GFSC Guidance Note on Remuneration Requirements for Insurers

Version: 2 Publication Date: 28/03/2025 www.gfsc.gi GFSC Guidance Note Remuneration Requirements for Insurers

Gibraltar Financial Services Commission Guidance Note on Remuneration Requirements for Insurers 2 Contents Table of Contents Contents ....................................................................................................................................................... 2

1. Introduction..................................................................................................................................... 3
2. Compliance with the Regulation ..................................................................................................... 3 Application across Gibraltar firms................................................................................................... 3
3. Solvency 2 Staff ............................................................................................................................... 4
4. Deferral............................................................................................................................................ 6
5. Performance Measurement............................................................................................................ 7
6. Proportionality ................................................................................................................................ 8
7. Disclosure to GFSC........................................................................................................................... 8

Gibraltar Financial Services Commission Guidance Note on Remuneration Requirements for Insurers 3

1. Introduction 1.1 This Guidance Note is relevant to all Gibraltar insurance and reinsurance firms (‘insurers’ or ‘firms’), and groups within scope of the Financial Services (Insurance Companies) Regulations 2020 (the ‘Insurance Companies Regulations’). 1.2 It provides guidance for significant insurers in complying with the requirements in Article 275 of the Financial Services (Solvency 2)(Technical Standards) Regulations 2020 (the ‘Solvency 2 Technical Standards’). In this context, ‘significant’ insurers are those insurers who are classified as ‘systemic’ by the GFSC. It may also be used as a guide for smaller firms when reviewing their remuneration policies and practices against the requirements in the Solvency 2 Technical Standards. 1.3 This Guidance Note does not set absolute requirements as these are contained in the Solvency 2 Technical Standards. However, any significant firms that are unable to meet or exceed the expectations set out in this Guidance Note should inform their GFSC supervisory contact. 1.4 This Guidance Note is intended to complement existing legislation, policies and guidance and is not intended to conflict with, amend or supersede them. It should be read in conjunction with: • The Financial Services Act 2019 (the ‘FSA 2019’)1 • The Financial Services (Insurance Companies) Regulations 2020 (the ‘Insurance Companies Regulations’);2 • The Financial Services (Solvency 2)(Technical Standards) Regulations 2020; 3 • The European Insurance and Occupational Pensions Authority (EIOPA) Guidelines on system of governance (the ‘EIOPA Guidelines’);4 • The GFSC’s ‘Approach to Insurance Regulation’;5 • The GFSC’s Policy Statement on the Interpretation of EU Guidelines and Recommendations;6 and • Any relevant EU-derived legislation.
2. Compliance with the Regulation 2.1 The GFSC expects all insurers to comply with the remuneration requirements of Article 275 of the Solvency 2 Technical Standards and with the EIOPA Guidelines. Application across Gibraltar firms 2.2 Regulation 223 of the Insurance Companies Regulations requires firms to ensure that risk management and internal control systems and reporting procedures are implemented consistently in all entities included in the scope of group supervision. The EIOPA Guidelines7 1 https://www.gibraltarlaws.gov.gi/legislations/financial-services-act-2019-4690 2 https://www.gibraltarlaws.gov.gi/legislations/financial-services-insurance-companies-regulations-2020-4808 3 https://www.gibraltarlaws.gov.gi/legislations/financial-services-solvency-2-technical-standards-regulations-2025- 7559 4 https://www.eiopa.europa.eu/publications/guidelines-system-governance_en 5 https://www.fsc.gi/publications/2019/05/Approach%20to%20Insurance%20Regulation.pdf 6https://www.fsc.gi/uploads/GFSC%20Policy%20Statement%20on%20EU%20Guidelines%20and%20Recommendat ions.pdf 7 Guideline 9 (para 139) - https://www.eiopa.europa.eu/publications/guidelines-system-governance_en

