As 2024 proved to be a significant year for regulatory change for insurers, we’ve compiled a list of some of the more noteworthy areas of development that shaped the industry. Listen to our final episode of the year as Skadden attorneys deliver a full round-up of updates and highlights for insurers from the last 12 months.
Episode Summary
As 2024 draws to a close, Rob Chaplin invites colleagues to review a year of change throughout the insurance industry. In keeping with the spirit of a traditional holiday countdown, the team presents 12 topics that spanned the year.
Twelve Insurance Regulatory Developments
Skadden’s 2024 Review
1. Restatement of Assimilated Law: Annabel Smethurst discusses the Prudential Regulation Authority’s Policy Statement 15/24, which she describes as a “big final step” in the Solvency U.K. project.
2. The BMA’s Approach to Private Equity-Owned (Re)insurers: Abraham Alheyali provides context to the Bermuda Monetary Authority’s (BMA) paper about overseeing Bermuda-licensed insurers that are connected with private equity and alternative asset management firms.
3. NAIC Approach to Asset-Intensive (Funded) Reinsurance: Elena Coyle reviews the U.S. National Association of Insurance Commissioners’ new guideline on “asset adequacy testing” of offshore reinsurance reserves.
4. PRA Supervisory Statement 5/24 on Funded Reinsurance: Feargal Ryan highlights the PRA’s supervisory statement on expectations for U.K. insurers that are a party to funded reinsurance arrangements.
5. IAIS Consultation Paper on the Supervision of AI: Caroline Jaffer breaks down four key areas that the International Association of Insurance Supervisors covers in its recent paper about supervising artificial intelligence.
6. PRA Reforms to the Matching Adjustment: Theo Charalambous explains the PRA’s significant changes to Matching Adjustment (MA), including expanding the range of assets and liabilities eligible for MA treatment.
7. UK, EU and US Group Solvency Recognition: Liana-Marie Lien outlines the challenges that regulators face in recognizing other solvency regimes and discusses how the EU, U.K. and U.S. have refreshed their mutual recognition.
8. UK Reforms to Third-Country Operating Branches: Usman Sawar discusses PRA reforms taking effect at the end of 2024 and their implications for third-country insurance and reinsurance branches operating in the U.K.
9. EIOPA Consultation on Technical Standards: James Pickstock examines the European Insurance and Occupational Pensions Authority’s five consultations on technical standards, designed to refine and enhance the Solvency II regulatory framework.
10. Recent BMA Papers on Collateral Structures / Liquidity Risk / Private Credit: Chiara Iorizzo addresses recent papers by the BMA on collateral structures, liquidity risk and private credit.
11. Lloyd’s Regulatory Update on Proposed Conduct Rules: Ben Lyon assesses Lloyd’s of London’s proposals addressing issues it has faced as it has sought to hold firms and individuals accountable for perceived misconduct.
12. PRIIPS and the New Consumer Composite Investments Regime: Justin Lau and Mary Bonsu define Packaged Retail Investment and Insurance Products (PRIIPs) and explain upcoming changes to these regulations in the U.K.
Voiceover (00:01):
From Skadden, the Standard Formula is a Solvency II podcast for UK and European insurance professionals. Join us as Skadden partner Robert Chaplin leads conversations with industry practitioners and explores Solvency II developments that matter to you.
Rob Chaplin (00:18):
Welcome to the Standard Formula podcast. I’m your host, Rob Chaplin.
(00:24):
It’s been a year of both evolution and significant change in insurance regulation. As we’re nearing the end of the year, I thought it would be fun to ask some of my colleagues to pick an area of evolution or change to talk about for a few minutes each. In keeping with the year-end holiday spirit, we have 12 items for you upcoming. What I should say is this isn’t meant to be a top dozen, but more a list of items that have caught our attention.
(00:56):
Annabel Smethurst will kick us off first. Annabel, over to you.
