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“european Insurance Regulatory Landscape: Navigating Compliance” – Rapid advances in technology are changing the way insurance and pension products are designed and the way consumers shop. These developments benefit businesses and consumers, but may also bring certain risks.
This rapidly changing environment presents new opportunities and challenges for leaders. Keep pace with the various aspects of innovation to ensure that regulatory and supervisory frameworks consider both the opportunities and risks that innovation brings.
“european Insurance Regulatory Landscape: Navigating Compliance”
Is actively evaluating these changes and is prepared to consider the impact on its own and its members’ insurance and pensions industries.
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The Digital Transformation Strategy was published in December 2021 to provide a systematic, balanced and comprehensive approach to ongoing technological change and oversight of the European insurance and pension markets.
In February 2022, the ESAs published a joint report on digital finance and called on the European Commission to issue guidance on digital finance and related issues. The report sets out ten cross-sectoral and two insurance-specific recommendations to ensure that the EU’s regulatory and supervisory framework is fit for the digital age.
In its strategy, the company has identified five key long-term areas for its contribution to digitization.
Work with the European Commission on the development of a financial information space on sustainable finance and pension data monitoring systems, as well as on open insurance developments.
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We believe that AI will play an important role in the digital transformation of insurance and pension markets, so we will try to use powerful AI systems while ensuring financial inclusion.
It is important to assess the prudential system in the context of digital transformation to ensure financial stability while increasing coordination of supervision in proper assessment of digital activities and risks.
Cybersecurity and ICT resilience have long been identified as policy priorities, and the coming years will focus on implementing these priorities, including the recently adopted Cloud Computing and ICT Directive and the upcoming Digital Resilience Act. (DORA).
When properly evaluating the relevant digital transformation process, it is necessary to take into account the investment of new assets such as crypto-assets, as well as the trend of “platforming” of the economy and the type of operations developed by insurance institutions. .
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Continue to support the development of the single market in times of change by promoting cross-border and cross-sector cooperation, promote the development of innovation intermediaries, and address the opportunities and challenges of fragmented value chains and platform economies.
And NCAs must strive to become digital, customer-centric and data-driven organizations to achieve their strategic goals effectively and efficiently. Opinions expressed in writing are those of the author. Other teams may have different perspectives and make different investment decisions. The value of your investment may be more or less than what you originally invested. The third-party information used is believed to be reliable, but its accuracy is not guaranteed. For professional, institutional or accredited investors only.
Changes in American industrial laws occur slowly, sometimes at a glacial pace. The recent changes by the National Association of Insurance Commissioners (NAIC) to fixed income insurers’ investment risk-based capital (RBC) premiums are no exception. US insurers were supposed to start reporting more detailed earnings data in late 2020, but the NAIC’s new bond risk premium won’t take full effect until late 2021, but it’s finally here.
It remains to be seen how these regulatory changes will affect insurance companies’ day-to-day portfolio management and/or long-term strategic asset allocation decisions. At the time of this writing, US insurers are in a stable position in terms of their assets (Figure 1). The NAIC notes that recent changes will increase the permitted risk-based capital controls for U.S. life insurers by less than 2%. However, the NAIC added that a relatively small number of insurers will have a major impact in recalculating their 2019 RBC accounts to reflect the new RBC structure.
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These recent changes have affected most US insurers (life, property, casualty, and health insurers) to some extent, so it is important to understand how investment risk affects the overall regulatory balance of US-based insurers’ RBCs. The rule of thumb we use is that life insurance companies cover about two-thirds of the total risk associated with their investment properties, while property and health and health insurance companies cover about one-third. Given the nature of insurance companies’ liability, these recommendations seem reasonable, but let’s take a closer look at them. Based on RBC’s final report for 2020, we see capital, interest and market risks comprising approximately 66% of total risk for life insurance companies, 39% for life and insurance, and 15% for health insurance companies (Figure 1). 2).
Given life insurer RBC’s significant capital exposure, any change in the cost of capital will clearly affect insurers in this channel.
With this in mind, what should American insurers look for? How have the relative prices of asset classes in general and fixed income investments in particular changed as a result of recent NAIC changes?
For the first time in history, P&C and health insurers will pay separately for bond risk. Although their risk factors have been updated, most of the factors listed in the results are higher than before. It is difficult and not useful to draw more precise and nuanced generalizations about the effects of changes in the life insurance industry (Figure 3).
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For starters, double-B and single-B bonds have become more attractive compared to their previous values, while single-A issuers have lost their luster due to a lack of “broad” payment types. This includes names rated through AAA under the old RBC NAIC structure.
Insurers seeking to increase capital efficiency more efficiently can allocate a portion of their core assets to high-yield BB/B rated bonds and limit their exposure to market sectors that offer large AAA/AA rated bonds. . In general, all securitizations and most municipal bonds must effectively meet the high yield requirement from a capital efficiency perspective (Figure 4).
Over 90% of the US BBG Corporate Bond Index is rated A or BBB, while the BBG Municipal Bond Index is approximately 70% AAA and AA rated bonds. Also, as discussed elsewhere, AAA-rated exposure in a safe location is important.
High-quality CLOs in particular can offer attractive yields, and coupons could rise further if the US Federal Reserve raises interest rates as many expect. This can also be applied to non-agency RMBS due to the volatility of the housing market and the short-term structure of income generation. While the current valuations of corporate bonds and taxable municipal bonds are comparable, we believe that municipal bonds generally have stronger fundamentals. We are more cautious about high-yield companies due to tight valuations (although we can justify this in some cases by strong fundamentals).
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Another piece of the fixed income puzzle is the latest update to the NAIC’s portfolio adjustment ratio. Recall that the portfolio adjustment ratio measures the diversification of a fixed income insurer’s portfolio by calculating a weighted average and then making a corresponding adjustment to the bond’s total cost of risk. Issuer numbers are determined by the first six digits of the CUSIP, except for tax-exempt U.S. government bonds. While the previous methodology required more than 1,300 calculations to derisk a bond (Credit < 1.0), the new methodology encouraged more than 650 issuers (Figure 5). However, a further increase in the number of issuers gives a net gain to the total count, and the previously mentioned areas contribute to the overall result (for example, there are 1,362 issuers of BBG-rated municipal bonds).
Adjustments to RBC’s underlying income have the effect of reducing the risk premiums associated with other types of investments. As noted above, risk factors for fixed income P&C and health insurance increased across all bond rating categories, while directly held stocks (15%) and Schedule BA funds (20%) remained the same. On the other hand, this new system could make riskier fixed income asset allocation more attractive as insurers seek investment returns in 2022 and beyond.
In recent years, commercial mortgage loans (CMLs) have been increasing as a percentage of insurers’ total assets (about 15% of life insurance companies’ portfolios at the end of 2020) and are now being used in P&C with longer commitments. Although the latter sector’s risk is still around 1 percent overall, insurance companies. Payout is still attractive for life insurers, but at a fixed rate of 5%.
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