Insurance Industry Regulatory Compliance Newsletters

The Demands and Needs Assessment

On the 24 May 2022, the Malta Financial Services Authority (MFSA) published a circular on their expectations with respect to the Demands and Needs Assessment that is to be carried out under Article 20 (1) of the Insurance Distribution Directive (‘IDD’). These requirements have been transposed in Chapter 4 of the Conduct of Business Rulebook and a more detailed analysis of the Demands and Needs Assessment can be accessed through here.

Implementation of Regulation (EU) 2019/1238 on a Pan-European Personal Pension Product (PEPP)

On the 6 of May 2022, the MFSA published a new legal notice entitled ‘’the Malta Financial Services Authority Act (Pan-European Personal Pension Product (PEPP)) Regulations, 2022 (L.N. 133 of 2022)’’. This notice was published to designate the MFSA as the competent authority responsible for the authorisation of financial undertakings to manufacture and, or distribute PEPPs, the supervision thereof and communication with EIOPA for the purposes of the PEPP Regulation and adopt Regulation (EU) 2019/1238 of the European Parliament and of the Council of 20 June 2019 on a pan-European Personal Pension Product which came into force on 22 March 2022.

Following the Consultation Document issued on the 10 May 2022, the MFSA proposed to:

a) amend the Malta Financial Services Authority Act (Pan-European Personal Pension Product (PEPP)) Regulations, 2022 (L.N. 133 of 2022), issued on the 6th of May 2022 and introduce new fees; and

b) a MFSA Rule containing information in relation to the pre-application process, the Guidelines on PEPP Supervisory Reporting and the conditions pertaining to the accumulation and decumulation phase.

The MFSA Act will be amended to introduce the fees proposed in the Consultation Document and have come into force on the same date of the publication of the Circular and can be accessed through here.

Amendments in the Glossary of Terms and Chapter 5 of the Insurance Rules and to the Insurance Business (Exemptions) Regulations

The MFSA issued a circular on the 5 of August 2022 noting the amendments carried out to Chapter 5 of the Insurance Rules and the Glossary of Terms of the Insurance Rules. These incorporate:

1. Amendments to the Glossary of Terms of the Insurance Rules;
2. Amendments to Chapter 5 issued under the Insurance Business Act of the Insurance Rules;
3. Amendments to Chapter 5 of the Insurance Rules to adopt the revised Guidelines on the Valuation of Technical Provisions and the revised Guidelines on Contract Boundaries

More information and detail on the above amendments can be found here.

EIOPA assesses the impact on the insurance industry on climate change-related physical and transition risks

On the 2 August 2022, the European Insurance and Occupational Pensions Authority (EIOPA) published the final version of the application guidance on climate change materiality assessments and climate change scenarios in the Own Risk and Solvency Assessment (ORSA).

The publication was done following a public consultation on the topic as well as a pilot exercise in which stakeholders were invited to participate.

The application guidance provides a detailed and practical basis on how to implement sustainable finance ambitions in practice. It gives insights into where undertakings have the possibility to address climate change risks in ORSA and provides examples using mock non-life and life companies to help undertakings design the steps for the materiality assessment and run climate change scenarios.

The concrete case studies for materiality assessment of climate change scenarios included in the guidance can help lower implementation costs for insurance undertakings, in particular small and mid-sized ones, taking into account the size, nature and complexity of climate change risk exposures.

EIOPA believes it is important to encourage a forward-looking management of these risks to ensure the solvency and viability of the industry.

Furthermore, EIOPA also published a report on an assessment on climate change risks, which focuses on property, content and business interruption insurance against windstorm, wildfire, river flood and coastal flood risks. These risks have been identified as the most relevant and potentially most disruptive for the European property insurance business under a current and forward-looking perspective.

The report aims to provide an initial assessment of the European insurance sector’s exposure to climate-related hazards and inform future work in this relatively new field. The results indicate that European groups and solo undertakings included in the sample have been historically well placed to handle claims stemming from three major European natural catastrophes analysed in the report. However, it is important to note that the insurance sector’s ability to continue to offer financial protection against the consequences of such events relies on their ability to measure the likely impact of climate change and adapt their business strategies.

Consultation on governance arrangements in third countries

EIOPA launched a public consultation on draft supervisory statement on the use of governance arrangements in third counties on the 1 August 2022.

The aid with the supervisory statement is to enhance the supervision and monitoring of insurance undertakings’ and intermediaries’ compliance with relevant EU legislation concerning governance arrangements in third countries.

The supervisory statement recalls that EIOPA has previously underlined the need for insurance undertakings to not display the characteristics of an empty shell company, and instead demonstrate an appropriate level of corporate substance, including the presence of key decision-makers, function holders and staff to an extent proportionate to the nature, scale and complexity of the entity’s business in the European Economic Area (EEA).

Specifically, governance arrangements raise concerns when they are used to conduct certain regulated functions and activities for undertakings and intermediaries that ultimately serve policyholders in EEA. This has the potential to impair risk management and effective decision making and impact the ability of supervisory authorities to conduct proper supervision.

To achieve clarity of supervisory expectations, the principle of substance over form is used to ensure that similar risks are treated in a similar way, irrespective of the legal form of the governance arrangement and their location.

Stakeholders are invited to provide their feedback on the draft supervisory statement until 31 October 2022 by responding to the questions via the online survey.

