FIG Top 5 at 5 - 19/10/2023

1. Insurance Ireland publish report: Protecting Tomorrow: the future of the Irish insurance industry

On 12 October 2023, as part of the European Insurance Forum, Insurance Ireland launched the outcome of a report which it had commissioned on the future of the Irish insurance industry. The Report provides an overview of the Irish insurance industry, the merits of Ireland as a location for international insurers, and the future outlook for the industry.

Overview of the Irish insurance industry

Measured in premiums, Ireland has the 4^th largest insurance industry in the EU, employing 35,000 people and contributing over €2.7 billion to the Irish economy annually. In 2022, insurers based in Ireland held more than €300 billion of life and pension assets and paid more than €68 billion in claims.

The industry has grown from €73 billion gross written premiums in 2017 to over €100 billion in 2022. Of this, non-life saw steady growth from €25.293 billion in 2017 to €53.592 billion in 2022; and life on the other hand increased from €48.113 billion in 2017 to €48.829 billion in 2022, seeing a low of €41.726 billion in 2018 and a high of €56.382 billion in 2021. As of August 2023, there were 187 insurance and reinsurance companies based in Ireland including: 75 captives insurers; 31 international non-life insurers; 30 reinsurers; 27 international life insurers; 13 domestic non-life insurers; 9 domestic life insurers; and 2 domestic health insurers.

Domestic Life: From 2017 to 2022, premiums increased by 37% to €19.372 billion; claims increased by 28% to €14.136 billion; and assets increased by 52% to €155.283 billion.

Domestic Non-Life (including health): From 2017-2022, premiums increased by 28% to €17.267 billion; claims increased by 14% to €9.715 billion; and assets increased by 8% to €36.231 billion.

International Life: Compared to the domestic sector, there has been a decrease in premiums, which decreased by 17% to €21.310 billion and claims which decreased by 6% to €15.27 billion. Assets, however, grew 13% to €188.573 billion. The number of companies also decreased from 36 in 2017 to 27 in 2022.

International Non-Life (including health): Brexit led to a number of insurance companies relocating to Ireland, and the non-life sector has seen considerable growth as a result. The number of companies increased from 23 to 30; premiums increased by 325% to €12.287 billion; claims increased by 568% to €7.1 billion; and assets increased by 248% to €30.233 billion.

Reinsurance: Ireland has one of the largest reinsurance markets in Europe. While the number of companies decreased from 28 to 22 from 2017 to 2022, premiums grew by 97% to €30.486 billion; claims grew by 109% to €21.335 billion; and assets grew by 71% to €69.637 billion.

Captives: Ireland is one of the leading countries for captive insurance firms. While captives account for the largest number of entities based in Ireland, they account for the smallest number of premiums, claims and assets. Premiums grew by 2% to €1.611 billion; claims decreased by 16% to €841 million; and assets increased by 7% to €7.552 billion.

Wider Variety of Firms: In addition to the companies outlined above, there are also a number of other firms within the insurance industry including:

• 2,000 insurance intermediaries registered in Ireland;
• specialist service providers such as captive managers, third party administrators, loss adjusters, specialist software providers, actuaries, risk professionals, lawyers and auditors;
• 4,000 people are employed in insurance back office and service centres;
• research and innovation centres focusing on data analytics; and
• 100 insurtech firms.

While the Report noted that there has been a decline in insurance and reinsurance companies, there has been significant growth in the establishment of back office and service centres. The Report notes that growth in this area is expected with increased focus in the industry on innovation, research and new technology such as AI. The insurtech industry is also seeing rapid growth with over €136 million in equity raised over the last number of years.

Investments

At the end of 2022, Irish insurers held some €90 billion in investments. Of this, bonds accounted for almost 70%, compared to 77% in 2016; collective investment vehicles accounted for almost 15; and equities, property, deposits, and derivatives all contributed single digit percentages. Of these assets, 12% were invested in Irish assets; 40% were invested in Europe; 9% in the UK; 17% in the US; 8% in the rest of the world; and there was no data available for the remaining 14%. Despite Solvency II 'prudent person principle', the asset allocation has not changed significantly since it came into force.

