Insurance – Q2 2023

Multi-occupancy building insurance

The FCA’s April consultation paper (CP23/8) on multi-occupancy building insurance proposes new rights and protections for leaseholders to improve transparency. This follows from a multi-occupancy buildings report published by the FCA in September 2022. The consultation provides feedback and analysis on the September 2022 report and outlines proposed handbook rule changes. The FCA plans to publish the final rules in a Policy Statement in Q3 2023 with three months for firms to implement them.

Under the proposals, leaseholders would be defined as buildings insurance customers. The rules would require insurance firms to act in leaseholders’ best interests, and bar firms from recommending a policy based on commission or remuneration levels. Insurers and brokers would also need to provide more information about insurance policies to leaseholders, including any commission paid.

The proposed rule changes aim to ensure that: 

• The interests of leaseholders (and others in similar positions) are considered when firms design their products.
• Prices are fair to leaseholders as well as freeholders.
• The remuneration of all parties involved in distribution has a fair relationship to the benefits provided to leaseholders.
• Leaseholders have sufficient information to challenge poor practices and unfair costs passed on to them.

The FCA also published its findings of a multi-occupancy buildings insurance remuneration review. The FCA requested information from 16 firms involved in multi-occupancy buildings insurance. These firms (13 brokers and 3 managing general agents) were included in the sample due to the levels of commissions charged.

The FCA asked for qualitative and quantitative data on areas such as relevant insurance policies, fair value assessments and remuneration. The FCA concluded that significant work was needed for brokers to improve their practices in this area. The key findings included:

• There had been an increase of nearly 40% in absolute levels of remuneration (including commissions), despite reductions in commission percentages.
• The number of parties involved in distribution chains and the sharing of commission significantly affected the cost of insurance.
• There were issues with the availability, completeness, quality, and comparability of data. Most brokers did not provide adequate evidence to show that they delivered fair value consistently. This was due to factors including:
  • deficiencies in product value assessment work
  • shortcomings in records
  • insufficient cost analysis and scrutiny over commissions paid to others
• The quality of the disclosures varied widely, and some firms will need to produce appropriate disclosures to meet the information needs of leaseholders if the proposals in CP23/8 become rules.

PRA Business Plan – financial resilience of insurers

In the PRA’s 2023/24 Business Plan published in May, the PRA set out the following points of focus in relation to the financial resilience of insurers.

Solvency II regulatory reforms

The PRA set out its priorities for the review of Solvency II and has since published a consultation paper on the proposed forms. A summary of the consultation paper is provided below.

Insurer Resolution Regime

The PRA is supporting the work by HMT to create an Insurance Resolution Regime. This provides tools to enable the authorities to take prompt action to manage and stabilise an insurer that is failing or likely to fail.

HMT published a consultation paper which closed in April 2023 and is currently analysing feedback and considering the next steps.

Insurance stress testing

The PRA is working on a longer-term strategy for insurance testing and is expected to announce a timeline for the next insurance test in H2 2023. The PRA published the 2022 Insurance Stress Test results earlier this year.

Reinsurance risk

The PRA is considering the impact of the reinsurance of longevity risk in new annuity business and the emergence of the ‘funded reinsurance’ in the UK life market. The potential impact from offshored counterparty concentration risk due to rapidly growing levels of reinsurance was also highlighted.

The PRA’s review will consider compliance of reinsurance strategies with the Prudent Person Principle. The PRA will also assess the need for further proposals or guidance on the use, and risk management of, reinsurance structures and limits.

Impact of claims inflation in general insurance

The PRA set out its intention to monitor the impact of claims inflation on general insurance claims.  They have since issued a Dear Chief Actuaries letter in June 2023 providing feedback from their thematic review work in this area. 

The PRA will stay focused on the impact of claims inflation and may ask firms to explain how they have considered the findings in the letter as part of their 2023 year-end reserve adequacy supervisory work.  This includes whether firms monitor and assess the impact of claims inflation, and how this has been incorporated into pricing, reserving, and capital modelling.

Solvency II Reforms

In June 2023, the government published draft regulations to reform Solvency II. After Royal Assent, the regulations will give effect to the reforms announced in the Review of Solvency II: Consultation Response and will revoke the existing Solvency II legislation.

The reforms are likely to result in a reduction of the risk margin by around 65% for long term life insurance business and 30% for non-life business.  This is an important component of firms’ insurance liabilities. HMT plans to initially implement the risk margin changes through transitional amendments to the existing onshored Commission Delegated Regulation (EU) 2015/35 (SII CDR). The PRA considers that this is likely to be a material change to a firm’s risk profile and that firms should apply to recalculate transitional measure on technical provisions (TMTP), as per PRA’s Supervisory Statement 6/16.

The PRA also published a Consultation Paper (CP12/23) on the review of Solvency II and set out its proposal for the new Solvency UK framework. The measures aim to simplify the framework, improve flexibility, and support growth and competitiveness. The proposed reforms include:

• A simplified calculation of the transitional measure on technical provisions.
• Streamlined principles-based rules for internal models to calculate capital requirements.
• Greater flexibility in the calculation of group solvency requirements.
• The removal of certain requirements for branches of international insurers operating in the UK.
• The removal of certain reporting requirements including:
  • the regular supervisory report
  • a range of third-country branch report templates relevant to branch capital requirements, the branch risk margin, and the localisation of assets to cover the branch solvency capital requirement (SCR)
• The introduction of new reporting requirements including:
  • the change in internally modelled SCR through the year
  • insurance groups to report SCR at the level of the approved Solvency II internal model, where multiple models are permitted
  • third-country branches on legal entity solvency and financial position
  • an extended scope of application of certain ‘national specific templates’ (NSTs) to cover third-country branches
• A new ‘mobilisation’ regime to facilitate entry and expansion for new insurers.
• An increase in the size threshold for entry into the regime for small insurers.
• Administrative amendments to the PRA Rulebook to update the SII CDR definitions. This is consequential to HMT’s proposed reforms to the Solvency II risk margin.

The consultation on the consequential changes to the PRA Rulebook to update the SII CDR definitions closes on 31 July 2023, with a proposed implementation date of 31 December 2023. For the remaining proposals, the consultation closes on 1 September 2023 and the proposed implementation date is 31 December 2024.