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10 November 2015
The EU Solvency II Directive (2009/138/EC) prescribes remuneration requirements – set out in Article 275 of European Commission Delegated Regulation 2015/35 – which will apply from January 1 2016. These pertain to the governance structure and risk management of (re)insurance businesses. They include requirements for the establishment and maintenance of remuneration policies and procedures to avoid conflicts of interest and promote sound and effective risk management, so as not to encourage excessive risk taking.
Article 275(1) sets out the following overarching governance requirements:
Article 275(2) sets out the following specific requirements for material risk takers:
Neither of the UK insurance regulators – the Prudential Regulation Authority (PRA) and the Financial Conduct Authority –has to date issued detailed guidance on the Article 275 requirements. However, the PRA has been conducting a comprehensive survey on current remuneration practices in the insurance industry in the context of developing its supervisory framework for 2016, and there seems to be a strong likelihood that the UK regulators will ultimately issue guidance on how they will supervise compliance with Article 275 of the delegated regulation.
Possible areas for future regulatory guidance, particularly with respect to the remuneration of material risk takers, include the following:
While not necessarily indicative of the approach that the UK regulators will take to supervision of remuneration practices in the insurance industry, (re)insurers might in the interim have regard to how some of these questions have been addressed in the banking and investment services industry. The applicable remuneration requirements - set out in the EU Capital Requirements Directive (2013/36/EU) (CRD IV) and implemented in the United Kingdom via the Senior Management Arrangements, Systems and Controls Handbook (SYSC) - are notably more prescriptive than the delegated regulation's Article 275 requirements which will apply to (re)insurers. For example, CRD IV requires that:
CRD IV also contains various rules on the form of any variable remuneration. CRD IV's new prudential requirements sit in a context of financial stability concerns arising from the banking crisis, but nonetheless provide a benchmark against which (re)insurers can assess their own remuneration policies and practices.
For those UK (re)insurers still reviewing the potential impact of Solvency II's remuneration requirements, the key items to be addressed will likely include the following:
For further information on this topic please contact Marisa Orr or Martin Membery at Sidley Austin LLP by telephone (+44 20 7360 3600) or email (morr
(1) CRD IV, Article 94(1)(g)(i)-(ii); SYSC 19D.3.48R-19D.3.49R.
(2) CRD IV, Article 94(1)(m); SYSC 19D.3.59R.
(3) CRD IV, Article 94(1)(n); SYSC 19D.3.61R.
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