The last number of years have been a busy time for both regulators and insurers in the Isle of Man with the introduction of the new risk-based solvency regime for life insurers in 2018. This article by Michael Fitzgerald looks at the most recent developments, including the introduction of the Insurance (Group Supervision) Regulations 2019 and the Corporate Governance Code of Practice for Designated insurers which came into effect on 1 July 2019.
It also looks at the next stages in the Isle of Man Financial Services Authority’s (“The Authority”) 2019 roadmap for updating the Isle of Man’s regulatory framework for insurance business and, in particular, at the proposed introduction of a risk-based solvency regime for non-life insurers in 2020.
Isle of Man Insurance Statistics
The Authority’s Annual Report for 2018/2019 was published on 5th September and summarises the size of the insurance sector as follows:
Regulatory Change & Roadmap
The Authority’s most recent regulatory update examines progress on the principal areas of change:
- The development of a more sophisticated risk capital and solvency regime
- Enhanced regulatory reporting
- Additional conduct of business requirements
- Enhanced corporate governance requirements, including Enterprise Risk Management (ERM).
- Introduction of a group supervision framework
- Enhanced requirements in respect of general insurance intermediation; and
- The introduction of public disclosure requirements where appropriate
Life Insurance Risk Capital and Solvency Regime
The new risk capital and solvency regimes were introduced with effect from 30 June 2018. Their key purpose was the introduction of new reporting requirements for life insurers, with existing requirements being transposed into the new regulations for non-life insurers.
The new life insurance regime follows the principles of Solvency II with some differences in detail on the Standard Formula approach reflecting, for example, the fact that Isle of Man based life insurers’ books of business are strongly multi-currency in nature. Pillar 3 implementation has also focused on key disclosure rather than information overkill. The detailed regulations were introduced as the Insurance (Long Term Business and Valuation and Solvency) Regulations 2018 (“the Regulations”)
However, risk-based capital solvency regulation is still evolving. The European Commission has already carried out an interim review of the Solvency II Delegated Regulation looking at the detail of calculating the Solvency Capital Requirement under the standard formula. The full review is to be completed in 2020 and consideration of such issues as the cost of capital rate for risk margin, interest rate risk and long-term guarantees has been postponed to the full review. It should be noted that the Isle of Man regulations already use a lower cost of capital of 5% pa rather than the 6% under Solvency II.
Changes already agreed cover such areas as:
- Reduction of reliance on credit rating agencies
- Treatment of long-term and un-listed equities
- More proportionate look-through approach
- Guarantees by regional authorities and local governments
As all companies under the Regulations in the Isle of Man are required to use a Standard Formula approach, this EU review in 2020 may have implications for the shape of future Isle of Man legislation.
The Authority have naturally been following Solvency II developments with interest.
With regard to its own timetable for review of the Regulations, it is mindful that the updated framework has only been in force for a period of just over 12 months and the EU review will not be completed until 2020. Additionally, the Authority have indicated that the post Brexit position will be an important consideration, given the current market composition of the Island’s life assurance sector.
Taking these factors into account, they have stated that “while the Authority may continue to make minor changes to reporting requirements, the Authority does not currently anticipate making any significant changes to the Regulations, probably for the next 2 years and that they will keep the situation under review and continue to engage with stakeholders, particularly at the point at which any changes are being considered”.
The updated Corporate Governance Code for Designated Insurers (including enhanced ERM requirements and the formalisation of the Own Risk and Solvency Assessment (ORSA)) and conduct of business requirements came into force on 1 January 2019.
As of 1 July 2019, the regulatory framework has been broadened with the introduction of the Insurance (Group Supervision) Regulations.
The new Group Regulations only apply to insurers where the Authority is deemed to be the Group Supervisor. This arises only in the context where the group headquarters, or the most significant insurance operations of the group, are based on the Isle of Man.
Risk Capital & Solvency Regime Non-Life Insurers including Captives
New reporting requirements for Isle of Man regulated non-life insurers will be introduced along with a new capital framework from 1 July 2020. On 22 July 2019 the Authority issued a consultation paper CP19-05/T04 on the proposed new regulations “Insurance (Non-Long-Term Business Valuation and Solvency) Regulations 2020. These follow a series of Quantitative Impact Studies.
As with life insurers, only a small number of non-life insurers belong to insurance groups of which the Authority expects to be Group Supervisor.
The Island’s non-life insurance sector is predominantly made up of captive insurers and associated specialist insurance management companies, ranging from subsidiaries of the major international insurance broking and risk management organisations to local operations.
Third party commercial writers and providers of insurance to individuals make up a relatively small portion of the non-life market on the Isle of Man. Most Captives are authorised under Class 11 and Class 12 of the existing Insurance Act.
Following consultation with the Isle of Man Captive Association the Authority has published a further consultation paper CP19-04/T04 on “Class 12 Insurance Authorisation”.
In the draft regulations, reduced regulatory requirements are proposed to apply to the following types of (re)Insurers
- (Re)insurers where policyholders (or direct policyholders underlying reinsurance) are directly or indirectly related to the (re)insurer
- (Re)insurers where policyholders (or direct policyholders underlying reinsurance) are sophisticated parties that have consented on an informed basis to being (re)insured by a class 12 (re)insurer
- Commercially fronted reinsurers
- Other re-insurers where the underlying direct insurance is ancillary to a main non-insurance activity of the reinsurer’s group
- A class 12 (re) insurer whose non-class 12 insurance business represents less than 5% of its total business.
The final definition of a class 12 insurance will be crucial to the proposed regulations impact on the captive market. A key factor in determining whether the Authority expects to be Group Supervisor for non-life insurers is whether an insurer should be treated as a class 12 or commercial insurer.
As ever the devil is in the detail and we await the next iteration following the closing of the consultation period on 13 September.