Annabel Smethurst (01:01):
Thanks, Rob. My regulatory development is Policy Statement 15/24, which was published by the Prudential Regulation Authority, or PRA, on the 15th November. This is the big final step in the Solvency UK project, which adapts the EU Solvency II regime for the UK market. The policy statement covers the restatement of Solvency II assimilated law into the PRA Rulebook. This follows Consultation Paper 5/24, and aims to adapt the UK’s Prudential regime for insurers post-Brexit.
(01:37):
Effective from the 31st of December 2024, the new rules replace the Solvency II assimilated law. Key changes include updates to technical provisions, own funds, and the standard formula for calculating the Solvency capital requirements, or SCR. The PRA has introduced a transitional rule for the loss-absorbing capacity of deferred taxes. The definition of ring-fenced fund has been clarified to exclude matching adjustment portfolios, an important clarification. The policy statement also addresses systems of governance, public disclosure, and insurance special purpose vehicles, or ISPVs. The PRA has made minor adjustments to improve clarity and ensure consistency with existing policy intentions.
(02:30):
The final rules and policy material otherwise aim to maintain the current requirements on firms while allowing for future reforms. This comprehensive restatement ensures that the UK’s insurance regulatory framework remains robust and aligned with domestic financial services regulation, providing clarity and stability for insurers operating in the UK.
(02:53):
I now pass you on to Abraham Alheyali.
Abraham Alheyali (02:58):
Thanks, Annabel. In recent years, insurance markets have experienced substantial growth driven by demographic changes and macroeconomic factors. This growth has led to a more active market and trading back books of insurance liabilities, enabling insurers to optimize capital allocation and write more business. Primary insurers have increasingly relied on this asset-intensive reinsurance to support market growth and maximize premium writing, fulfilling broader economic needs.
(03:27):
In an effort to keep their regulatory framework up to date, the Bermuda Monetary Authority, or the BMA, published a letter right at the end of last year clarifying their position on the oversight of insurers licensed in Bermuda that are connected with private equity, or PE, and alternative asset management firms. These insurers adopt diverse strategic allocation approaches, including having a high proportion of alternatives such as private credit in their portfolios.
(03:56):
When considering whether to grant a PE-backed insurer, a license to write business, the BMA will consider, amongst other things, the insurer’s business model, conflicts of interest, assets allocation, liquidity management, and financial insolvency projections. The BMA may place conditions on its approval, which may include investment limits.
(04:17):
They’ve also taken a strong interest in governance matters. The BMA requires PE-backed insurers to appoint an agreed number of BMA-vetted independent, non-executive directors. These directors will chair conflict of interest and risk and audit board committees. The BMA regularly holds closed-door sessions with independent directors to confirm that insurers are protecting their policyholders’ interests. As Bermuda continues to evolve as a key insurance hub, the future will undoubtedly bring further regulatory evolution as the BMA responds to new challenges and industry feedback.
(04:53):
I’ll now hand you over to Elena Coyle.
Elena Coyle (04:56):
Thanks, Abraham. I’m going to say a few words now about the approach of the NAIC to asset adequacy testing for offshore reinsurance reserves. The NAIC’s Life Actuarial Task Force met on October 24th to discuss a new guideline on this subject. This may increase the cost of asset-intensive, or as they say in the UK, funded reinsurance, for US seeding companies of both annuities and life insurance risk. This is against the backdrop of seeding over 600 billion in liabilities over the course of the past six years, much of which has increasingly ended up in either Bermudian or Cayman reinsurers, where the US regulators don’t necessarily have direct visibility over the assets backing those reserves, particularly in certain reinsurance structures.
(05:42):
Over the past year, the Life Actuarial Task Force of the NAIC has worked on this issue and produced a draft new guideline, which, quote, “establishes additional safeguards to ensure that the asset supporting reserves continue to be adequate.” This draft was discussed at the October 24th meeting and the task force expects to publish the final form of the guideline in 2025.
