GFSC Guidance Note on Financial Management and Planning by Insurers

Version: 2
Publication Date: 28/03/2025 www.gfsc.gi
GFSC Guidance Note
Financial Management and Planning by Insurers

Gibraltar Financial Services Commission Guidance Note on Financial Planning and Management by 2 Insurers
Table of Contents

1. Introduction..................................................................................................................................... 3
2. Risk Appetite Statement.................................................................................................................. 3
3. Business and Financial Plans ........................................................................................................... 5
4. Dividend suitability and sustainability............................................................................................. 7

Gibraltar Financial Services Commission Guidance Note on Financial Planning and Management by 3 Insurers

1. Introduction
   1.1. This Guidance Note is addressed to all Gibraltar firms that fall within scope of the Financial
   Services (Insurance Companies) Regulations 2020 (“the Insurance Companies Regulations”), (collectively referred to as ‘insurers’) and sets out the GFSC’s expectations concerning:

• The development and maintenance of a risk appetite statement by insurers;
• How insurers apply their risk appetite when developing and monitoring their medium term
  business and financial plans; and
• The assessment of the suitability and sustainability of capital distribution plans in the
  context of the risk appetite.
  1.2. This Guidance Note should be read in conjunction with:
• The Insurance Companies Regulations1
  ;
• The Financial Services (Solvency 2)(Technical Standards) 2020 (the ‘Solvency 2 Technical
  Standards’);
  2
• The ‘GFSC’s Approach to Insurance Regulation;3
• EIOPA’s Guidelines on System of Governance;4
• EIOPA’s Guidelines on Own Risk Solvency Assessment (ORSA);5
• The GFSC’s Guidance Note on Corporate Governance: Board Responsibilities;6
• Own Risk and Solvency Assessment Feedback Document;7
• [The GFSC’s Guidance Note on Cyber Insurance Underwriting Risk;8
• The GFSC’s Guidance Note on Dealing with Market Turning Events for General Insurers;9
• The GFSC’s Policy Statement on the Interpretation of EU Guidelines and
  Recommendations10
  .

2. Risk Appetite Statement
   2.1. For the purpose of this Guidance Note, the ‘risk appetite’ is intended to mean the amount and
   type of risk that an insurer is willing to take in order to meet its strategic objectives. 1 https://www.gibraltarlaws.gov.gi/uploads/legislations/financial-services/2020s044/2020s044(08-09- 23).pdf#viewer.action=download 2 https://www.gibraltarlaws.gov.gi/legislations/financial-services-solvency-2-technical-standards-regulations-2025- 7559 3 https://www.fsc.gi/publications/2019/05/Approach%20to%20Insurance%20Regulation.pdf 4 https://register.eiopa.europa.eu/GuidelinesSII/EIOPA_Guidelines_on_System_of_Governance_EN.pdf 5 https://www.eiopa.europa.eu/publications/guidelines-own-risk-solvency-assessment-orsa_en 6 https://www.fsc.gi/uploads/Guidance%20Notes/Guidance%20Note%20- %20Corporate%20Governance%20Board%20Responsibilities2024.pdf 7 https://www.fsc.gi/publications/download/adobe/2016ORSAFeedbackDocument.pdf 8 https://www.fsc.gi/uploads/Guidance%20Notes/GFSC%20Guidance%20Note%20on%20Cyber%20Insurance%20U nderwriting%20Risk%20(Final).pdf 9 https://www.fsc.gi/uploads/Guidance%20Notes/GFSC%20Guidance%20Note%20on%20Dealing%20with%20a%20 Market%20Turning%20Event%20in%20the%20General%20Insurance%20Sector%20(Final).pdf 10https://www.fsc.gi/uploads/GFSC%20Policy%20Statement%20on%20EU%20Guidelines%20and%20Recommenda tions.pdf

Gibraltar Financial Services Commission Guidance Note on Financial Planning and Management by 4 Insurers
2.2. The GFSC expects an insurer’s risk appetite to be approved by the board, and to be
documented in terms that are clearly understandable in a risk appetite statement, along with the rationale for the terms in which the risk appetite is expressed, and for how this appetite has been determined. The GFSC expects the insurer’s risk appetite statement to identify the reasonably foreseeable circumstances under which the statement might be reviewed and changed. Any revision to this statement is expected to be signed off by the board.
2.3. The insurer’s risk appetite statement is expected to include the risk appetite for the levels of
capital that are to be maintained in reasonably foreseeable market conditions (e.g. as assessed through stress and scenario tests, or through some suitable alternative approach, to provide no more than a 1 in X probability that Solvency Capital Requirement (SCR) coverage might fall below 100%). This appetite is expected to take into account factors such as the following, where relevant:

