC/LPT Covers Review ORSAs and underlying contracts: Additional risk from capitalisation clauses (PPOs) and minimum and deposit premiums Commissions structures (incl. sliding scales) and contractual limits on contracts Extent of risk transfer following loss corridors and commutation clauses, and appropriateness of SCR modelling Focus on insurers where: Reinsurance use is high SCR coverage is low There are large reinsurance concentrations Asset liquidity is low (reinsurance will impact liquidity) Reinsurance may just be a very expensive form of capital -Is it always loss absorbing in times of stress? 09 February

19 Quantitative and Qualitative Reporting Data analytics developed Identify risks and issues Raise questions and concerns Timelines set for review QRT analysis Identify risks and issues Ensure ORSA feedback incorporated Assess business plans Assess OAEC Timelines set for review Financial Statements Ongoing work ORSAs Timelines set for review Identify risks and issues Follow up with firms and auditors Reserving Reports Identify risks and issues Check standards applied Check limitations Check data reconciles Deeper dive by actuarial resource 09 February

20 Professional service providers Auditors Work performed is critical in supporting regulatory oversight Expect firms to follow ISAs and industry best practice Should appropriately consider work of experts Will be considered in our QA visits Actuaries Work performed is critical in supporting regulatory oversight We will consider quality of reports to licensees We will coordinate with governing bodies We will consider application of standards 09 February

21 What we expect from you/what you can expect from us Collaborative approach No surprises Early engagement Regular dialogue Maintain accessibility -transparent, open and pragmatic approach to issues 09 February

22 Questions Comments 09 February

23 Insurance Distribution Directive January

24 Introduction Insurance supervisory approach includes the implementation of IDD Importance of Senior Management being involved Changes brought about by IDD are very important for this industry given its reliance on cross border activity IDD is a large Directive in terms of impact Delay in implementation means that firms have no excuse not to be fully compliant by 1 st October February

25 Agenda Key Features of the IDD Conduct of Business Product oversight and governance Knowledge and Competence Enforcement powers Passporting Supervisory strategy Next Steps Questions? 09 February

26 IDD key Features from a consumer perspective Greater transparency (price and costs) Better and more comprehensible information (IPID) Cross-selling Transparency & business conduct All distribution channels caught Stronger safeguards (investment products suitability) Fair competition 09 February

27 Who does it apply to? Insurance Intermediaries Insurance Companies Insurance Distributors Ancillary Insurance Intermediaries 09 February

28 What is distribution? Advising Proposing Carrying out preparatory work to contracts Concluding such contracts Assisting in administration and performance of such contracts 09 February

29 IDD Areas for you to consider Corporate Governance Host state regulator rules Compliance by 1 st October

30 Conduct of Business 09 February

31 Objectives In terms of Conduct of Business requirements, IDD seeks to: Improve regulation in the retail insurance market Strengthen consumer protection, in particular with regard to the distribution of insurance-basedinvestment products. 09 February

32 GeneralPrinciples The new regime will introduce two general principles: Insurance distributers must "always act honestly, fairly and professionally in accordance with the best interests of customers All information must be "fair, clear and not misleading." 09 February

33 Requirements Enhanced Requirements for IBIPs Product Oversight & Governance Advice COB Requirements Conflicts of interest & Transparency Insurance Product Information Document (IPID) Cross Selling 09 February

34 Product Oversight and Governance Requirements 09 February

35 Product Manufacturer Recital 55 In order to ensure that insurance products meet the needs of the target market, insurance undertakings, and in the Member States where insurance intermediaries manufacture insurance products for sale to customers, insurance intermediaries should maintain, operate and review a process for the approval of each insurance product Article 25 Insurance undertakings, as well as intermediaries which manufacture any insurance product for sale to customers, shall maintain, operate and review a process for the approval of each insurance product, or significant adaptations of an existing insurance product, before it is marketed or distributed to customers. Regulations Insurance intermediaries shall be considered manufacturers where an overall analysis of their activity shows that they have a decision-making role in designing and developing an insurance product for the market. 09 February

36 Co manufacturers Where insurance intermediaries are also product manufacturers, the insurer and the intermediary can act as co-manufacturers: Separate out responsibility between each party Contractual arrangements Knowledge sharing Where you are not a manufacturer, but are involved in the distribution, you need to have controls in place to ensure you understand the product and its target market. 09 February

37 Requirements Article 25 Product Testing Product Approval Process Appropriateness of Distribution channels Management Involvement Product monitoring and review Target Market 09 February

38 What do these requirements mean for you? New processes Updating internal policies and processes Training within the organisation Embedding of the processes Training of distributors New contractual arrangements 09 February

39 Knowledge and Competence

40 New knowledge and competence requirements Sets high standard based on a benchmark Appropriate in relation to the products offered Continuing Professional and development requirements Onus on Firms to ensure staff meet standards and support staff

41 Establishing a benchmark Establish a high standard Qualifications; examples from industry Firms need to assess all individuals currently selling or in relevant management position Firms need to establish if other qualifications meet this benchmark

42 Firm s assessment of Individuals Meet benchmark? Qualifications and training previously held? Any gaps? Training going forward?

43 Examples of support for new employees Listening in on discussions with clients Peer review of advice Providing support and time for studies Providing a robust induction and training programme Usually 6 months to be competent dependent on products

44 Ongoing training 15 hours minimum CPD Structured training covering areas in Annex I Covers products offered by firm Understand firm s internal policies Keep up to date with market and industry developments Firms need to document staff CPD and ensure compliance

45 Enforcement Powers 09 February

46 Enforcement powers Administrative sanctions may be imposed for all infringements of the provisions within the directive and local regulations The directive requires us to take all measures necessary to ensure that the provisions are implemented Administrative sanctions and other measures shall be effective, proportionate and dissuasive Order the entity or individual to cease any conduct which constitutes a breach and desist from any repetition of the conduct Power to revoke the licence For investment based insurance products there are further powers: Publish statement on nature of breach Financial penalties Up to 5m / 5% of annual turnover / 2x profits gained from non-compliant activity 09 February

47 Passporting 09 February

48 Passporting Firms can passport across the EU to carry out the activity of insurance distribution Insurance companies need to ensure that firms distributing their products are registered to carry out the activities of insurance distribution in the member state in which they operate There is an obligation for firms and individuals to comply not only with the local requirements, but also with the host state requirements which can differ from jurisdiction to jurisdiction 09 February

49 Host state New powers If breach occurs GFSC Obligation to consider any action or measures we may want to take to remediate situation If host member state considers that despite any action taken by GFSC consumers are detrimentally impacted or our actions are in their view insufficient it can take separate action to prevent further irregularities 09 February

50 Next Steps 09 February

51 Supervisory Strategy Collaborative With industry Within the GFSC With host state regulators Focused on higher risk areas Implementation plans by firms Product oversight and governance Transparency Tailored to the firm being reviewed 09 February

52 Next steps Currently Working with highest impact firms around IDD implementation preparedness IDD Workshops Provide focus for firms to ensure compliance with requirements by implementation date 31 March 2018 Follow up with high impact firms to ensure on track to be IDD compliant by 1 October June 2018 FSC to consider all the implementation plans to be satisfied that all firms are on route to meeting the implementation deadline of 1 October 2018 September 2018 Ensure that we are confident that compliant on key areas: Corporate Governance and Product governance, training and Competency, Conduct and passporting (general good) requirements or have action plans in place. 09 February

53 Key messages Corporate Governance Host state regulator rules Compliance by 1 st October 09 February

54 Useful information Dedicated address: Dedicated website page: 09 February

55 Questions Comments 09 February