IVASS news

The Italian Insurance Regulatory Authority (“IVASS”) published today the following:

1.???? Consultation Document no. 2/2024 on unit linked contracts (“Consultation Document 2”);

2.???? Consultation Document no. 3/2024 amending and integrating ISVAP Regulation no. 38/2011 in matter of separately managed accounts (“gestioni separate”, in Italian) for life insurance undertakings (“Consultation Document 3”);

3.???? Letter to the Market of 27 March 2024 – IVASS expectations concerning product oversight and governance of insurance products (POG) (“Letter”).

Please find below a summary of IVASS’ publications.

1.???? Consultation Document 2

On 11 March 2022, IVASS launched a public consultation laying down provisions relating to linked contracts according to art. 41, paragraphs 1 and 2 of the Code of Private Insurances. During such consultation, closed on 9 June 2022, IVASS received a high number of comments and observations by stakeholders.

Based also on the comments received by stakeholders, IVASS decided to modify, integrate and confirm the provisions of the consultation document published in 2022.

With Consultation Document 2, which contains a draft regulation (“Draft Regulation”), IVASS intends to regulate linked policies, updating, in line with regulatory changes that have occurred at an European and national level, the provisions contained in Circular No. 474 of Feb. 21, 2002 and Regulation No. 32 of June 11, 2009, which contain the regulation of insurance products linked to internal funds or UCITS and policies with benefits directly linked to a stock index or other reference values.

The Draft Regulation contained in Consultation Document 2 provides for the following:

a.???? Part I: contains the general provisions, the sources of law and definitions, as well as its scope of application. In respect to this latter, the Draft Regulation, except for the provisions that provide otherwise, applies also to EU insurance undertakings operating in Italy under the freedom to provide services or the right of establishment regimes (articles 1, 2 and 3).

Article 4 describes the characteristics of unit and index linked contracts, while article 5 provides for the evaluation of the demographic risk.

b.???? Part II focuses entirely on unit linked products:

-??????? In Chapter I, in particular, reference is made, on one hand, to Chapters III, IV and IV-bis and, on the other hand, to ?Chapter V for the identification, respectively, of the characteristics of the assets contained in internal funds held by the insurance company and UCITS in the case of policies whose benefits are directly linked to them.

-??????? Chapter II contains the provisions pertaining to the manner in which internal funds are established and the criteria for drafting the relevant regulations (Article 7), the minimal content of the regulations containing the criteria for the management of the fund or individual sub-funds (Art. 8), the manner and frequency of calculation of the value of the unit (art. 9), the criteria for the representation of expenses, direct and indirect, borne by the internal fund or individual sub-fund (art. 10).

With particular regard to the overperformance commissions (art. 11), reference is made to the European guidelines on performance commissions of UCITS issued by ESMA and their transposition into the national framework.

Furthermore, article 12 provides for the amendments to fund regulations, while articles 13 and 14, respectively, regulate the relationships between intermediaries and undertakings for the purposes of valuation of premiums paid and the payment of insurance benefits, and the accounting of the assets of each internal fund and of each individual sub-fund separate from that relating to the insurance company's other activities.

-??????? Chapter III: provides for the types and for the limits on investments of the assets comprising the internal fund or individual sub-funds and refers, where relevant, to the instructions contained in the regulation on collective asset management issued by the Bank of Italy. Without prejudice to the need to ensure an adequate distribution of risks, the internal fund is allowed, for a maximum period of 6 months from the date of start of operations, to derogate from the investment limits indicated in the Draft Regulation (art. 15).

The subsequent articles regulate in more detail the investment criteria to use with reference to listed financial instruments (art. 16),? unlisted money market instruments (art. 17), listed derivative financial instruments (art. 18), unlisted derivative financial instruments (art. 19), unlisted financial instruments – for which the company is required to evaluate the degree of liquidity using specific parameters (art. 20) – , investments in AIFs and UCITS (art. 21) and, finally, to other eligible assets (art. 22).

-??????? Chapter IV: provides for limits on management of investments and concentration of risks, providing for general limits (art. 23) and specific limits, such as concentration limits for issuers (art. 24), bank deposits (art. 25), OTC derivative financial instruments (art. 26), overall investment limits (art. 27), investments in parts of open-ended UCITS (art. 28), limits on investments in unlisted financial instruments (art. 29), assets underlying derivative financial instruments (art. 30) and overall exposure in derivatives (art. 31).

-??????? Chapter IV-bis: provides for exceptions to investment limits upon the occurrence of conditions specifically identified by regulatory provisions (Art. 31-bis) and indicates also specific safeguards for risk management of the undertaking (article 31-ter).

-??????? Chapter V: regulates the investments of insurance contracts whose performance are directly linked to the value of UCITS units. In the event that the value of the insurance performance is directly linked to the units of more than one UCITS, the conditions of insurance shall clearly define the composition, predefined or variable, of the basket of UCITS, the method of determining its value for the purpose of determining the insurance performance, as well as the type of risk that can occur with the basket (Art. 32).