Gibraltar Financial Services Commission Guidance Note on Remuneration Requirements for Insurers 4 confirm that a consistent remuneration policy for the whole group should be implemented and that the ‘policy should be applied to all relevant persons at group and individual entity level’. 2.3 All entities within the scope of an insurance group should have a consistent remuneration policy that is in line with the group’s risk management and internal control system to ensure those systems (including remuneration policy governance) can be controlled effectively at group level. Material risks at group level should also be reflected appropriately in the design of remuneration arrangements across all group entities. 2.4 It does not follow that the same remuneration policy with identical variable remuneration structures and pay practices should apply to every group entity. If staff identified in accordance with Article 275(1)(c) of the Solvency 2 Technical Standards (’Solvency 2 staff’) are employed by non-European Economic Area (EEA) entities located in jurisdictions with conflicting local regulatory, legal, operational or taxation requirements it may be necessary to deviate from the group remuneration policy for these employees. Firms should communicate to the GFSC any significant deviations from the group’s remuneration policy, and should include an explanation where there are material differences between: (i) the remuneration arrangements for Solvency 2 staff identified in non-EEA entities; and (ii) the remuneration arrangements for other group Solvency 2 staff. 2.5 The EIOPA Guidelines8 are clear that ‘the holding company should ensure all undertakings that belong to the group comply with the [Solvency 2] remuneration requirements’. Therefore, where the GFSC is the group supervisor, the GFSC expects non-EEA entities in the group to comply with the Solvency 2 Technical Standards. The GFSC accepts however that, in groups with non-EEA entities, application of the ‘specific arrangements’ (contained in Article 275(2) of the Solvency 2 Technical Standards) to Solvency 2 staff may require modifications to the remuneration policy to accommodate jurisdictional restrictions, which may mean the GFSC’s expectations are unable to be met. Application to non-Solvency 2 entities 2.6 The GFSC recognises that insurance groups may contain banking and asset management entities which are subject to other regulatory regimes such as the Capital Requirements Directive (CRD), Alternative Investment Fund Managers Directive (AIFMD) and Undertakings for Collective Investment in Transferable Securities Directive (UCITS V), and thus different remuneration requirements may need to be applied within the group. However, there will still need to be a high degree of consistency across individual firm policies to enable the remuneration policy to be controlled at group level as required. 3. Solvency 2 Staff 3.1 Article 275(1)(c) and (2) of the Solvency 2 Technical Standards require insurers to apply specific arrangements to ‘the administrative, management or supervisory body, persons who effectively run the undertaking or have other key functions and other categories of staff whose professional activities have a material impact on the undertaking’s risk profile’. 3.2 In order to satisfy the scope of this Solvency 2 staff identification requirement, the GFSC expects the following individuals to be identified as being subject to Article 275(2) of the Solvency 2 Technical Standards (‘Solvency 2 staff’): 8 Guideline 9 (para 140 b) - https://www.eiopa.europa.eu/publications/guidelines-system-governance_en

Gibraltar Financial Services Commission Guidance Note on Remuneration Requirements for Insurers 5 • Board members; • Executive Committee members; • Key Function Holders (KFHs)9 and • Material Risk Takers (MRTs). 3.3 It is important for senior decision makers and those who are responsible for key functions (both at a regulated entity level and at the higher group level) to be identified as Solvency 2 staff. 3.4 The EIOPA Guidelines consider risk management, compliance, the actuarial and the internal audit function to be Key Functions, and this aligns with the GFSC’s view. The GFSC considers individuals to be holders of Key Functions if they are responsible for functions of specific importance for the firm in view of its business and organisation. Consequently, the GFSC expects those with significant levels of responsibility for risk management, compliance, actuarial and internal audit functions (i.e. not only heads of function at group level) to be identified as Solvency 2 staff at regulated entity level. The same applies across material business lines given the wholly different businesses of many subsidiaries and branches within group structures. 3.5 Key functions should not necessarily be restricted to these four areas. Firms are expected to consider whether there are any additional key functions of specific importance to the sound and prudent management of their business, such as the investment function, IT function or a claims management function. 3.6 As part of the supervisory review process and consistent with Article 275(1)(c) of the Solvency 2 Technical Standards, the GFSC expects firms to be able to demonstrate that employees carrying out activities which have a material impact on the risk profile of the firm have been appropriately identified as MRTs. The GFSC does not intend to mandate the specific arrangements and processes that firms should put in place. Rather it is the responsibility of firms to develop consistent materiality thresholds across their identification process. For example, one approach may be setting a quantitative risk threshold (monetary or other metrics) to identify underwriters with significant underwriting limits relative to the firm’s overall risk tolerance, or investment managers able to commit to significant credit risk exposures and market risk transactions above a certain material threshold. 3.7 Based on the risk profile specific to the firm, to meet the GFSC’s expectations, firms should seek to: (i) Identify staff members able to take material risks. Key Factors to consider • The firm should take into account the types and severities of risks to which it is exposed as well as its aggregated risk appetite when assessing whether the activities of the individual could have a material impact on the risk profile of the firm. • Staff members operating within the constraints of committee-set limits on their authority should not systematically be excluded from identification. The risk-taking authority and level of decision-making responsibility attached to the role should still be properly assessed for materiality. For example, if having taken into account the extent of management supervision prior to an underwriter being able to commit the firm, there is still the potential 9 ‘Key Function Holder’ means any person who is responsible for discharging a key function.