Ireland as a location for Insurance

In 2022, the Irish insurance market wrote €33 billion of premiums for international business. 38% for Italy, 15% for the UK, 10% for Germany and 9% for France. The Report noted that the EU cross-border business model is under increasing pressure and identifies a number of reasons for this:

• the harmonising of the regulatory rulebook introduced by Solvency II;
• the repatriation of business following the global financial crisis;
• non-EU entrants have not materialised; and
• many companies have exited, some as a result of parent company mergers.

The number of undertakings based in Ireland peaked in 2009 and has steadily declined by 39% since then. The Report also noted that the falling numbers 'disguise the boost that Brexit provided'.

The Report carried out a survey on international insurers based in Ireland on the main factors which led them to establish themselves in Ireland more than 10 years ago. The most important 5 factors: EU market access; fiscal regime; availability of skilled labour; regulatory regime and language.

The Report then asked the same international insurers how well Ireland scores now in these factors on a scale on 1-5. EU membership; language; and fiscal regime scored over 4. However, availability of skilled labour scored 3.38 and regulatory regime scored 2.79. The Report suggested that this indicated that Ireland is now seen as a less attractive destination.

• 27% has recently considered moving out of Ireland with the most common factors being regulation and the cost of doing business;
• 20% do not expect to still do business in Ireland in 5 years' time;
• 18% planned to further invest in their business in Ireland in the next 5 years, and 23% did not;
• 3 respondents expected their business to be more than 50% bigger in 5 years' time; 12 expected to be between 25-50% bigger; 18 expect to be between 0-25% bigger; 2 expect to remain the same size and 6 expect their business to be smaller;
• over 50% of domestic 15% of international respondents felt that the regulatory regime had a positive impact on the sector; almost 45% of international respondents did not agree or disagree; and 10% of international and 6% of domestic respondents felt it had a negative impact;
• 65% of domestic and 40% of international respondents felt that the regulator's oversight was proportionate, whereas 15% of international respondents strongly disagreed; and
• 4 international respondents believed that Ireland's regulatory regime made it a more attractive location than competitors, while 17 disagreed and 9 strongly disagreed.

The Report noted the strong differences in opinions between domestic and international firms, and recommended that the industry further explore this. In order to remain competitive, the Report noted that focus must be on key factors such as cost, skills, and regulation.

Outlook for the sector

The factors and themes that emerged from the Report as the most significant are macroeconomic outlook; cost of doing business; regulatory agenda; impact of new technologies; and cyber risks. Within technology over the next 5 years,

• over 80% of domestic and 40% of international respondents planned to adopt AI;
• over 50% of both domestic and international respondents planned to adopt data analytics; and
• almost 40% of domestic and 60% of international respondents planned to adopt predictive modelling.

Domestic respondents planned to use new technologies in customer experience; claims and process automation; and international respondents planned to use them for data management and process automation. Cyber risk, particularly in relation to the risk of data breaches was raised as a concern by the majority of respondents.

2. EBA recommends enhancements to Pillar 1 framework to capture environmental and social risks

On 12 October 2023, the European Banking Authority ("EBA"), published a Report on the role of environmental and social risks in the prudential framework of credit institutions and investment firms ("Report").  Environmental and social issues are changing the risk profile of the financial sector and this is expected to become more significant over time.  The Report is based on the feedback received from the EBA's discussion paper on the appropriateness of the existing Pillar 1 to address these new risks published in May 2022.

Short Term Proposals

The EBA proposes targeted enhancements to the Pillar 1 framework which can be implemented in the short term. The purpose of these enhancements is to accelerate the integration of environmental and social related risks across the Pillar 1 framework, while safeguarding its integrity and purpose.

Some of the key short-term proposals put forward are:

• to include environmental risks as part of the stress testing programmes for both the internal ratings-based approach ("IRB") and the internal model approach ("IRM");
• include environmental and social factors as part of external credit assessments;
• include environmental and social factors as part of due diligence requirements and valuation of immovable property collateral;
• require institutions to identify whether environmental and social factors constitute triggers of operational risk losses; and
• develop environment-related concentration risk metrics as part of supervisory reporting.