• the sensitivity of the balance sheet to changes in the key risk drivers, including changes
  in market and underwriting conditions, and the emergence of large claims;
• non-linearities and discontinuities that may arise in the balance sheet due to
  combinations of adverse events and the potential loss of matching adjustment (MA) or volatility adjustment (VA) approval in stress scenarios;
• the quality of capital resources;
• the inherent uncertainty in the technical provisions (including in the application of the
  MA or transitional measure on technical provisions (TMTP)), risk margin, the value of any illiquid assets, and the SCR, due to limitations and approximations in the insurer’s regular solvency monitoring;
• the levels of uncertainty in forecast earnings;
• the results of stress and scenario testing (including reverse stress testing);
• capital levels that are considered to be required to maintain credit ratings and market
  reputation;
• the potential impact of firm failure on policyholders (including substitutability of
  insurance cover); and
• recovery options that may be available to the insurer, including consideration of when
  each option may not be available.
  2.4. The GFSC also expects the risk appetite statement to include, in a proportionate manner, the
  insurer’s appetite for the level and volatility of future dividend payments that it would be willing to make, in the context of, among other things:
• its financial and business plans;
• the levels of capital held by the insurer; and
• the volatility of its earnings.
  2.5. The risk appetite statement should encompass all the material risks that are relevant to the
  insurer, including those listed in Regulation 45(3) of the Insurance Companies Regulations that are considered to be material. It should include the risk tolerance limits (i.e. the limits on the amount of risk) that have been set for the various types of risk (including market risk, underwriting risk, operational risk and liquidity management risk) that the insurer is willing to bear. Many of these limits are likely to be expressed in quantitative terms, but the appetite for some types of risk (e.g. reputational risk) may be expressed qualitatively.

Gibraltar Financial Services Commission Guidance Note on Financial Planning and Management by 5 Insurers
2.6. The GFSC expects any significant change to an insurer’s risk appetite only to be made by the
board following an overall discussion on the risks and capital requirements of the business. Most insurers review their strategy and business plans on an annual basis, in the context of the insurer’s risk profile, a process which inherently includes reviewing the risk appetite, and a review may also be appropriate following some major external event. The GFSC does not however expect the risk appetite to be changed solely to justify, or regularise, particular actions, such as the assumption of a new risk, a change in investment policy, or a dividend payment.
2.7. The level of detail to be included in the risk appetite statement should be commensurate with
the nature, scale and complexity of the risks borne by the insurer.
2.8. The GFSC expects this risk appetite statement to be communicated appropriately within the
insurer, so as to set a framework for the management and reporting of relevant risks that can be clearly understood by individuals performing key functions at the insurer, and to be expressed in sufficient detail to be clearly relevant to them.
2.9. The GFSC expects communications to external stakeholders, such as shareholders/capital
providers, customers and their agents, rating agencies, and regulators, to be consistent with the risk appetite statement.
3. Business and Financial Plans
3.1. The GFSC expects insurers to have business plans that are consistent with their risk appetite
and risk tolerance limits, and which show how they intend to generate revenue and earnings each year. Such plans should reflect achievable capital generation and a capacity for dividend payouts in accordance with their risk appetite. Insurers should identify and understand the drivers of their profitability, and potential balance sheet volatility, together with the significant risks relating to their business plans, and consider reasonably foreseeable adverse scenarios. Insurers should have plans for the maintenance of capital resources in line with their risk appetite, that take account of each of these factors, as well as the insurer’s intended levels and mix of business growth.
3.2. The GFSC expects regular management information (MI) to be maintained, and provided to
both relevant senior managers and the board, to show how the insurer is performing against its plans. Frequency of MI generation should reflect the volatility of drivers of capital surplus and calculations should, if approximate, reflect the main drivers well enough to provide useful information to management.
3.3. The GFSC expects this MI to include information about whether any deviation from these plans
is, and is likely to continue to be, over the planning timescale, within its risk appetite and/or risk tolerance limits. Any material deviations that are not within appetite should result in appropriately timed action to limit the insurer’s exposures to the relevant risks, as well as revisions to the business and financial plans to bring these in line with its risk appetite.
3.4. The GFSC expects insurers to consider how they will address the risks and vulnerabilities to
their business plans consistently with their risk appetite, including through an appropriate allocation of capital and through their risk management framework and controls.