Gibraltar Financial Services Commission Guidance Note on Remuneration Requirements for Insurers 6 for their decisions to significantly increase the risk of harm to the firm in reasonably foreseeable adverse scenarios, they should be identified. (ii) Identify staff members able to influence material risk taking. Key Factors to consider • Senior staff members working within key functions (not necessarily the Key Function Holder) with significant levels of responsibility for monitoring adherence to the risk appetite and framework should be identified, particularly if they have overall responsibility for their function within a material division or business line. • Voting members of committees responsible for the oversight of risk-taking activities (e.g. setting risk appetite limits) across the firm, or group, or material business lines should be identified. 3.8 Senior staff members should be categorised as Solvency 2 staff and subject to the specific remuneration arrangements set out in Article 275(2) of the Solvency 2 Technical Standards where they perform activities on behalf of a firm that have a material impact on the risk profile of either: (i) that firm and/or another insurer within the group; or (ii) the group as a whole. 3.9 Firms can engage with their supervisors prior to finalising their approach for identifying MRTs. The GFSC expects all firms to keep a record of the assessment criteria applied and the final list of staff identified as Solvency 2 staff for each performance year. 4. Deferral 4.1 Where remuneration contains a variable component, Article 275(2)(c) of the Solvency 2 Technical Standards requires firms to defer a ‘substantial portion of the variable remuneration component’ for a period of not less than three years for Solvency 2 staff. There is no flexibility in the Solvency 2 Technical Standards for firms to elect a shorter period than this specified minimum three year period, with firms required to ensure that the period (be it three years or longer) is ‘correctly aligned with the nature of the business, its risks, and the activities of the employees in question’. The natural life cycle of the business and associated risks should be considered when setting the length of the deferral period. Variable remuneration payable under these deferral arrangements must vest no faster than pro-rata from year one. There may also be the potential for multi–period schemes to operate within the same deferred bonus plan or Long-Term Incentive Plan (LTIP). The actual arrangements put in place to comply with this requirement will remain, however, a discretionary matter for the firm. 4.2 The ‘variable remuneration component’ should be read as the aggregate amount awarded in a given performance year from bonus plans, LTIPs and/or any other variable remuneration plans in which the individual participates. For these purposes, the LTIP should be valued at the grant date as the maximum potential value that could be paid out if 100% of the performance conditions are met with the deferral period commencing on grant. 4.3 The GFSC believes that a ‘substantial portion’ of variable remuneration, which must be deferred for a minimum of three years, is very unlikely to be less than 40%. Based on current industry practice, the GFSC is of the view that a deferral threshold of 40% or more is likely to be

