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David Rule gently raps insurers’ knuckles on implementation of Solvency II remuneration requirements

  • United Kingdom
  • Employment law
  • Financial institutions

16-07-2019

The Solvency II Delegated Regulation (the Delegated Regulation) contains the remuneration requirements for insurers and reinsurers in scope of the Solvency II Directive. The PRA has provided guidance on implementing these regulations by way of a policy statement PS22/16 and a supervisory statement SS10/16 (last updated in July 2018). Together, these set out the PRA’s expectations of how compliance with the remuneration requirements of the Delegated Regulation can be achieved. Smaller firms not in scope of Solvency II should appropriately comply with the Delegated Regulation when setting remuneration policies. Firms that cannot meet the PRA’s expectations as set out in its supervisory statement are expected to contact the PRA.

The PRA has conducted an analysis of Remuneration Policy Templates (RPS templates) detailing remuneration policies, practices and procedures. This, together with the feedback from roundtable meetings with Remuneration Committee (RemCo) chairs, has prompted David Rule, executive director of insurance supervision, to write to the chairs of RemCos of Solvency II insurers to highlight certain areas of concern. These principally arise from a variety of interpretations of the remuneration requirements and, perhaps more worryingly, pressure from shareholders and other stakeholders.

Rule highlights the following:

  • It is vital to appropriately and clearly identify material risk takers (MRTs). Given the variety of firms in scope it is not necessary to impose a uniform approach; however some firms are not fully capturing or reporting individuals who should be categorised as MRTs.
  • Few firms have been able to demonstrate compliance with the requirement that total variable remuneration be based on a combination of performance of the individual, business unit and overall firm, or group.
  • Analysis of RPS templates shows a strong reliance on financial returns metrics for measuring performance against LTIPs; these metrics have been linked to excessive risk taking. Some RemCo chairs said that they came under pressure from shareholders/ proxy advisers and other stakeholders on this issue, with pressure to focus primarily on financial metrics. However Article 275.2(d) of the Delegated Regulation clearly stipulates that financial and non-financial criteria must be taken into account.
  • Some insurers faced challenges in adhering to the requirement that variable remuneration for control functions staff should be independent of the performance of the functions they oversee. Firms are reminded that the Delegated Regulation offers no discretion here.
  • Most firms are able to evidence the use of risk adjustments and most firms detailed how the malus and clawback tools could be applied; however evidence of these tools being used was far more limited. While the Delegated Regulation does not specifically refer to malus adjustments, the PRA makes clear in its supervisory statement that firms should consider whether or not to apply malus during the deferral period and to be able to apply it where appropriate.
  • Firms must be able to explain how risk and control functions have input into the setting of remuneration. The extent of such input varies across firms. Rule suggests that where contribution from risk is limited, firms should consider ways in which risk can contribute to remuneration decisions in a more meaningful manner.
  • Although the design, responsibilities and roles of RemCos differ across firms (with some RemCos focussed on senior manager remuneration) the Delegated Regulation requires remuneration policy to apply to the firm as a whole. The firm’s board should be comfortable that appropriate governance and consideration is given in other forums to areas of remuneration policy which fall outside RemCo’s responsibility.

Rule emphasises that the PRA will continue to focus on remuneration in its ongoing prudential supervision of firms and will seek to address any inconsistency in the interpretation of the Solvency II requirements. Now would be a good time for insurers to refresh themselves with the requirements and the guidance provided in the PRA’s supervisory statement.

Read David Rule’s letter

Read the PRA’s supervisory statement on remuneration requirements

 

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