Articles - What to expect in 2018 for insurance regulation?

As we reach the end of 2017, I decided to pause and reflect on what this year brought to insurance regulation and what we can expect in 2018. Surprisingly, it feels the level of activity and change on the horizon are well above what we might have expected a few years back. I remember thinking that, following Solvency II implementation, we would have a period of quiet contemplation around regulatory matters. But life happens and so does Brexit and, as a result, more change is coming.

 By Kareline Daguer, Director, PwC

 So here is my round up for the year just gone and the one to come. I wish you all a great end of the year and an even better beginning of 2018!

 First on prudential matters, Solvency II itself looks set to go through numerous changes during 2018 and beyond. EIOPA has started its planned review of the regime and is consulting on advice to the EC about changes to the standard formula and other simplifications. But much to the disappointment of the UK insurance industry, EIOPA is not proposing changes to the risk margin. The Solvency II review will run throughout 2018, with changes due to be implemented by 2021.

 Changes are also afoot in the UK, with the Treasury Committee (TC) issuing its final report on the Solvency II inquiry in October 2017. The TC expects the PRA to develop a clear strategy on immediate and post-Brexit changes to Solvency II to foster innovation and competition. Ahead of the TC’s report, the PRA announced planned improvements to Solvency II, which include: matching adjustment, model change process, decreasing the burden of national specific reporting, simplifying Transitional Measures on Technical Provisions recalculation process, and reviewing the policy on mandatory audits of Solvency and Financial Condition Reports. The PRA is most likely to announce further changes next year and is due to respond to the TC’s report by March 2018.

 A more interesting development this year was the finalisation in October 2017 of the rules for the new insurance-linked securities (ILS) framework. The new framework was developed with the London Market Group and aims to establish the UK as an attractive jurisdiction to carry out insurance risk transformation activities, where insurance risk is transferred to investors in capital markets. The regime includes the creation of a new type of body corporate called Protected Cell Companies (PCCs) and the PRA has clarified its approach to authorisations and requirements to make the regime more pragmatic. Crucially, the regime includes tax regulations that exempt these vehicles from tax and their investors from withholding tax on their investments in ILSs. The new framework could result in increased ILS activity in the UK and the formation of specialised PCCs to deal with it, which would connect the insurance industry to capital markets.

 In the conduct space both EIOPA and the FCA worked to finalise the IDD during 2017. The IDD is expected to be implemented from February 2018 but most Member States are instigating a move to delay implementation by six months until October 2018. In some areas the FCA is gold plating the IDD and seeking to align it with MiFID II requirements. Insurers and insurance brokers have a few more months to prepare for IDD implementation and those efforts are expected to continue well into 2018.

 Wholesale insurance brokers are also currently subject to an FCA market study. This study builds on the FCA’s previous work on value in distribution chains. The FCA is consulting on the study’s terms of reference and will soon start to gather data from relevant firms. Firms should understand and reflect on the objectives of the study when communicating with the regulator. The FCA plans to issue a report in autumn 2018 with preliminary conclusions and proposed remedial actions.

 Finally, Brexit is posing a number of challenges for many insurers and brokers in the UK. Many insurers have already announced restructuring plans to allow them to continue to access the EU market post-Brexit, and I expect firms to accelerate their plans in early 2018. A number of challenges remain, such as insurers’ ability to continue to fulfil their obligations (e.g. by paying claims on contracts written pre-Brexit) in a post-Brexit environment. Lack of certainty on this issue could lead to significant Part VII transfer activity and could prove very costly for the industry. There is also uncertainty around the PRA’s approach to authorising insurance third country branches in the UK, and we expect the PRA to provide more certainty on this in early 2018.

 So, what to expect in 2018? Peace and quiet will probably not be on the cards. Insurers will continue to grapple with difficult decisions to enable them to adapt to Brexit while dealing with ongoing challenging market conditions and pressure from both the PRA and FCA. It is very likely that consolidation across the market will continue with some insurers focusing on their core activities and disposing of books that are unlikely to turn a profit soon. I feel we are in a defining moment for the future of the UK’s financial services industry and, as a result, decisions made in 2018 will shape the UK insurance market for decades to come.

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