Transparency and the Drive for Supervisory Convergence - Sylvia Cronin, Director of Insurance Supervision

Speaking at PWC / Insurance Ireland CEO Breakfast Briefing

Good morning, ladies and gentlemen. I am very pleased to join you at this event today and I would like to thank PwC and Insurance Ireland for the invitation to speak with you.

When the EU overhauled its financial system in the wake of the financial crisis, it introduced a Single Rulebook for financial regulation in Europe and created the European Supervisory Authorities (ESAs) and the European Systemic Risk Board (ESRB). These bodies are pivotal in ensuring that financial markets across the EU are well regulated, strong and stable.

The European Supervisory Authority for Insurance – European Insurance and Occupational Pensions Authority (EIOPA) - is responsible for ensuring a high, effective and consistent level of regulation and supervision taking account of the varying interests of all Member States. In 2016 Solvency II, the biggest regulatory overhaul in Insurance history was implemented in 27 Member States.

With Solvency II embedded and becoming business as usual, I would like to take the opportunity to discuss the drive towards supervisory convergence and the importance of transparency.

What do we mean by supervisory convergence, and why is it important?

A key component of any single market is that the rules that govern the market apply equally to all the players irrespective of where they are based. This is as true for insurance as it is for food production or manufacturing. Consumers know that what they are buying is of the same standard irrespective of where it is produced. In the case of insurance, it means that policyholders can be assured of a stable insurance market and their interests are protected.

To ensure supervisory convergence is achieved, there needs to be a common understanding and interpretation of the laws and regulation, and a common view of what is considered good and effective supervision.

Our approach to insurance supervision is to ensure we are aligned with European best practice. As a member of the EIOPA Board of Supervisors, EIOPA working groups and committees, we play an active and important part in shaping and influencing European standards.

EIOPA Peer Reviews

 Supervisory convergence is a key strategic goal for EIOPA. As stated by EIOPA “supervisory convergence becomes key in a period where effective implementation of Solvency II is both a challenge and an opportunity” and a “true single market demands a level playing field and quality regulation and supervision”. Several initiatives are used to drive consistency between Member States. These include working groups, college of supervisors meetings, common supervisory handbook, EIOPA guidelines and Peer Reviews.

EIOPA periodically conducts peer reviews on Supervisory Authorities on particular topics: to highlight best practices; to strengthen consistency; and to drive convergence. Peer Reviews generally focus on topics that have garnered interest at EIOPA level.

Typically, a Peer Review would consist of a questionnaire issued to all Supervisory Authorities. Based on these results, a number of authorities are selected for an on-site visit from the EIOPA Peer Review Panel. The Panel comprises of representatives from different National Supervisory Authorities who have the necessary independence, seniority and expertise in supervisory practices. A final report is published which highlights best practice and may feed into future EIOPA guidance.

I will share the essence of three Peer Reviews which the Central Bank has participated in this year: Authorisations, Key Functions and Probity of Board Members & Qualifying Shareholders.

Authorisations

Firstly, the Authorisations review. There has been much media coverage and speculation about possible supervisory arbitrage with member states competing to attract companies in the wake of Brexit. Whilst the new Solvency II regime applies to all member states of the EU it is perceived that there is scope for different interpretations for some of the rules. EIOPA has a key role in ensuring convergence of supervisory practices under Solvency II, and this is something the Central Bank supports.

As part of its review, the Central Bank was one of six regulators who received an onsite visit from the Peer Review Panel. The Central Bank’s review took place in April this year. EIOPA acknowledged a comprehensive, transparent authorisation process in place. Key to this is the publication of processes, checklists and guidance on our website. In relation to on-going monitoring, the Central Bank was considered as a benchmark, as it was viewed as particularly important that changes in the business model and governance structure are reviewed with regard to its appropriateness, as part of the authorisation process.

The output of this review helped develop the guidance titled “EIOPA Opinion on supervisory convergence in light of United Kingdom withdrawing from the EU”. The stated main aim of the guidance “is to foster convergence and consistency of authorisation processes across Member States”.

So why is it important to have a robust authorisation process in place? As a regulator, it is imperative that there is a strong authorisation system in place to ensure we have adequate governance, oversight and understanding of potential risks facing undertakings.

Why are we concerned with the substance within an undertaking?

In order to effectively supervise undertakings it is essential that the key decisions are been made by the local entity in which we regulate. We expect strong governance with a sound risk management framework.

Should governance of outsourcing arrangements be a key concern?

It is vital that critical functions such as underwriting, claims or distribution channels that are outsourced to a third party or to group are monitored and reviewed on a frequent basis to ensure that there is adequate control.

Why are we concerned with the level of reinsurance? 

Although reinsurance is an effective risk transfer tool, a high level of quota share reinsurance may indicate a lack of substance in the local entity or possibly exposure to concentration risk and counterparty risk.

All these elements form the basis of the EIOPA guidance. The Central Bank’s authorisation process and its approach to substance, reinsurance and outsourcing are aligned to the EIOPA’s guidance.