(06:05):
By its very nature, asset-intensive reinsurance, when the whole liability and not just longevity risk is reinsured for those of you in the UK, means that much more of the [inaudible 00:06:15] assets are used as a premium in the reinsurance. This means that the performance and security of the invested reinsurance assets becomes all the more important for the regulators. So regulators need to be able to keep an eye on what’s going on. Accordingly, the NAIC task force is considering enhancements to reserve adequacy requirements for life insurance companies by requiring that asset adequacy testing use a cash flow testing method that evaluates seeded reinsurance as integral components of the asset intensive business.
(06:45):
In summation, the NAIC plans to establish the new guidelines by the end of 2025 and we will continue to watch this subject with interest.
(06:53):
Now I’ll hand it over to Feargal Ryan in London.
Feargal Ryan (06:56):
Thanks, Elena. My subject echoes yours. On the 26th of July, the PRA published a supervisory statement, or SS, effective immediately setting out its expectations for UK insurers that are a party to funded reinsurance arrangements, stemming from concerns that assets and liabilities are leaving the UK’s jurisdiction and landing with reinsurers which PRA can’t regulate. The PRA stresses that the uncontrolled growth of funded reinsurance could lead to a systemic buildup of risks, namely counterparty risks being underestimated by UK insurers and assets are captured, not being sufficient in the event of reinsurer default.
(07:42):
Accordingly, the PRA mandates that UK insurers must engage in funded reinsurance in line with the prudent-person principle, only investing in assets, the risks of which they can measure, manage, and control, taking into account their own solvency needs. The supervisory statement provides guidance on how UK insurers should determine internal limits on funded reinsurance and how they should engage in ongoing risk management of risks incurred through funded reinsurance.
(08:16):
Clear collateral policy is essential. Insurers must ensure that collateral is adequate to cover technical provisions and risks recaptured, even under stressed conditions. Insurers must also formulate a detailed recapture plan approved by their board, outlining steps to monitor the financial condition of reinsurers and actions to take in case of deterioration to achieve recapture of assets and liabilities.
(08:45):
Life insurers are subject to additional requirements and must submit to the PRA amongst other items, a self-assessment, risk analysis, and board approved reinsurance limits for individual counterparties. For further insights into this area, see our publication on the PRA’s expectations for funded reinsurance.
(09:06):
I’ll now hand you over to Caroline Jaffer, who recently joined us from the Bank of England.
Caroline Jaffer (09:11):
Thanks, Feargal. I’m going to talk about the International Association of Insurance Supervisors, or IAIS. The IAIS is a global standard-setting body comprising regulators from over 200 jurisdictions that creates core international standards for insurance supervision, known as the Insurance Core Principles or ICPs, which are used by regulators worldwide.
(09:34):
On the 18th of November, the IAIS launched a public consultation on a draft application paper addressing the supervision of artificial intelligence or AI. The IAIS recognizes the increasing adoption of AI by insurers and its commercial benefits, whilst noting the risks posed, including potentially impacting financial soundness. The paper complements and refers to already existing ICPs which remain appropriate and addresses risks specific to AI and provides guidance. Its purpose is not to repeat traditional governance risk management requirements, but to focus on areas where AI could accentuate risks and covers the following.
(10:13):
Number one, governance and accountability, including risk management systems, human oversight, use of third-party AI systems, and record-keeping. Number two, robustness, safety and security, including evaluating performance of systems, and considerations surrounding the use of generative AI. Number three, transparency and explainability, including the importance of being able to explain outcomes for each to using AI. And four, fairness, ethics and redress, including data management, monitoring outcomes, and redress mechanisms.
(10:45):
The annex to the paper provides examples from IAIS members where supervisors are already taking steps to address the risks from AI through regulation, including the EU AI Act, the NAIC’s Model Bulletin on AI, and initiatives by the European Insurance and Occupational Pensions Authority, the UK government, and the Monetary Authority of Singapore. The IAIS held a public webinar on the 13th of December to present the paper and answer questions from stakeholders.
(11:14):
I’ll now pass you to Theo Charalambous, who is going to talk about the matching adjustment reform. Theo.