Medium-Long Term Proposals

The Report also considers medium-long term actions, which involve more comprehensive revisions to the existing framework. Given the fundamental nature of some of the changes, the Report also noted that international cooperation from the Basel Committee on Banking Supervision is vital. The Report emphasised that such comprehensive changes would be justified, only where a clear link between environmental and social factors and traditional categories of financial risks can be established.

Some of the medium-long term proposals include:

• enhancing forward-looking elements of the prudential framework by using scenario analysis;
• examining the future role that transition plans play in developing further risk-based enhancements to the Pillar 1 framework;
• reassessing whether the revision of the IRB supervisory formula and the related standardised approach to credit risk is appropriate to reflect environmental risk elements; and
• the introduction of environment-related concentration risk metrics under the Pillar 1 framework.

The Report also acknowledges that the integration of environmental and social risks across all pillars of the regulatory framework must be strengthened, as well as broader policy initiatives outside the framework. This is to ensure the smooth transition to a more sustainable economy as well as resilience in the banking sector.

3. MiCA Updates

ESMA clarifies timeline for MiCA and encourages prompt preparation for the transition

On 17 October 2023, the European Securities and Markets Authority ("ESMA") published a statement and a letter which clarifies the timeline for MiCA and encourages market participants and national competent authorities ("NCAs") to start preparing for the transition to ensure effective application of the MiCA Regulation.

ESMA Statement

The Statement emphasised that MiCA coming into force is a fundamental development in establishing a single rulebook for the regulation of crypto asset issuance, trading and service provision. However, it also stressed that MiCA does not address all the risks that are associated with these products. By their nature crypto-assets are highly speculative and are prone to novel risks, and ESMA cautions that 'retail investors must be aware that there will be no such thing as a safe crypto-asset'.

Implementation Phase

During the implementation phase which will continue until the date of full application in December 2024, ESMA alongside NCAs and the other European Supervisory Authorities will develop technical standards which specify how the new rules will apply to issuers, offerors and service providers of crypto-assets. The first public consultations, which were published in July and October were important milestones. Full MiCA rights and protections do not apply in the implementation phase, and MiCA rules will not enter into force until December 2024. In the interim, clients of crypto-asset services and holders of crypto-assets should be aware of the existing protections available in their jurisdiction.

The Grandfather Clause

Once MiCA is applicable to crypto-asset providers, Member States may grant entities already providing crypto-services in their jurisdiction an additional 18 month 'transitional period' where they can continue to operate without a MiCA licence (grandfather clause). If a Member States takes this option, then holders of crypto-assets will not benefit from the full protections and rights under MiCA until as late as 1 July 2026.

It is anticipated that most Member States will make full use of the grandfather clause, resulting in uneven protection for holders and clients of crypto-assets until July 2026. This may cause particular risks in relation to global crypto firms, who have opaque group structures making it difficult for clients to know what entity they are dealing with and its regulatory status. To address this, ESMA is promoting coordinated actions across Member States to ensure alignment on supervisory expectations regarding crypto-asset service providers during the transitional period. In order to ensure a strong regulatory framework with 'consistent, effective and forceful supervision', NCAs should:

• dedicate sufficient resources from the beginning of the implementation of the MiCA framework;
• establish authorisation procedures and encourage dialogue with potential applicants as soon as possible;
• align supervisory practices in relation to crypto-asset authorisation, based on common EU best practices to prevent regulatory arbitrage;
• share information regarding authorisation demands in relation to global crypto firms;
• prevent the establishment of 'letter-box' entities;
• ensure the simplified authorisation procedure is appropriate in ensuring full compliance with all MiCA requirements, and it is not used to gain a competitive advantage; and
• during the transitional phase of MiCA subject entities engaging in unlawful provision of crypto-assets to enforcement action where national law provides.

