Insurance News Update – October
  • Wednesday, 23 October 2019

Insurance News Update – October

Artificial Intelligence governance 

The Dutch Financial Markets Authority (AFM) and the Dutch Central Bank (DNB) predict a more frequent usage of artificial intelligence (AI) in the insurance industry. While the regulatory bodies acknowledge the chances for the market, the goal of the attention points is to raise awareness for risks during the application of AI. Insurance companies must develop a governance framework which clearly defines the scope and limitations where AI is used.

Due to the technology’s high dependence on input data, the data quality should be sufficient. Additionally, the insurers must ensure that the results do not implicitly include discriminating factors in their pricing. Finally, the insurability and solidarity principle are not allowed to be jeopardized.

In line with the discussions on the application of AI, the European Insurance and Occupational Pensions Authority (EIOPA) created a digital ethics expert group in September. The focus area of this expert group is the fairness in pricing and underwriting. A thematic review about big data analytics (BDA) concluded that big data allows for increasing granularity of risk assessment. This may lead to an exclusion of high-risk consumers, although it has not been observed yet.

Brexit and low interest rates remain top risks for insurers

A report published by the Joint Committee of the European Supervisory Authorities (ESAs), which includes EIOPA, highlighted three key risks facing the financial industry sector:

  • The uncertainties around the terms of the Brexit (and the possibility of a no-deal Brexit in particular);
  • Risks related to the low interest environment
  • Sustainable finance and environmental, social and governance (ESG) related risks.

Despite the lower profitability, the ESAs concluded that the European insurance sector remains well capitalised.

Liquidity Risk Management

During the summer, the Bank of England published a Financial Stability Report which discusses potential mismatches between the liquidity of fund assets and redemption terms offered to investors. This report led to questions regarding the Liquidity Risk Management (LRM) recommendations issued in 2018 by the International Organization of Securities Commissions (IOSCO) to open ended investment funds (OEFs).

In particular, the report states that although the Financial Stability Board recommended to align investment strategies with redemption terms, it did not prescribe how to achieve this. IOSCO defends its principle-based recommendations by arguing that a “one-size-fits-all” prescriptive approach would be impractical for the highly diverse fund management industry and expects securities regulators to still ensure effective implementation of the recommendations. IOSCO intends to start a robust assessment exercise in 2020, which will review the implementation of the LRM recommendations in practice.

Stress testing for alternative investment funds 

The European Securities and Markets Authority (ESMA) published final guidance for stress testing of alternative investment funds (AIFs) and Undertakings for the Collective Investment in Transferable Securities (UCITS). EU based funds will be subject to regular financial stress tests, including liquidity risk. The guidelines also recommend notifying National Competent Authorities if substantial risks are identified. These guidelines allow convergence in supervision of liquidity stress testing among the national supervising bodies.

Basel

Basel Committee and IOSCO agree extend the final implementation phase of margin requirements for non-centrally cleared derivatives by one year
The Basel Committee on Banking Supervision and IOSCO previously indicated that the margin requirements for non-centrally cleared derivatives does not hold if the bilateral initial margin amount does not exceed $50 million. Additionally, the Basel Committee and ISOCO agreed to extend the deadline for the implementation of the margin requirements by one year, to support a smooth and orderly implementation.

This implies that the implementation is split into two phases. The first one involves participants, such as asset managers and financial institutions, with an aggregate average notional amount (AANA) of non-centrally cleared derivatives over $50 billion. Compliance for these entities is required by 1 September 2020, whereas entities which have an AANA for non-centrally cleared derivatives of more than $8 billion are given one more year. Both regulatory bodies continue to monitor the progress to ensure a consistent implementation across products, markets and its participants.