Ed Sibley, Deputy Governor (Prudential Regulation) of the Central Bank of Ireland, spoke about functioning of the insurance market, key issues that affect the industry, and key challenges ahead. He highlighted that the approach to regulation and supervision must be appropriate, proportionate, and effective for the markets and for the complex array of firms operating within them.
Mr. Sibley mentioned that the focus on improving the resilience of Irish authorized insurance firms from both a financial resources and a business model perspective, together with driving improvements in governance, risk management, and culture should contribute to the stability of the insurance markets while ensuring that policyholders can continue to have confidence that their policies will pay out when required. In considering the future strategy, it is important to consider the current landscape, issues, and risks as well as the desired future. In this context, Mr. Sibley discussed certain issues relevant to all sectors and firms, including the following:
- Brexit. Central Bank of Ireland has sought to ensure that all insurance firms operating in the state are appropriately prepared for a hard Brexit—the risk of which remains—and that risks to consumers are mitigated to the greatest extent possible. There have been significant volumes of financial services firms seeking authorization to protect their ability to provide services across EU. In Ireland, Central Bank of Ireland has approved 14 Brexit-related insurance applications for new authorizations and notifications of material changes of business for existing firms. Additionally, Central Bank of Ireland has been enhancing the regulatory and policy framework to reflect changes in the sector—for example, making enhancements to the framework for third-country branches and with profits insurance.
- Operational Resilience. The management of outsourcing arrangements and safeguarding IT resilience are two critical components of operational resilience. The Central Bank of Ireland expects boards to have appropriate oversight and awareness of outsourcing arrangements and the associated risks; firms to ensure they have the appropriate skills and knowledge to effectively oversee and understand arrangements, and their associated risks, from inception to conclusion; and firms to prepare for the worst—considering what the loss of service providers would look like. In Central Bank of Ireland, a common methodology has been developed across all financial sectors to assess technology risk within regulated firms. For 2019, firms are continuously being pushed to focus on the fundamentals, while also enhancing their cyber and operational resilience, to be able to withstand, absorb, and recover from IT incidents.
- Reinsurance. The overall levels of reinsurance across the Irish insurance industry are relatively stable. However, some firms are seen increasing their levels of risk cession and, in particular, firms with a heavy reliance on other group entities. Where individual firms use extensive reinsurance, both counterparty and concentration risks need to be closely managed and exposures may need to be collateralized to reduce the associated risks.
- Investments. Recent Solvency II returns are showing a slow but noticeable shift toward a riskier asset allocation at the industry level. In particular, a marginal shift from sovereign debt toward corporate debt has been seen.
- Recovery planning. Internationally, and in Ireland, insurance is behind banking in recovery planning, both in terms of the regulatory framework and firms’ preparedness, which needs to change. The focus of Central Bank of Ireland and EIOPA on resolution planning will continue to increase. The 2020 Review of Solvency II, for example, which the Central Bank of Ireland is taking an active role in, is wide ranging in scope covering many fundamental areas of the regime, including insurance guarantee schemes and recovery and resolution.
Mr. Sibley also highlighted that the insurance industry is materially exposed to climate change. Physical risks will impact liabilities (including the costs of claims) while assets and transition risks could be extremely costly on the investment side. EIOPA has calculated that 13% or EUR 1.4 trillion of European insurers' assets are exposed to climate transition risk—that is, the change in asset values that might occur in the shift to a low-carbon economy. He expects insurers to not only be able to assess the financial and operational impact of a cyber-attack on their own systems, but also to quantify the cyber risk exposures, including hidden cyber exposures, within the policies they have underwritten. More broadly, technological changes will affect both how insurance is offered and what is insured.
Assessment of the long-term resilience of the insurance sector is a fundamental part of the supervisory mandate. As such, regulated firms can expect the Central Bank of Ireland to increase its focus on the adequacy of firm’s emerging risk management. In particular, he expects firms to use scenario analysis and stress testing to help determine the potential impact of their exposure to emerging risks; evidence how they will mitigate these risks; and disclose in a clear, meaningful and timely way, for example, through the Own risk and solvency assessment (ORSA) and Solvency and Financial Condition Report (SFCR).
Related Link: Speech
Keywords: Europe, Ireland, Insurance, Reinsurance, Solvency II, Brexit, Recovery Planning, Climate Risk, ORSA, SFCR, Cyber Risk, Central Bank of Ireland, BIS
Previous ArticleSRB Publishes Expectations to Ensure Bank Resolvability Post Brexit
The finalization of the two sustainability disclosure standards—IFRS S1 and IFRS S2—is expected to be a significant step forward in the harmonization of sustainability disclosures worldwide.
Decentralized finance (DeFi) is expected to increase in prominence, finding traction in use cases such as lending, trading, and investing, without the intermediation of traditional financial institutions.
The Basel Committee on Banking Supervision (BCBS) published reports that assessed the overall implementation of the net stable funding ratio (NSFR) and the large exposures rules in the U.S.
At the global level, supervisory efforts are increasingly focused on addressing climate risks via better quality data and innovative use of technologies such as generative artificial intelligence (AI) and blockchain.
The finalization of the IFRS sustainability disclosure standards in late June 2023 has brought to the forefront the themes of the harmonization of sustainability disclosures
The European Banking Authority (EBA) recently issued several regulatory publications impacting the banking sector.
The Basel Committee on Banking Supervision (BCBS) launched a consultation on revisions to the core principles for effective banking supervision, with the comment period ending on October 06, 2023.
The U.S. banking agencies (FDIC, FED, and OCC) recently proposed rules implementing the final Basel III reforms, also known as the Basel III Endgame.
The Financial Stability Board (FSB) recently published the second annual progress report on the July 2021 roadmap to address climate-related financial risks.
The recognition of climate change as a systemic risk to the global economy has further intensified regulatory and supervisory focus on monitoring of the environmental, social, and governance (ESG) risks.