Theo Charalambous (11:20):
Thanks, Caroline, and it’s amazing to have you join our team. Chief amongst the PRA’s reforms in 2024 have been the significant changes to the matching adjustment, or MA, an important Solvency II mechanism whereby eligible firms can adjust the discount rate that they use to value their insurance and reinsurance obligations to reduce the present value of their liabilities. The PRA has expanded the range of assets and liabilities eligible for MA treatment, including by permitting from 30 June 2024 the MA to be applied to a limited pool of assets with highly predictable cash flows and to new categories of liabilities, including in-payment income protection claims. The PRA has also removed the cap on the inclusion of sub-investment grade assets in MA portfolios.
(12:15):
In parallel, the PRA has introduced a more balanced approach to MA condition breaches. Firms are no longer required to cease applying the MA upon a breach, and provided the breach is insignificant, should instead taper the MA by 10% each month where noncompliance is observed. Lastly, to encourage firms to swiftly respond to investment opportunities, the PRA has set itself a target of six months to grant firms permission to apply the MA. The PRA also expects to establish a streamlined permissions process to ease administrative burdens on applicants and deliver permissions on a timeline of less than six months.
(13:01):
I will now hand you over to Liana-Marie Lien.
Liana-Marie Lien (13:05):
The mutual recognition of group solvency regulation is a continual challenge for regulators. To what extent do you recognize other solvency regimes in order to avoid an undue burden being placed on groups, and so is to make your jurisdiction attractive for them to do business in.
(13:25):
The EU, UK and US have grappled with this problem and have now refreshed their mutual recognition, as between the EU and US and the UK and the US. In the case of the UK-US arrangement, this is now being reformalized in UK domestic law through the restatement process that Annabel mentioned. Due to the UK-US bilateral agreement, supervision for US parented groups occurs at the level of the US parent entity and by the supervisor in that parent entity’s home state, with the PRA having the ability to supervise at the level of any UK subgroup.
(14:12):
To exercise a process outlined in the UK-US bilateral agreement, UK Solvency II insurers in a US parented group must apply for a rule modification. The application process is standardized. The PRA will issue bespoke individual other methods directions to UK Solvency II insurers that meet the requirements in the bilateral agreement, which effectively amend the requirements set out in the group supervision part of the PRA Rulebook.
(14:49):
The UK-US Agreement streamlines the administrative impact for insurance groups with a US parent entity by requiring that each relevant member of the group in the UK insurance holding company provide to the PRA its group risk report and provide the same to its US supervisor. While the UK-US arrangements are to be welcomed, we await with great interest to see whether the EU recognizes the UK regime in the fullness of time.
(15:23):
Now over to Usman Sawar to talk about branches. Usman.
Usman Sawar (15:28):
Thanks, Liana. The PRA’s recent reforms to the UK solvency tier regime will reduce regulatory requirements for third country insurance and reinsurance branches operating in the UK. Currently, third country branches in the UK must calculate a branch minimum capital requirement, or MCR, and a branch solvency capital requirement, or SCR, which they must then cover with eligible own-funds. Additionally, unless it’s a pure reinsurance branch, they must hold assets in the UK to cover the branch SCR and deposit assets as security in a UK bank account in an amount equal to at least one quarter of the absolute floor of the MCR.
(16:10):
Now, once the PRA’s reforms come into effect on the 31st of December, third country branches will no longer need to calculate and report a branch SCR and branch MCR or cover these with eligible own-funds. The reforms also eliminate the need to hold assets in the UK to cover the branch SCR and to establish and report branch risk margins on balance sheets.
(16:34):
Earlier this year the PRA also simplified reporting by removing the requirement for all Solvency II firms, including third party branches, to submit the regular supervisor report. Through these reforms, the PRA enforces the reality that third country branches should not be viewed as independent entities severable from their wider legal enterprise. This indicates that the PRA will exercise greater scrutiny over entities holistically, including over their home regimes. This also means that third country branches will not have to comply with both home state and UK rules. This makes the UK more attractive as a jurisdiction to do business in.
(17:16):
I’ll now hand over to my colleague James Pickstock, who is going to talk about EOPPA.