Gibraltar Financial Services Commission Guidance Note on Financial Planning and Management by 6 Insurers
3.5. As explained in more detail in the GFSC’s Guidance Note on Market Turning Events for General
Insurers11
, the GFSC expects general insurance firms, along with insurance composites and groups undertaking general insurance business to consider in advance, in a proportionate manner, the possible implications of a ‘market turning event’ on their business, including what steps might reasonably be taken in advance to enable them to respond appropriately and to meet their regulatory obligations.
3.6. The insurer’s own risk and solvency assessment (ORSA) should help to ensure there are
effective links between an insurer’s business plan, risk appetite, and capital management plans. Sections 5 and 6 in the ORSA Feedback Document12 provide further detail on how insurers are expected to address risks to their business strategy and plans through their ORSA, and through the development of appropriate plans and management actions for managing the ongoing levels of capital resources within the business.
3.7. The GFSC expects insurers and groups to identify and analyse potential management actions, in
response to stress scenarios, that are realistic, credible, consistent with regulatory expectations, and achievable. The potential management actions and the analysis of them should be approved by the relevant board. Insurers should also consider whether any of the actions identified should be taken (or facilities established) in advance as precautionary measures, or whether they would be relevant or desirable only in the stress scenario.
3.8. The GFSC expects insurers to understand any dependencies for the implementation of their
identified management actions on third parties or external market conditions, and monitor those dependencies so that the effectiveness of those actions is not undermined.
3.9. Insurers should consider the circumstances under which their identified management actions
might be applied. In particular, they should consider and establish suitable trigger points at which they would intend to implement any planned management actions that they take into account in the calculation of their technical provisions or the SCR.
3.10. Any planned reliance by an insurance firm on support from its group should be assessed
carefully, after consultation with the group board, to consider whether such support would be readily available, taking account of:
(a) the potential effect of any stressed conditions on the group as a whole, as well as on other individual members of the group; (b) the group’s likely appetite to provide such support; and (c) any other potential barriers to the provision of such support (e.g. legal or regulatory requirements, or practical difficulties in transferring funds between currencies or countries). 11 https://www.fsc.gi/uploads/Guidance%20Notes/GFSC%20Guidance%20Note%20on%20Dealing%20with%20a%20 Market%20Turning%20Event%20in%20the%20General%20Insurance%20Sector%20(Final).pdf 12 https://www.fsc.gi/publications/download/adobe/2016FeedbackDocument.pdf

Gibraltar Financial Services Commission Guidance Note on Financial Planning and Management by 7 Insurers
4. Dividend suitability and sustainability
4.1. When assessing potential dividend payments,13 the GFSC expects insurers to be able to
demonstrate that any planned dividend payments are appropriate in relation to actual and projected business performance, as well as the current and future capital position of the insurer, taking account of its documented risk appetite14 .
4.2. For this purpose, the GFSC expects insurers to consider whether the level of their capital
resources held following payment of a planned dividend would be in line with the insurer’s risk appetite; and to have a dividend policy that takes account of the sources of the insurer’s earnings and their sustainability. In this context, insurers are also expected to consider how the dividend may be adjusted in the event of adverse financial performance by the insurer that could result either from adverse market (or other external) conditions, or from insurer-specific issues.
4.3. Accordingly, it will be important for insurers to consider the level, timing, and source of capital
generation, including for example whether it comes from new business, the back book or one￾off management actions; and hence to consider the longer term implications of their dividend policies, including whether future dividends could be supported by future capital generation. Insurers are expected to have suitable MI to inform this analysis.
4.4. Insurers must notify the GFSC of any dividend payment that they propose to make at the
earliest opportunity and at least 30 days before the day on which they propose to declare (or otherwise to decide to make) it, pursuant to Regulation 51A of the Insurance Companies Regulations. They may only proceed with the dividend payment if the GFSC does not object to the payment being made at least 15 days before the day on which the firm proposes to declare (or otherwise decide to make) it.
4.5. Upon receipt of a dividend payment notice, the GFSC will assess whether in making the
dividend payment, the insurer is remaining within its risk appetite; whether the dividend payment will leave the insurer’s capital position within its risk appetite (and whether the capital position will likely remain so), and whether the insurer’s SCR coverage will remain above 100%.
4.6. GFSC supervisors may also wish to review the sustainability of insurers’ capital management
and dividend policies as part of their regular supervision and may put particular focus on insurers that operate with capital levels that are close to the SCR or which fluctuate unexpectedly.
4.7. If an insurer’s capital management policies are calibrated such that frequent or foreseeable
breaches of SCR occur or are likely to occur, the GFSC may consider whether the insurer is meeting the requirement in Regulation 43 of the Insurance Companies Regulations to have in place an ‘effective system of governance which provides for sound and prudent management of its business’. Similarly, if the level of capital of an insurer regularly or persistently falls outside of its risk appetite, or an insurer makes frequent changes to its risk appetite for its 13 This would include here the assessment made for distributions to any capital providers, including for a return of premiums to the members of a mutual, or for a loan to a parent or holding company. 14 See Regulation 51A(5) of the Insurance companies Regulations.

Gibraltar Financial Services Commission Guidance Note on Financial Planning and Management by 8 Insurers planned levels of capital, the GFSC may consider whether this indicates failings in the governance process by which the insurer sets its risk appetite.

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