Integrating the customer’s sustainability preferences in the suitability assessment under the Insurance Distribution Directive (IDD)

EIOPA published on the 20 July 2022 its guidance on integrating the customer’s sustainability preferences in the suitability assessment under the IDD. The MFSA also implemented changes in the Conduct of Business Rulebook on the 29th July 2022 relating to the three Amending Delegated Acts which integrate sustainability issues and considerations into the IDD.

1. The Commission Delegated Regulation (EU) 2021/1257

The above regulation amended the Delegated Regulations (EU) 2017/2358 and (EU) 2017/2359 as regards to the integration of sustainability factors, risks and preferences into the product oversight and governance requirements for insurance undertakings and insurance distributors and into the rules on conduct of business and investment advice for insurance-based investment products.

2. Commission Delegated Regulation (EU) 2017/2358

Supplementing the IDD by further specifying product oversight and governance requirements for insurance undertakings and insurance distributors. This regulation amends relevant provisions and aims to ensure, amongst other matters, that the sustainability profile and preferences of clients belonging to the target market are considered in the product approval process and the product oversight and governance arrangements

3. Commission Delegated Regulation (EU) 2017/2359

Commission Delegated Regulation (EU) 2021/1257 modifies Commission Delegated Regulation (EU) 2017/2359 and aims to clarify, amongst other matters, that insurance undertakings and insurance intermediaries distributing IBIPs need to take into account possible conflicts of interest that may arise in relation to sustainability factors. Furthermore, when providing advice on IBIPs, insurance undertakings and insurance intermediaries need to carry out a mandatory assessment of sustainability preferences of their clients and shall then take these sustainability preferences into account in the selection process of the IBIPs that are offered to these Clients.

The guidance issued by EIOPA focuses on the new legislation which came into effect on the 2 August 2022, with the objective to promote better understanding of the new rules mentioned above and facilitate a correct implementation by presenting the new requirements in a more user-friendly language and presentation.

The guidance provided by EIOPA is mainly focused on:

• how to help customers better understand the concept of “sustainability preferences” and their investment choices;
• how to collect information on sustainability preferences from customers;
• how to match customer preferences with products, based on product disclosures under the Sustainable Finance Disclosure Regulation (SFDR);
• what arrangements are necessary to ensure the suitability of an insurance-based investment product; and
• the sustainable finance-related training and competence expected of insurance intermediaries and insurance undertakings who provide advice on insurance-based investment products (IBIPs.

EIOPA seeks input on supervisory statement on differential pricing practices

On the 11 July 2022, EIOPA launched a three-month-long public consultation relating to a draft supervisory statement on differential pricing practices.

For the purpose of the statement, EIOPA understands differential pricing practices as those pricing techniques in which consumers with similar risk and cost of service characteristics are charged different premiums for the same insurance products.

The statement reflects upon “price walking” in particular, which refers to the practice of increasing premiums at the renewal stage based on the analysis of characteristics specific to a particular consumer to predict behaviours not related to risk or cost of services, such as how much of a premium increase an individual consumer will tolerate before shopping for coverage with other product manufacturers.

EIOPA’s objective with the statement is to strengthen consumer protection by preventing the unfair treatment of consumers and to promote greater convergence in the supervision of differential pricing practices, to ensure that detriments to consumers are prevented via adequate product oversight and governance (POG) processes.

While the current EU legislative framework does allow certain differential price practices, such as commercial, marketing and underwriting discounts, EIOPA is of the view that some types of differential pricing practices fail to comply with the applicable framework and lead to the unfair treatment of consumers.

Price walking practices in particular can have a detrimental effect on policyholders who are unlikely to switch providers. The practice unfairly penalises loyal customers and can disproportionately affect vulnerable groups such as the elderly.

EIOPA therefore sets out in its supervisory expectations that insurers wishing to make use of differential pricing practices must demonstrate that they have adequate POG measures in place to ensure the fair treatment of consumers and the mitigation of consumer risks.

Stakeholders are kindly invited to provide their feedback on the consultation paper until 7 October 2022 by responding to the questions via the online survey, which can be accessed through here.

Postponing the application date of certain PRIIP’s-related disclosures

On the 24 June 2022 the European Commission published in the Official Journal of the EU the Commission Delegated Regulation (EU) 2022/975 adopted by the Commission on the 17 March 2022 and endorsed by the co-legislators following a scrutiny procedure that ended on 17 June 2022.

The delegated regulation postpones the application date of certain PRIIPs-related disclosures to 1 January 2023 (instead of 1 July 2022 as initially foreseen in the amending act adopted on 6 September 2021 (Commission Delegated Regulation (EU) 2021/2268).

The delegated regulation also prolongs the application of Article 14(2) of Commission Delegated Regulation (EU) 2017/653 until 31 December 2022 (instead of 30 June 2022 as initially foreseen in the amending act adopted on 6 September 2021), concerning the ability to use UCITS Key Investor Information to provide specific information for the purposes of disclosures relating to PRIIPs offering a range of options for investment.

While the entry into force of the delegated act has taken place on the 14 July 2022, the intention of the co-legislators is clearly to:

• postpone the start of application of the new rules included in Delegated Regulation 2021/2268 to 1 January 2023; and
• prolong the application of Article 14(2) of Delegated Regulation (EU) 2017/653 until 31 December 2022.