James Pickstock (17:21):
On the 1st of October, EIOPA, the European Insurance and Occupational Pensions Authority, opened its first batch of consultations on technical standards following Solvency II review. This marks a pivotal moment for the insurance industry in the EU as these consultations aim to refine and enhance the regulatory framework established by Solvency II.
(17:38):
There are five consultations. First, liquidity risk management. This aims to define the criteria defining which undertakings and groups should include medium and long-term analysis in their liquidity risk management plans, as well as specifying the content of the plans and the frequency at which they should be updated.
(17:55):
Second, exceptional sector-wide shocks, which aims to provide criteria to supervisory authorities for identifying such shocks. At the time of exceptional shocks, supervisors may require insurers with a particularly vulnerable risk profile to restrict or suspend dividend payments, share buybacks or bonuses, undertakings under dominant or significant influence or managed on a unified basis. This specifies factors for identifying insurance undertakings that are under dominant or significant influence, as well as those managed on a unified basis. These factors are relevant for supervisory authorities to identify and effectively supervise insurance groups.
(18:31):
Fourth, scenarios for best estimate valuations for life insurance obligations. This relates to the simplification of the valuation for life insurance obligations. The simplification is to be used by a specific, small and non-complex undertaking. Fifth and finally, enhancing cross-border supervision of activities. New rules to enhance cooperation and information exchange between home and host supervisors in case of significant cross-border activities. Stakeholders, including insurance companies, industry associations, and other interested parties are encouraged to participate in the consultations. The feedback gathered will be instrumental in shaping the final technical standards, ensuring they’re both effective and practical. EIOPA is set to publish its findings in early 2025. Watch this space.
(19:14):
Now, over to Chiara Iorizzo and back to Bermuda.
Chiara Iorizzo (19:17):
Thanks, James. Increased strengthening of the global regulatory landscape in the reinsurance industry has led to a similar increase in engagement between regulators and those they regulate. Specifically, Bermuda continues to be an attractive choice for reinsurers and their investors alike, continuing its transformation into one of the world’s largest specialist reinsurance markets.
(19:39):
The Bermuda Monetary Authority, or BMA, routinely publishes articles on its guidelines and approaches. This year, it published papers on collateral structures, liquidity risk, and private credit. The papers can be regarded as a thoughtful strengthening of aspects of the Bermuda regime, and another step towards making Bermuda more attractive to [inaudible 00:20:03] jurisdictions against a global backdrop of unsure regulatory caution. Regarding the volume of asset-intensive reinsurance flows offshore, as both Elena and Feargal mentioned, collateralized transactions and structures are considered an effective safeguard by the BMA, particularly in an asset-intensive reinsurance sector such as life and annuity reinsurance.
(20:29):
However, the macroeconomic environment is changing. Reinsurers must be aware of the need to stress test their liquidity in the face of immediate shocks and access to assets, reinforcing the potential benefits of a properly constructed collateralized policy and warning of the danger of a sudden policyholder lapse en masse. It is not coincidental that these papers were published at more or less the same time. The BMA notes in the papers that despite the risks and rewards of various financing methods, its approach to governance is through the lens of key principles. This is another subject area to be watched closely for future evolution.
(21:15):
Now over to Ben Lyon at Lloyd’s.
Benjamin Lyon (21:18):
Thanks, Chiara. Lloyd’s of London, the specialist insurance market, has set out some proposals in a consultation paper recently following the recent criticism of its processes and decision-making around misconduct. These suggestions are designed to address practical and procedural issues that Lloyd’s has faced, as has sought to hold firms and individuals to account for perceived misconduct.
(21:44):
That all being said, the consultation paper indicates that the changes are not intended to increase the number of cases actually handled under the Lloyd’s framework. This new non-exhaustive list of poor and bad behavior and conduct that has been proposed within the rules are set to clarify what constitutes actual misconduct and the circumstances in which Lloyd’s will directly intervene. The list includes examples of non-financial misconduct and makes it clear that Lloyd’s remit extends to conduct outside the professional context in certain circumstances, and so therefore picks up the social settings.
