Consultation Paper - A Green Investment Discount for Life Insurer Capital Requirements (October 2020)

Summary

This is a Guernsey Financial Services Commission consultation paper (October 2020) seeking feedback on a proposed Green Discount to the Insurance Business (Solvency) Rules, 2015. The Green Discount would let life insurers reduce the spread risk capital requirement for qualifying green fixed income assets, subject to safeguards to protect policyholders. It includes an exposure draft of the proposed rule amendments and is not yet in force.

• Scope: Applies only to Category 1 (Commercial Life Insurers) and Category 2 (Commercial Life Reinsurers) insurers; general insurers are excluded.
• Mechanism: A green bond or similar green fixed income asset could be treated as one credit rating band higher when calculating spread risk capital under the Prescribed Capital Requirement (Guernsey standard formula, recognised standard formula, or internal model).
• Voluntary: Use of the Green Discount would be optional for life insurers, but associated governance and disclosure requirements would apply only to those who adopt it.
• Governance and risk management: Insurers adopting the discount would need to update investment, risk management and ORSA/OSCA processes to address green asset risks such as liquidity risk.
• Disclosure: Insurers using the discount would need to disclose this to policyholders and potential policyholders, including the effect on risk profile and capital adequacy.
• Notification: Use of the Green Discount would be treated as a material change of business plan requiring prior notification to the Commission, including supporting documents and quantified capital impact.
• New applicants: An applicant for an insurance licence wishing to use the Green Discount would need to state this in its application and demonstrate how it will meet the requirements.

The paper poses specific questions for industry comment on scope, design, limits and disclosure of the proposed Green Discount, and includes an exposure draft of the amended Solvency Rules for review. As a consultation, it creates no binding obligations at this stage; any requirements described reflect the proposed (draft) rule text and would only take effect if and when the Commission finalises amendments.

Key obligations

• If adopted, an insurer applying the Green Discount would need to adapt investment policies, procedures and controls, and risk management/ORSA processes to address green asset risks in a manner proportionate to its nature, scale and complexity
• If adopted, an insurer applying the Green Discount would need to disclose that fact and its effects to policyholders and potential policyholders in pre-contractual or contractual information
• If adopted, an insurer must notify the Commission prior to implementing the Green Discount, treating it as a material change of business plan, and provide supporting documents and a quantified impact on Capital Adequacy
• If adopted, an applicant for an insurance licence wishing to use the Green Discount must state this in its application and demonstrate how it will meet the relevant requirements
• Respondents to the consultation are requested to submit feedback by 10 November 2020

Applies to

long term insurance licensees (life insurers), Category 1 insurers (Commercial Life Insurers), Category 2 insurers (Commercial Life Reinsurers), applicants for an insurance licence, general insurance licensees (interested party only, not directly affected)

Deadlines

• 10 November 2020: Deadline for responses to the Consultation Paper