Furthermore, management commissions charged by insurance companies are allowed only if an effective management service is provided on the basis of an investment strategy, consistent with predefined risk-return objectives and shall be identified in the conditions of insurance (art. 33).

-??????? Chapter VI: provides for the asset and financial separation regime of the assets that are part of each internal fund or external UCITS (art. 34).

c.???? Part III focuses on index linked products:

-??????? Chapter I: sets out the requirements for financial indexes and other reference values to which the performance or surrender values relating to index-linked contracts can be linked (Art. 35) and the manner of indexing (Art. 36).

-??????? Chapter II: contains the regulation of assets covering technical provisions (Art. 37).

d.???? Part IV indicates that the new Draft Regulation applies only to the linked contracts concluded after its entry into force.

Furthermore, if such Draft Regulation enters into force, all insurance undertakings are required to gradually comply with its provision within 12 months after its entry into force.

In addition, all the previous regulations in matter of unit and index linked are repealed once the Draft Regulation enters into force.

IVASS Circular no. 474/2002, which continues to produce effects only to contracts concluded before the entry into force of the Draft Regulation, is repealed as well.

Any comment or proposal may be sent to IVASS, by 27 May 2024, to the following e-mail address: [email protected], using the word table attached to Consultation Document 2.

Consultation Document 2 is available, only in Italian, at the following link: https://www.ivass.it/normativa/nazionale/secondaria-ivass/pubb-cons/2024/02-pc/index.html

2.???? Consultation Document 3

ISVAP Regulation No. 38/2011 (“Regulation 38”), which provides for the constitution and management of separately managed accounts of life insurance undertakings, since its original wording, indicates that the average rate of return of separately managed accounts shall be determined on the basis of a calculation criterion which provides for the allocation of all realized capital gains and losses to the return of the separately managed accounts in the same year of realization.

The economic and financial situation determined by a progressive and significant reduction of returns recorded over the years, led IVASS to the modification of Regulation 38 and to the introduction of an additional criteria for calculating the return rate of separately managed accounts that would allow to set aside net capital gains realized in favorable economic periods and allocate them in less favorable periods.

In fact, IVASS Order no. 68/2018 introduced amendments to allow insurance undertakings to provide for modalities of determination of the average rate of return of separately managed accounts that take into account the allocation of the net capital gains realized - following the sale of securities held in the separately managed accounts - in a special "profit fund," having the nature of a mathematical reserve.

The net capital gains set aside are fully allocated to insurance obligations provided for in the contracts within the maximum period of eight years from their realization, thus producing, also, an effect of stabilization of the returns over time.

The Order, however, applies only for new contracts, since the modalities of calculation of returns are indicated in the separately managed account regulation, which cannot be modified unilaterally by insurance undertakings, unless certain conditions occur (i.e., art. 6, para. 1, lett. g) of Regulation 38).

Therefore, based also on the new provisions introduced in 2018, in the same separately managed account may coexist contracts to which two different criteria for determining the average rate of return apply (depending on whether in the respective contractual terms and conditions is provided for the profit fund or not).

Following a specific request from stakeholders, IVASS has focused on the possibility of extending profit funds also to ongoing contracts, when specific conditions occur, in order to allow insurance companies to propose to policyholders of existing contracts to modify, on a consensual basis, the criteria for the calculation of the average rate of return, in order to introduce a profit fund.

Therefore, with Consultation Document 3, which is a draft Order, IVASS intends to modify Regulation 38 introducing new provisions that will allow insurance companies, at the occurrence of specific conditions, to use the profit fund and the consequent methods of calculating the average rate of return of separately managed accounts even for ongoing contracts.

In particular, the draft Order contained in Consultation Document 3:

-??????? modifies para. 3 of art. 14-bis of Regulation 38, extending to existing contracts the possibility to adopt the rules for the determination of the average rate of return linked to the presence of the profit fund, making also a reference to the newly introduced art. 14-sexies of the same regulation. This latter provides for the modalities and conditions that insurance companies shall comply with when they intend to propose to policyholders an amendment to the regulation of the separately managed account and part of the policy’s condition in order to introduce the profit fund for existing contracts;

-??????? introduces a new paragraph in article 14-ter of Regulation 38, in order to provide for the applicability of the information provided therein also with respect to policyholders of insurance contracts with revaluable benefits who have non consented to the modification of the rule for determining the average rate of return proposed by the company pursuant to the newly introduced article 14-sexies.

Any comment or proposal may be sent to IVASS, by 27 May 2024, to the following e-mail address: [email protected], using the word table attached to Consultation Document 3.