Ensuring effective implementation

The Statement outlined a number of actions that market participants can take to ensure an orderly and timely transition:

• ensure NCAs and clients are informed of their transition plans as early as possible;
• inform clients of the regulatory status of the crypto-assets and services they are providing, whether they are offering services using the grandfather clause, what type of authorisation they hold, and the country they operate from;
• clarify the regulatory status of their products and/or services;
• align their practices in anticipation of the need to comply with incoming requirements under MiCA;
• apply for MiCA authorisation as soon as possible; and
• engage with NCAs on any queries regarding the perimeter of MiCA and the application of it to their current activities.

The Statement also emphasises that the provision of crypto-asset services or activities by a third-country firm is strictly limited under MiCA to 'cases where such service is initiated at the own exclusive initiative of a client' (reverse solicitation exemption). This exception is very narrowly framed, and cannot be exploited to circumvent MiCA.

ESMA letter to the Council of the European Union

In ESMA's letter to the Council of the European Union, ESMA stressed that coordinated action across EU Member States is needed in 2 key areas:

• the designation of the NCAs which will be responsible for carrying out the functions and duties set out in MiCA, and to ensure that such NCAs are granted adequate powers and resources to exercise their supervisory, investigative and enforcement responsibilities; and
• inviting Member States to consider reducing the grandfather clause period to a maximum of 12 months, particularly regarding entities that have not been through a fully-fledged authorisation process and are not subject to effective supervision within the EU. Member States should also notify the European Commission and ESMA well in advance of the 30 June 2024 deadline, and ideally by the end of 2023.

For more details on MiCA and in particular the exercise of national discretions, see FIG's recent podcast -  Matheson talks Financial Regulation podcast

SMSG Advice on the Consultation Paper on Technical Standards specifying certain requirements of the Markets in Crypto Assets Regulation ("MiCA")

On 11 October 2023, the Securities and Markets Stakeholder Group ("SMSG") published its advice to the European Securities and Markets Authority ("ESMA") in response to ESMA's consultation paper on technical standards under MiCA.

The following captures some of SMSG's key advice:

• the regulation in this area must adequately balance the need for investor protection and the need to create an environment that does not stifle innovation;
• crypto should be subject to the same regulation and oversight as intermediaries which are providing economically equivalent financial services to ensure a level playing field as well as ensuring financial stability and investor protection;
• the information package given to national competent authorities should be enhanced to explain the measures that will be put in place to make retail clients aware of the different level of asset protection;
• online marketing activities by 'finfluencers' should also be considered as they may result in cases of false advertisements and price manipulation;
• disclosure requirements should not be an alternative for preventing and managing conflicts of interests;
• a cross-border coordinated approach is necessary to foster investor protection and minimise regulatory arbitrage;
• by its nature crypto amplifies the need to clarify what conduct constitutes solicitation or reverse solicitation due to channels such as blogs and message boards; and
• there is a need to begin monitoring developments in the DeFi area immediately and provide clarification as to whether MiCA Regulations apply to specific operations performed within the DeFi setting.
  

4. EIOPA publishes a Digital Strategy

On 12 October 2023 the European Insurance and Occupational Pensions Authority ("EIOPA") published its Digital Strategy ("Strategy") highlighting the importance of having a key Strategy to guide its priorities, principles, role and focus areas over the next three years.

Technology is developing rapidly, and changing the ways in which businesses operates and how people and organisations connect and exchange information. In the insurance sector, these developments are changing the way in which insurance and pension products are developed, how underwriting is done and how consumers shop for insurance and pension products.

EIOPA acknowledges that innovation is key for the evolution of the sector, but cautions that it must be properly regulated and well supervised. In addition, the different perspectives involved must also be balanced to ensure the insurance market remains healthy for all participants. When it comes to digitalisation, EIOPA's two core principles are "technologically neutral, and people first" and "flexible, yet firmly rooted".

Tools such as artificial intelligence, big data analytics, cloud computing and blockchain have all been used by insurers in recent years, with some notably more developed than others. Tools such as automation and predictive analytics have enabled insurers to carry out their internal processes in a more efficient manner, and use datasets to transform their businesses. BigTech companies and Insurtech start-ups have also begun to enter financial markets which is changing the landscape of insurance suppliers in the market, forcing more traditional suppliers to embrace these new technological developments. While digitalisation has brought many benefits, it also creates a number of risks such as cyber threats, concerns over the governance of artificial intelligence, data protection and ethical issues arising from unintentional bias and discrimination.

