With Solvency II having launched on 1 January, the main regulatory issues that need to be on insurers’ radar in 2016 include the senior insurance managers regime (SIMR) and insurance resolution planning for globally systemically important insurers (GSIIs). Ronan McCaughey explains
These are the key regulatory predictions in a report by Deloitte Top 10 for 2016: Outlook for the financial markets regulation.
In the first place, the UK’s Prudential Regulatory Authority (PRA) and Financial Conduct Authority (FCA) published their final rules on the new Senior Insurance Managers Regime (SIMR).
SIMR reflects regulatory changes under the Solvency II Directive as well as efforts to ensure some alignment with the Senior Managers Regime (SMR) for the banking industry.
The senior insurance managers regime (SIMR) will reinforce individual accountability and through that a focus on culture, according to Deloitte.
Michael Ruck and Elena Elia who are financial regulation experts at law firm Pinsent Masons explain the (SIMR) is designed to hold individuals increasingly responsible for failings by their firms.
It is based on similar rules as the Senior Managers Regime (SMR) in the UK which is applicable to banks, building societies and designated investment firms, but "tailored to the different business models and associated risks of insurers", according to the Prudential Regulation Authority (PRA).
The SIMR will apply to:
– senior managers who are running insurance companies and are subject to pre-approval by the PRA for a ‘controlled function’
– senior persons who have responsibility for key functions and who need to be assessed as being "fit and proper" by the PRA
– certain non-executive directors (NEDs) who carry specific responsibilities for areas or committees directly relevant to a firm’s "safety and soundness" – potentially the chairman, senior independent director, chair of the risk committee, chair of the audit committee and the chair of the remuneration committee
The Deloitte report explains the UK government’s recent announcement about extending SMR to all regulated financial services firms by 2018, will result in insurers being subject to the certification regime.
Deloitte says: "The SMR must also be on the radar of insurance brokers as a result of the same extension."
The Deloitte report adds that Solvency II remuneration requirements will apply from 1 January 2016 and include requirements for insurers to establish and maintain remuneration policies that promote a strong risk culture.
Deloitte says: "The International Association of Insurance Supervisors (IAIS) work on conduct of business risk emphasises the importance of insurers having appropriate remuneration and incentive policies, and the board and senior management being involved in promoting good culture."
Insurance resolution planning
The Deloitte reports adds that insurance resolution planning has lagged behind the banking sector. However, it says momentum will increase in 2016 with the FSB recently consulting on draft guidance for developing effective recovery and resolution plans for GSIIs and any other insurers deemed systemically important by their national authority.
Responding to the consultation by the Financial Stability Board (FSB) on effective resolution strategies for G-SIIs, Insurance Europe has this week welcomed the FSB’s decision to limit the scope of the "critical functions" definition.
However, Insurance Europe, the European (re) insurance federation, says the ultimate aim that the "critical functions" concept tries to achieve has still not been unambiguously defined.
Therefore, Insurance Europe believes that a further clarification of this aspect is needed. There should also be recognition that designation of systemically important insurers and identification of critical functions are very different, and policymakers should not mix up these two approaches.
Insurance Europe welcomes the FSB’s preference for portfolio transfers in the proposed guidance.
Indeed, along with run-offs, the body says portfolio transfers are sufficient to deal with the majority of insurance failures and these should therefore be the most preferred resolution tools.
Commenting on the Deloitte report, David Strachan, co-head of Deloitte’s EMEA Centre for regulatory strategy, says: "Despite being eight years on from the financial crisis and the enormous regulatory progress already made, the policy-making agenda is far from complete, and framework reviews are already underway in some instances.
"As such, looking to 2016, whereas we expect to see a continuation in the trend for fewer, brand new regulatory initiatives, there will be little change in the scale, scope, and pace of regulatory, supervisory and enforcement activities in the UK and EU."
‘Challenging year ahead’
Overall, Chris Finney, a partner at law firm Cooley (UK) LLP, tells Life Insurance International (LII) 2016 will be a challenging year for insurers.
For example, Finney explains that in addition to UK (re)insurers preparing for the UK’s Senior Insurance Managers Regime, which is being phased in between 1 January and 7 September 2016; there is also (b) the Insurance Act 2015, which applies to new policies, and changes to existing policies, entered into after 12 August 2016.
Finney says: "I’m also expecting to see some headline grabbing enforcement action next year, especially for those (re)insurers that aren’t meeting Solvency II’s capital requirements; and those that have failed to properly contingency plan against the risk that the PRA will not give them permission to use an internal model, or the waivers they need to avoid having to comply with some of Solvency II’s rules, despite the PRA’s clear warnings about these things."