Consultation Document 3 is available, only in Italian, at the following link: https://www.ivass.it/normativa/nazionale/secondaria-ivass/pubb-cons/2024/03-pc/index.html?com.dotmarketing.htmlpage.language=1

3.???? Letter to the Market

The Letter is the outcome of the public consultation started in 2023 by consultation document no. 8/2023.

This Letter aims to outline IVASS's POG expectations directed at insurance companies and manufacturers de facto intermediaries, in order to facilitate the uniform and correct application of the European and national regulatory framework.

As to the scope of application of the Letter, despite being addressed to insurance companies with legal seat in Italy and to establishments of extra-EU companies, IVASS anticipates that it will represent the content of the Letter also to other EU insurance supervisors (home supervisory authorities of the companies operating in Italy under the right of establishment or the freedom to provide services regimes) in order to assure to the Italian customers the same level of protection. Moreover, IVASS clarifies that, considering that the expectations are aimed at strengthening the POG process and considering the comments made during the public consultation, the governance profiles of the POG process of companies with registered offices in other EEA states must be considered subject to the regulatory framework of the home authority.

In a nutshell, the 15 expectations of IVASS in matter of POG are the following:

1.???? the POG process is an essential part of the corporate governance of the company and of the system of management and control of the risks and, as such, is adequately considered in the organization of the company, in the distribution of the tasks and of the responsibilities of the operation structure and of the fundamental functions. In this respect, the administrative body of the company must have an adequate level of knowledge of the POG legislation in order to define the strategies of the corporate governance of the company and in to verify that such strategies are implemented by the company;

2.???? the POG policy must include clear granular indications of the target market, as well as indications on how the products’ test has been carried out. In particular, the targets aimed at by the company with respect to the value for money of the product for the client must include assessments that the costs and the expenses of the products shall not jeopardize the expected financial performance of the IBIP;

3.???? the second level key functions of the company (with the exclusion of internal audit function) must evaluate the activities carried out by the operational units involved in the POG process through a complete and autonomous assessment. For the approval process of new products, a specific committee made of the above indicated fundamental functions shall have to be set up;

4.???? in the company’s risk assessment framework and in the risk management system, the administrative body must consider the market conduct risks related to the POG, also through the identification of risk targets and tolerance thresholds, in any case in the light of the need of minimizing the compliance risk;

5.???? the definition of the target market must be carried out with an adequate level of granularity, with respect to both the factors provided by article 5 of Delegated Regulation (EU) 2017/2358 and other reference values considered relevant for the evaluation;

6.???? the insurance company must identify a sufficiently graduated scale of complexity in which to place IBIPs. The placement of the IBIP in the scale must be carried out by taking into account the IBIPs’ features and its comprehensibility by the client;

7.???? with respect to MOP (multi-options products), IVASS expects that the number of options is critically evaluated and that the definition of the target market is made through combinations of predefined options which reproduce the segmentation of the target market;

8.???? the product test must be carried out separately (although consistently with) the sustainability and profitability analysis carried out by the company;

9.???? the product test must be:

a)???? defined and developed consistently with the granularity of the target market and must be grounded on realistic data in line with the company’s portfolio;

b)???? defined formally in details and contain metrics and thresholds whose unfulfillment is followed by adequate remedial actions (escalation, amendment or not approval of the product);

c)???? carried out in a traceable way;

10.? the profit test from the perspective of the client must be central in the product test process. The profit test must consider jointly the profit, the costs borne the client in the development of the product and, where relevant, the inflation’s impacts. With respect to MOPs, the profit test must be developed also considering the combinations of the various investment options;

11.? the profit test in the perspective of the client must produce a value which is adequate to the client, i.e. in line with the target market’s features, the client’s expectations of profits and his/her insurance needs, lacking which adequate measures must be adopted, including the non-commercialization of the product. The indexes used for the profit test in the perspective of the client must be in compliance with the purposes which are generally attributed to the product test activity;

12.? the test product must include a limited weighted qualitative component, in which:

a)???? only the elements in line with the target market’s needs are considered;

b)???? the technical features of the product already considered in the quantitative analysis are disregarded, in order to avoid a double evaluation of the same component;

13.? the product test activity must end with a final assessment determined by an evaluation system which must adequately integrate the findings of the various analysis carried out. In the final assessment, the quantitative analysis must have a significant weight, also with the application of the blocking thresholds applied on the most relevant variables;

14.? the monitoring and the review of the product must be carried out with a methodology consistent with the one used during the test of the product, in order to verify that it meets the features, needs and targets of the target market for which the product was created, by taking also into account the experience gained by the product as compared to the evaluations made before its commercialization;

15.? the insurance company must review periodically the IBIPs marketed before 1st October 2018 and the products no longer marketed for a number of years exceeding the relevant RHP (Recommended Holding Period).

The Letter is available, only in Italian, at the following link: https://www.ivass.it/normativa/nazionale/secondaria-ivass/lettere/2024/lm-27-03-24/Lettera_al_mercato_del_27_03_2024.pdf.