Insurance – Q4 2023

Smarter Regulatory Framework - the Insurance Distribution Directive (IDD)

In our Q3 update, we covered the FCA’s consultation (CP23/19) on the proposed changes to its sourcebooks to replace provisions of EU regulations that were due to be repealed. The consultation closed and the final rules have now been confirmed in the FCA’s policy statement (PS23/18).

The changes cover:

• Updates to terms within the FCA’s Handbook Glossary to improve consistency and remove those that are obsolete, for example, removal of the “IDD IPID Regulation” definition.
• Adjustments to language to make it consistent with the Handbook style, for example changing the word ‘shall’ to ‘must’.
• Replacement of cross-references to rescinded legislative provisions with references to the relevant FCA Handbook rule instead.
• Clarification of Handbook rules versus supporting or contextual guidance, for example, it is guidance for a firm to choose to insert its company logo in an Insurance Product Information Document (IPID).

The changes will come into force on 5 April 2024.

Solvency II – Considerations for year-end 31 December 2023

The final decision on the Solvency UK regime is anticipated in 2024, with a staggered approach to implementation. The PRA has now confirmed the changes to be implemented on 31 December 2023 ahead of the final decision.  These include:

• The removal of the Regular Supervisory Report including both the full triennial report and the material changes report.
• Removal of the requirement to submit templates: S.07.01, S.08.02, S.21.01, S.21.03, S.31.02 and NS.06.
• The removal of the FRR test when recalculating the Transitional Measure on Technical Provisions (TMTP) unless firms were required to limit the TMTP due to the financial Resource Requirements (FRR) test in the recalculation before 31 December 2023. In this case, the removal of the FRR test will be subject to assessment by the firm’s supervisor.
• Approval of the Statutory Instrument to implement the changes to the calculation of the risk margin. Reducing the cost of capital from 6% to 4% and an amendment to the risk margin formula with an introduction of the risk tapering factor for life insurers and reinsurers.
• Clarification of the risk margin calculation in respect of Periodical Payment Orders.

Third-country branch authorisation and supervision

In October 2023, the PRA issued CP21/23 aimed at consolidating and providing improved transparency on the authorisation and supervision of overseas insurers that write business in the UK through a third-country branch (TCB).

The PRA proposes to introduce a new statement of policy to consolidate and formalise existing policy for the authorisation of TCBs.

When assessing the risk of a TCB the PRA considers whether:

• The TCB home jurisdiction’s prudential regime is broadly equivalent to that of the UK.
• Policies apply appropriate levels of prioritisation in an insolvency to UK policyholders.
• The size of the branch can be effectively supervised by the home entity.
• The TCB can meet PRA rules on governance.

Additionally, as part of these updated proposals, the PRA provided further clarity on their risk assessment approach towards TCB’s reinsurance arrangements with a focus on levels of intra-group reinsurance cessions and concentration of reinsurance arrangements.

Fair value data and warning to act

When the FCA published its insurance value measures data, it also issued letters to insurance firms warning them that action must be taken to deliver good customer outcomes. The letters sought to remind firms of the expectations to make sure they check their products provide fair value.

The FCA’s data suggested that Guaranteed Asset Protection (GAP) products may be failing to provide fair value to customers. For GAP, only 6% of the amount customers pay in premiums was paid out in claims. The FCA also mentioned examples where 70% of premiums were paid in commission to parties in the distribution chain, such as motor dealerships. The FCA gave firms manufacturing GAP a three-month ultimation to act. Another product highlighted by the FCA was excess protection (for motor insurance), which also had a low proportion of claims costs to premium written.

The FCA expects firms to meet the obligations set under PROD and the Consumer Duty and raised three concerns:

• The extent and quality to which firms have implemented and embedded these rules overall.
• Certain firms and products where customers may not be receiving fair value - and whether their fair value assessments are in line with the FCA rules.
• Initial indications from supervision shows deficiencies in product governance and a lack of adequate management information.

Appointed Representatives (AR) reporting and attestations

In December 2023, the FCA gave a reminder that its AR reporting requirements had gone live, and Principals needed to log into RegData to check when their return was due. Principals need to confirm details of their ARs when completing the annual Firm Details Attestation. The FCA warned of the £250 fee for late returns and possible enforcement action.

Critical Third Parties to the UK Financial Sector

Please see the Banking newsletter for an update on the proposed changes stemming from CP26/23 that are relevant across financial services.