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Insurance Supervisory Approach
09 February 2018
January 2018
Welcome and Introduction
• Evolution of our supervisory approach under Solvency II
• Providing clarity on our key areas of focus
• Setting expectations for the next 18-24 months
• International recognition of high standards of supervision post BREXIT
• Collaboration
09 February 2018 2
Agenda
09 February 2018 3
Insurance Regulatory Approach for the next 18-24 months
Q&A on Insurance Regulatory Approach
Insurance Distribution Directive
Q&A on Insurance Distribution Directive
09 February 2018 4
Authorisations
Supervision (Prudential and Conduct)
Enforcement
Insurance Regulatory Approach – GFSC Functions
Insurance
Regulatory
and
Supervisory
Plan
Insurance Supervisory Approach Overview
09 February 2018 5
Governance
Underwriting
Systems and
data
Reserving
InvestmentsReinsurance
Group
Contagion
Capital/SCR
Reporting
Quality
Assurance
Performance
of Auditors
Performance
of Actuaries
Resolvability &
Recovery plans
Conduct
Root causes of problems
09 February 2018 6
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
Authorisations
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•How does the firm
make revenue
•Can it sustain
stressed situations
•Key Processes
(UW, claims, etc.)
• Does it make
sense for the
entity to set up in
Gibraltar?
• What markets do
they want to
access?
•F&P
assessments
•Interviews
•Head office
assessments
• Access to
additional funding
in stressed
situations
• Capital
management
policies Access to
CapitalGovernance
Adequacy
of business
model
Rationale
for setting
up in
Gibraltar
Prudential Team
Risk based supervision
09 February 2018 8
IST Team
BAU Team
Super REAL’s with
other NCAs
Meetings
Letters
Regulatory Intervention
Enforcement
Exchange of
information with
other regulators
Prudential supervision overview
09 February 2018 9
BAU
QRTs
Financial
Statements
ORSA
Reserve
reports
Technical
leads will
focus on risk
areas
Focus areas
will intersect
with BAU
work
Conduct of Business SupervisionFocus areas for 2018-2019
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Policyholder
Protection
IDD
Implement
-ation
Delegated
Authorities
Product
Oversight
and Governance
ComplaintsOutsourcing
Claims
Handling
Reserving
09 February 2018 11
Independent Reserving Reports
Actuarial reconciliations
Actuarial Function Holder Reports
Board / Committee minutes
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
• 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
Underwriting
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Underwriting
framework
MonitoringForward looking plans
• Risk selection
• Pricing
• Policy coverage
• Aggregation management
• Risk appetite statements
• Timely reactions to market
events (e.g. Ogden rate)
• Ongoing appropriateness of
underwriting framework
• Strategic impacts due to
competitors, distributors,
service providers
• Forecast loss ratios (SCR
assumptions, ORSA) vs
prior year loss ratios
• Actuarial justification for
any improvements
• Actual vs Expected analysis
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
Capital / SCR Appropriateness
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• 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
Own Risk and Solvency Assessment (ORSA)
Reviews
Discussions of potential capital add-on proceedings
where standard formula is not appropriate
Solvency II Approvals and ongoing appropriateness reviews for:
• Internal Models
• Internal Model Change
• Undertaking Specific Parameters (USPs)
• Volatility Adjustment (VA)
• Ancillary Own Funds (AOF)
Group contagion
09 February 2018 14
Risk and areas of focus
Key risks identified to date:
How GFSC will approach:
RPTsStrip out
profits
Going
concern
Lack of
visibility
Outsourcing
controlsGovernance
Peer group
analysis
Review of
controls
Prudent Person
Principle
Impairment
reviews
Business model
analysis
Quarterly
reporting
Recovery and resolution
09 February 2018 15
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
Systems and data
09 February 2018 16
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….
Auditor’s Management Letters
Financial Statements
Reserving reports – Uncertainty comments
Actuarial Function Holder Reports
Assessment of Data Quality
Internal Audit Reports
Regulatory reporting quality
Investments
09 February 2018 17
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
Group debtors
Group investments
Property investments
Liquidity and concentration
concerns from:
Reinsurance / Co-insurance
09 February 2018 18
Quota share
Excess of Loss (XoL)
ADC/LPT Covers
Co-insurance
Review ORSAs and underlying contracts:
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?
• 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
Quantitative and Qualitative Reporting
09 February 2018 19
Ongoing work ORSAsFinancial
Statements
Reserving
Reports
QRT analysis
• Timelines set for review
• Identify risks and issues
• Follow up with firms and auditors
• Identify risks and issues
• Check standards applied
• Check limitations
• Check data reconciles
• Deeper dive by actuarial resource
• Identify risks and issues
• Ensure ORSA feedback incorporated
• Assess business plans
• Assess OAEC
• Timelines set for review
• Data analytics developed
• Identify risks and issues
• Raise questions and concerns
• Timelines set for review
Professional service providers
09 February 2018 20
Auditors
Actuaries
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
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
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 2018 21
09 February 2018 22
Questions
Comments
23
Insurance Distribution DirectiveJanuary 2018
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 1st October 2018
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Agenda
09 February 2018 25
Key Features of the IDD
Conduct of Business
Product oversight and governance
Knowledge and Competence
Enforcement powers
Passporting
Supervisory strategy
Next Steps
Questions?
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 2018 26
Who does it apply to?
Insurance Intermediaries
Insurance Companies
Insurance Distributors
Ancillary Insurance Intermediaries
09 February 2018 27
What is distribution?
Advising ProposingCarrying out
preparatory work to contracts
Concluding such contracts
Assisting in administration and
performance of such contracts
09 February 2018 28
IDD – Areas for you to consider
Corporate Governance
Host state regulator rules
Compliance by 1st October
Conduct of Business
09 February 2018 30
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-based investment products.
09 February 2018 31
General Principles
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 2018 32
09 February 2018 33
Requirements
COB
Requirements
Product
Oversight &
Governance
Advice
Cross
SellingInsurance
Product
Information
Document (IPID)
Conflicts of
interest & Transparency
Enhanced
Requirements
for IBIPs
Product Oversight and Governance
Requirements
09 February 2018 34
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 2018 35
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 2018 36
Requirements – Article 25
09 February 2018 37
Product Testing Product Approval
Process
Management
Involvement
Appropriateness
of Distribution
channels
Product
monitoring and
review
Target Market
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 2018 38
Knowledge and Competence
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
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
Firm’s assessment of Individuals
Meet benchmark?
Qualifications and training previously held?
Any gaps?
Training going forward?
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
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
Enforcement Powers
09 February 2018 45
Enforcement powers
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 conductPower 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
The directive requires us to take all measures necessary to ensure that the provisions are implemented
Administrative sanctions may be imposed for all infringements of the provisions within the directive and local regulations
09 February 2018 46
Passporting
09 February 2018 47
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 2018 48
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 2018 49
Next Steps
09 February 2018 50
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 2018 51
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 2018
30 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 2018 52
Key messages
09 February 2018 53
Corporate Governance
Host state regulator rules
Compliance by 1st October
Useful information
Dedicated email address:
[email protected] website page:
http://www.fsc.gi/firms/idd
09 February 2018 54
09 February 2018 55
Questions
Comments