(22:24):
Procedural reform, we’ll see a new Lloyd’s committee comprised of senior Lloyd’s leadership to determine whether individual issues should be dealt with by the wider market oversight team or referred to the Enforcement division. Lloyd’s general counsel and its Chief of Markets will be made solely accountable for decision-making and will be more closely involved in reviewing alleged misconduct and determining Lloyd’s actual responses. Though the consultation preserves the existing governance and committee approvals, which will be required before formal enforcement action can actually be commenced.
(23:04):
Additionally, the framework focuses only on the regime applicable to Lloyd’s managing agents and its syndicates. The framework applicable to cover holders, brokers, delegated claims, service providers, technically remains unchanged. Given the prominent press and enforcement actions to date, it’ll be interesting to see whether these proposals actually have the desired impact.
(23:27):
And so finally, let’s pass over to Justin and Mary to talk about PRIIPs.
Justin Lau (23:32):
Thanks, Ben. Today we’re diving into the world of packaged retail investment and insurance products, or PRIIPs, and the upcoming changes to these regulations in the UK.
Mary Bonsu (23:42):
So what exactly are PRIIPs?
Justin Lau (23:44):
A PRIP is an investment where the amount repayable to the retail investor fluctuates due to exposure to reference values or the performance of assets not directly purchased by the investor. This includes insurance-based investment products with values exposed to market fluctuations. The rules around PRIIPs were brought in by the EU in 2017 and remained in UK regulations after Brexit.
Mary Bonsu (24:07):
Examples of PRIIPs include unit linked policies with profit policies and Holloway sickness policies. Unit linked policies combine insurance coverage with investment in equities or bonds, with profit policies pull money from policyholders and invest in a mix of shares, securities and cash deposits. Holloway sickness policies offer health benefits and investment returns derived from surpluses accrued by friendly societies.
Justin Lau (24:35):
That’s right. And currently anyone advising or selling PRIIPs must provide a Key Information Document, also known as a KID, to the retail investor before any transaction. KIDs offer consumer-friendly information about the product’s features, risks and costs, improving transparency and allowing investors to compare PRIIPs across the EU and the UK.
Mary Bonsu (24:57):
Now, let’s talk about the changes. In November 2023, the UK government published a draft statutory instrument to replace existing European PRIIPs regulations. The new rules will grant the FCA powers to replace PRIIPs and create a new retail disclosure framework for consumer composite investments, or CCIs.
Justin Lau (25:16):
The new UK regime is expected to come into force in the first half of 2025, subject to parliamentary approval and FCA consultation. Key differences include the scope of products, the removal of provisions related to requirements like the formatting of the KID, detailed methodologies for calculating costs, risks and performance, enhancing the FCA’s powers, and expanded civil liability for firms.
Mary Bonsu (25:42):
Although the rules aren’t finalized, firms offering insurance-based investment products such as unit linked policies with profit policies and structured investment products, including insurance policies, should keep a close eye on these developments.
Justin Lau (25:55):
Absolutely, and we will continue to monitor developments, so stay tuned for further updates.
Rob Chaplin (26:01):
Well, team, what can I say? That was amazing. We hope that all our listeners have enjoyed today’s episode and all our podcasts and publications this year. I should add that we recently updated all the chapters in our guide to Solvency II, and these are now on our website.
(26:20):
From all of us here at Skadden, thank you for listening. Please tune in in 2025. Until then, happy holidays.
Voiceover (26:30):
Thank you for joining us on the Standard Formula. If you enjoyed this conversation, be sure to subscribe in your favorite podcast app so you don’t miss any future episodes. Additional information about Skadden can be found at skadden.com.
(26:42):
The Standard Formula is a podcast by Skadden, Arps, Slate, Meagher & Flom, LLP, and affiliates. Skadden is recognized for its deep experience in representing insurance and reinsurance companies and their advisors on a wide variety of transactional and regulatory matters. This podcast is provided for educational and informational purposes only, and is not intended and should not be construed as legal advice. This podcast is considered advertising under applicable state laws.
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