To address these benefits and risks, updates to existing legislative frameworks are needed. EIOPA has published a Digital Transformation Strategy and a SupTech strategy, as well as publishing a Joint Report on digital finance with the other European Supervisory Authorities. In addition, initiatives such as the Artificial Intelligence Act, DORA and a Framework for Financial Data Access will also have an impact on the market.

The Strategy identifies 3 long term priorities:

• ensuring innovation is aligned with the best interest of citizens: this includes consideration of digital ethics and financial inclusion when assessing whether technologies and services should become mainstream;
• strengthening the business model sustainability and resilience of all insurance market players: to achieve this EIOPA identified 3 actions which can be taken to manage the risks of digitalisation while enjoying the benefits:
  • update risk management frameworks and ensure they remain relevant and valid in the digital age;
  • ensure IT hardware and software are upgraded and resilient; and
  • culture shift by integrating new and old teams; and
• enhancing the supervisory capabilities of EIOPA and national competent authorities: the supervisory community must equip itself with new skills and techniques and develop new tools, and be conscious that different competent authorities may have different digital maturities and cross border business may increase with digitalisation.

Within the Strategy, EIOPA states that its role should be to ensure the correct balance is struck between seizing the opportunities arising from digitalisation, while also mitigating the risks of digitalisation and supporting consumers, supervisors and the industry. In light of all of this, EIOPA is reviewing and integrating its own strategies in this area and aims to set out a clear reasoning for prioritisation, principles, and EIOPA's role over the next 3 years.

5. Financial services aspects of the European Commission's 2024 Work Programme

On 17 October 2023, the European Commission ("Commission") published its Work Programme for 2024. This update outlines the aspects which are of relevance to financial services firms. The Work Programme consists on a number of annexes in which the key plans are detailed. The following is a summary of same:

Annex II

Annex II outlined the significant proposals and initiatives to rationalise reporting requirements and REFIT evaluations and fitness checks:

• Proposed Regulation amending the European Systemic Risk Board Regulation, EBA Regulation, ESMA Regulation and InvestEU Regulation as regards certain reporting requirements in the fields of financial services and investment support;
• Proposed Regulation amending the Benchmarks Regulation as regards the scope of the rules for benchmarks, the use of Union of benchmarks provided by an administrator located in a third country and certain reporting requirements;

REFIT evaluations and fitness checks

The REFIT evaluation and fitness check most relevant to the financial services is that of EU consumer law which will:

• assess whether the Unfair Commercial Practices Directive, the Consumer Rights Directive and the Unfair Credit Contract Terms Directive ensure a high level of protection in the digital environment;
• assess the adequacy of existing EU consumer protection rules; and
• evaluate whether the existing framework requires targeted strengthening or streamlining.

Annex III

There are 154 pending proposals contained within Annex III which the Commission wishes to reach an agreement on with the co-legislators. Those of most relevance to financial services include:

• Proposed Regulation laying down harmonised rules on artificial intelligence and amending certain Union legislative acts;
• Proposed Regulation on payment services in the internal market amending the EBA Payment Services Regulation;
• Proposed Directive on payment services and electronic money services in the internal market amending the Settlement Finality Directive and repealing the revised Payment Services Directive and the Second Electronic Money Directive;
• Proposed Regulation on a framework for financial data access and amending EBA Regulation, the EIOPA Regulation and the ESMA Regulation and the Regulation on digital operational resilience for the financial sector on a framework for financial data access;
• Proposed Regulation on the transparency and integrity of ESG rating activities;
• Proposed Directive amending MiFID II, Insurance Distributive Directive, the UCITS Directive, AIFMD and Solvency II as regards retail investor protection rules (Retail Investment Protection Directive);
• Proposed Regulation amending the Regulation on key information documents for packaged retail and insurance based investment products as regards the modernisation of the key information document.

Next Steps

The Commission will present its Work Programme to the European Parliament and other institutional partners. Its factsheet will be presented at the first General Affairs Council on 15 November 2023.