Gibraltar Financial Services Commission Guidance Note on Remuneration Requirements for Insurers 7 proportionate, particularly given this would not be applied independently to distinct variable remuneration awards but to the total amount. 4.4 Deferral of variable remuneration allows firms to apply downwards adjustments by the application of malus10 prior to the award vesting, to take account of specific risk management failures. In order to comply with Article 275 of the Solvency 2 Technical Standards, the GFSC will expect firms to consider whether or not to apply malus during the three year deferral period required by the Solvency 2 Technical Standards and to be able to apply it where appropriate. Whether reductions should be made to the unvested variable remuneration of Solvency II staff or other forms of performance adjustment. 5. Performance Measurement 5.1 Article 275(2)(b) of the Solvency 2 Technical Standards requires that, where variable remuneration is performance related, the aggregated ‘total amount of variable remuneration’ is to be based on a ‘combination of the assessment of the performance of the individual and of the business unit concerned and of the overall result of the undertaking or the group to which the undertakings belongs’. Performance should also be assessed based on financial and non￾financial criteria (Article 275(2)(d)). To encourage positive behaviours or actions, incentive plans should incorporate non-financial criteria, particularly at the individual assessment level. These criteria should include the extent of the employee’s adherence to effective risk management and compliance with the relevant regulatory requirements relating to the activities of the employee in question. 5.2 Article 275(2)(e) of the Solvency 2 Technical Standards requires performance measurement as a basis for variable remuneration for Solvency 2 staff to ‘include a downwards adjustment for exposure to current and future risks, taking into account the undertaking’s risk profile and the cost of capital’. The GFSC recognises that, given that the risks faced by Solvency 2 firms will vary subject to the business models and operational approaches to risk mitigation within the firm, it is appropriate to allow for a degree of flexibility. The GFSC will expect firms to be able to demonstrate how they have taken into account the risks they face in the short to long term and the cost of capital when determining variable remuneration at aggregate and individual level. To reflect this requirement, firms should strongly consider incorporating risk-adjusted metrics where risk is calculated as a measure of the return relative to the risk taken over a specified period (e.g. economic profit). A firm should also apply discretionary factors to the extent that it is appropriate. 5.3 A balanced approach comprising both financial and non-financial criteria should be adopted when assessing individual performance for either bonus or LTIP awards. Firms’ attention should be drawn to the current practice in the banking sector whereby the weightings attached to profit measures (e.g. net income) or value creation measures (e.g. total shareholder return (TSR) or return on equity (RoE)) are restricted and should be employed only as part of a balanced, risk-adjusted performance scorecard. 5.4 Particular care should be taken to ensure that variable remuneration awarded to Solvency 2 staff identified within the risk management, compliance, internal audit and actuarial functions is not determined using criteria which measure the performance of the operational units or business areas subject to these individuals’ control (Article 275 (2)(h)). 10 Malus is defined in the EBA Guidelines on sound remuneration policies under Articles 74(3) and 75(2) of Directive 2013/36/EU as ‘an arrangement that permits the institution to reduce the value of all or part of deferred variable remuneration based on ex post risk adjustments before it has vested’.

Gibraltar Financial Services Commission Guidance Note on Remuneration Requirements for Insurers 8 5.5 Article 275(2)(f) of the Solvency 2 Technical Standards stipulates that ‘termination payments shall be related to performance achieved over the whole period of activity and be designed in a way that does not reward failure’. Termination payments for Solvency 2 staff should be fair and proportionate relative to prior performance. 6. Proportionality 6.1 Article 275(3) of the Solvency 2 Technical Standards provides for the application of the proportionality principle with the ‘internal organisation of the insurance or reinsurance undertaking, and the nature, scale and complexity of the risks inherent in its business’ to be taken into account when designing the remuneration policy. 6.2 The GFSC takes the view that for smaller insurers, meeting the expectations set out in this Guidance Note would have a disproportionate cost impact on these firms. Conversely, larger firms with complex risk profiles should seek to meet (or exceed) the GFSC’s expectations as set out in this Guidance Note in complying with the regulatory requirements. The GFSC therefore considers it appropriate to limit the application of the expectations as set out in this Guidance Note to significant firms (i.e. those classified as ‘systemic’ by the GFSC). 6.3 The GFSC will still expect smaller firms to comply appropriately with the Solvency 2 Technical Standards when setting their remuneration policies. The application of proportionality under Article 275(3) does not equate to smaller firms being able to disapply the Solvency 2 Technical Standards requirements. These firms should be exercising appropriate judgement to ensure that the specific arrangements for Solvency 2 staff contained in Article 275(2) are applied proportionality and modified where required to reflect the size and nature of their businesses. 6.4 The GFSC will take a proportionate approach in assessing firms’ compliance with Article 275(2). The GFSC will also seek, so far as possible, to limit the potential for outcomes that are disproportionately different across sectors. For example, when assessing the specific arrangements that firms have put in place for Solvency 2 staff in order to comply with Article 275(2) of the Solvency 2 Technical Standards, the GFSC will be proportionate in its approach where an individual has total remuneration of no more than £500,000 and has been awarded variable remuneration of no more than 33% of their total remuneration. For Solvency 2 staff performing activities for the firm for only part of the performance period, the quantitative threshold can be adjusted relative to the months for which services were performed. 7. Disclosure to GFSC 7.1 To enable firms to demonstrate how their policies, practices and procedures are meeting the requirements in the Solvency 2 Technical Standards and the expectations in this Guidance Note, the GFSC may design a reporting template for firms to use. However, use of any template the GFSC may design in this context will be voluntary, as the GFSC recognises that some firms may prefer to document how their remuneration policies comply with the requirements in a different way. All information received in this regard will be treated as confidential.

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