Key Functions

The second Peer Review focused on our assessment of how undertakings structure their system of governance. Undertakings are expected to have in place proportionate and effective systems of governance which provides for sound and prudent management of the business. Solvency II requires insurance undertakings to set up four key functions: compliance, risk management, actuarial and internal audit. The functions are required to be operationally independent, however, different functions may be combined and held by the same individual if deemed appropriate. The review in particular focused how we apply proportionality. How our assessment may differ depending on the nature, scale and complexity of the undertaking when assessing combinations, subordinations and outsourcing of key functions. Assessment criteria includes for example the type of undertaking: whether it’s a captive, domestic insurer or group, the number of employees within the company, the classes of the business underwritten, whether the firm is expanding or in run-off. 

So why do we care how undertakings are governed?

Governance and oversight underpin the very essence of how organisations operate and fulfil their obligations to stakeholders. It is imperative that key functions have the appropriate stature within a firm and are operationally independent. Where there are combinations or subordinations it is essential that conflicts of interests are managed and mitigated.

The Peer Review Panel visited the Central Bank in May with the final report expected in October. Initial feedback signaled a consistent approach is taken, with clear criteria outlined and applied in practice.

The outcome of the review will demonstrate the degree of supervisory convergence reached and best practices identified.

Probity of Board Members and Qualifying Shareholders

The final Peer Review of this year focused on the probity assessment of Board Members and Qualifying Shareholders. Different national supervisory practices have developed across Europe, particularly regarding cross border engagement. The Peer Review focused on the assessment of Board Members and Qualifying Shareholders on appointment at solo and at group level. It also looked at how to supervise fit and proper requirements on an ongoing basis, including cross border co-operation and communication.

This is a pertinent review for the Central Bank, given the comprehensive Fitness & Probity regime introduced in 2011, with over 700 insurance PCF applications and 30 acquiring transactions/qualifying shareholder changes assessed since the introduction of Solvency II.

The Review Panel visited the Central Bank in August: this was the first on-site visit for this review, with other supervisory authorities scheduled for later visits. No formal feedback has been received to date however, initial observations were positive given the F&P regime has existed in practice long before the introduction of Solvency II.

As a clear demonstration of our support of EIOPA’s drive for supervisory convergence, the Central Bank of Ireland is leading this peer review within EIOPA.

Transparency and Pillar 3 Reporting

Now I will move on to discuss the importance of transparency and the role of Pillar 3 reporting.

What do we mean by transparency?

In today’s regulatory environment, it is imperative that both undertakings and regulators are accountable for their actions. 

There have been two noteworthy initiatives this year, related to improving transparency on behalf of the industry and regulatory authorities with public stakeholders. These are the publication of Solvency and Financial Conditions reports, and the Transparency and Accountability templates issued by Regulators.

The first publications of the SFCRs was a significant milestone this year. The structure of the reports laid down in the regulations, is comprehensive. These reports cover key topics including the business, governance, risk management, valuation and capital management. One of the key responses to the financial crisis of a decade ago has been the introduction of additional reporting to better inform stakeholders of the key risks. For the Insurance sector, the SFCR is a key initiative in improving transparency to a much broader set of stakeholders. 

To this end, we propose to compile a repository of all SFCRs on our website, and we are aiming to have that in place before the end of the year. We have reviewed the SFCRs provided copied to us. In this initial assessment, we have concentrated on adherence to the structure of the reports as laid down in the regulations as well as the completeness and accuracy of the appended templates. There are issues for a minority of firms arising with respect to the completeness of the Reports. We will be writing to that those firms shortly with a view to ensuring that a complete SFCR document is available on our Repository.

Transparency and Accountability Templates

Of course, transparency, data exchange and reporting requirements are not just for undertakings. A key requirement under Solvency II is that supervisory authorities conduct their tasks in a transparent and accountable manner.

The EIOPA procedure for collaboration between supervisory authorities was revised in May of this year. This now requires a lot more data to be exchanged between supervisory authorities in order to enhance collaboration and co-operation, particularly where insurers are operating under freedom of services. 

Supervisory Authorities are required to publish Supervisory Disclosure Templates to ensure uniformity in the disclosure of aggregate statistical data. This enables comparison between different member states and will support the drive for supervisory convergence. The data submitted by undertakings forms the basis of the aggregate statistics. The Central Bank was one of the first regulators to publish the transparency and accountability templates on our website on the required deadline.

Also, as an example, it is interesting to note that we conducted 37 on-site inspections during 2016, at both solo and group level, accounting for 2,864 days. We also attended 62 college of supervisors meetings, reflecting our commitment to cross border collaboration and reinforcing supervisory convergence.

Closing remarks

To conclude, as we work towards achieving supervisory convergence it is imperative that we place transparency and accountability at the heart of what we do. We must be proactive in how we embed different aspects of the Solvency II Directive and reflect on how processes and controls can be enhanced. This applies to supervisory authorities as well as to undertakings.

The regulatory framework will continue to evolve, keeping pace with new developments in the regulatory environment such as IDD, PRIIPs, GDPR and IFRS 17. EIOPA’s work on supervisory convergence through various elements such as the Revised General Protocol and peer reviews helps ensure a certain and consistent supervisory approach is taken across the EU.