Address by Director of Insurance Supervision, Sylvia Cronin, at Deloitte

13 December 2016

Introduction

Good evening ladies and gentlemen. I would like to start by thanking Deloitte for the invitation to speak to you this evening. We have taken quite a journey together over 2016, which has proven to be a challenging one in terms of balancing the Solvency II regime with market uncertainties – we certainly all deserve this opportunity to meet and mingle together as the year draws to close.

2016 Challenges

Implementation of Solvency II & impact

As you know, the major development entering 2016 was the implementation of Solvency II. The practices introduced are robust and comprehensive and it heralds a new phase for the insurance industry. These new regulations hold all of us to more rigorous standards and are intended to stimulate risk based decision making at every level of the organisation. The implementation phase was lengthy, costly and challenging. The great body of work completed to date cannot be disputed; however, continued refinement and embeddedness is required. The momentum we have gathered to date will need to continue to achieve these objectives.

Solvency II is leading to a more sophisticated risk based regulatory and supervisory regime. As regulators, the most significant changes within the Insurance Directorate this year have been centered on the introduction of a dedicated analytics team, onsite supervisory capability and the fitness and probity (F&P) process for the Head of Actuarial (HoAF) function.

Analytics

In respect of the development of our analytics capability, given the volume of reports and returns introduced by Solvency II, the division will complement our evolving analytics strategy with the intention of facilitating more relevant micro and macro prudential decision making. The qualitative analysis output will shape the topics and scope of our risk assessments. It will also inform sectorial-wide analysis that will support our assessment of financial stability issues.

2017 will be a significant year for firms in terms of the suite of reports and returns to be completed. The use of high quality validated underlying data is a priority. Underpinning this should be a robust and effective governance and control structure to support the production and approval of these reports and returns.

One such example is the first publicly disclosed solvency and financial condition report (SFCR) based on the 2016 year-end. We expect that there will be refinement of the SFCR over the coming years as insurers benchmark against each other. However, as a starting point you need to ensure that the key areas noted in the Directive are addressed and that the content can be understood by the intended readers. It is important that an appropriate level of detail is supplied to facilitate an informed overview of the undertakings operations, whilst acknowledging the concepts of proportionality and materiality. This regulatory reporting will be examined between our supervision and onsite inspections teams during 2017.

Another example is the annual own risk and solvency assessment (ORSA) which is intended to be the heart of Solvency II. Through previous engagement and feedback with you, we note that the ORSA is evolving year on year and becoming a more intrinsic part of daily operational and strategic decision making. However, the ORSA should contain a clear and concise representation of your own solvency needs (OSN) assessment. This assessment should be linked from the results of your comprehensive suite of relevant and current stress tests (e.g. Pension, Brexit). Our analytics division will be completing detailed analysis of stress tests throughout the non-life sector in 2017. In addition, the actuarial and supervision teams will be reviewing the ORSA and feedback will be provided in H1 2017. The level of involvement and discussion by the Board within the ORSA process is an area that our supervision teams will be assessing on a continuous basis.

Onsite inspections division

Insurance supervision now benefits from in-depth inspections completed by our onsite team. The inspections involve up to six weeks onsite including testing of controls. To date there has been very positive interaction with the Companies where reviews have occurred. This enhancement to our supervisory toolkit in 2016 allowed us to drill down further into practices within individual insurance Companies and has facilitated a reinforced supervisory overview, with quality reviews and constructive recommendations identified. Areas of focus for 2017 for the onsite team will include branch inspections, operational risk reviews and regulatory reporting.

Head of Actuarial Function (HoAF)

The HoAF role was introduced within insurance undertakings over 2016. The HoAFs will be presenting their first actuarial function report (AFR) and related signoffs (e.g. reinsurance) to the Board. We expect this report will result in significant engagement and challenge from the Reserving committee and the Board. We will be reviewing these reports in addition to the new peer review reports. A main actuarial supervisory focus for 2017 will be on the interconnectivity of reserve and pricing risk. In addition, arising from the recent thematic pricing review in the domestic non-life sector, actual v’s expected (AvE) analysis, and the monitoring of this, will remain a priority.

The challenging business environment

In terms of risk assessment, geopolitical risk is fast becoming one of the top risks facing insurers who conduct business on a European and Global basis.

The geopolitical risk introduced by Brexit and more recently with the results of the US Presidential election, will likely have a profound impact on how we transact business in Ireland. Local market dynamics will be implicated; however, the unknown is, to what degree. Therefore, when completing your ORSA and the stress testing such environmental factors need to be considered. The impact and results will need to be clearly linked to your RAS, your own solvency needs (OSN) assessment and strategic plans.

It surprises me to need to speak about this, but we need to assess what potential impact there will be on the insurance industry as a whole as well as at the individual company level as a result of Brexit.

2017 – The year ahead

Going into 2017 we are entering an intense period of uncertainty, this will be the year of reality for Brexit – what will it mean for the Industry, the regulators and Europe.

From the Central Bank’s perspective, we are open to discussion and engagement with any applicant. However, when reviewing applications we need to be satisfied that the ‘hearts and mind’ of the entity are located here; that the decision-making happens here. We also need to have comfort that the institution is actively engaged in managing the risks they face.

Some business models are more risky than others and require more safeguards - for instance, underwriting foreign risks throughout Europe require deep knowledge and expertise of those markets. A few business models can be ill-conceived, such as taking on far-flung risks in very foreign jurisdictions on an Irish balance sheet, or selling products widely seen as unsuitable.

For any authorisation process we are focused on the firm's own understanding of the risks, and how they are managed and mitigated. We also seek to ensure that the customers interests are central to the business proposition, from the suitability of products to the treatment of claims. This is the role of a regulatory authority. Proper business models, with convincing risk identification and management, focus on consumer needs, suitable products, sound finances, strong boards and executives, can be expected to be approved, whether or not such business models already exist in Ireland.

If an institution satisfies our expectations and is successful in its submission, then they will be subject to the same regulations and supervision activities that apply currently to you. It is important to note that Brexit will not just result in authorisations for the sake of authorisations, we will ensure that any business seeking to establish themselves here is of suitable standard and quality.

Closer to home, one of the more topical subjects in the public domain over 2016 was rising motor premiums. In a recent appearance before the Oireachtas Committee on Finance, Public Expenditure and Reform, and Taoiseach, the Central Bank put forward a number of suggestions that we believe could assist in the reduction in the premiums being charged. First, we advocated for initiatives that could contribute to the reduction of road collisions such as improving infrastructure, raising public awareness on how to prevent collisions and the effective enforcement of road safety law.

We highlighted that the cohort of uninsured drivers around the country are a factor in motor insurance pricing. We also referred to how fraudulent claims and the cost associated with these are a key influence in the rise in premiums. However, each insurance undertaking must focus on their pricing to ensure it adequately reflects the underlying risks and characteristics of their book of business. From a thematic pricing review completed within the domestic non-life sector, we strongly advocated improvements in the governance of pricing decision making and the resulting monitoring, including AvE results. The HoAF is expected to play a crucial role in addressing these objectives.

As if the pricing and uncertain claims environment was not challenging enough, we had to contend with volatile investment markets and continued low interest rates. Investment strategies must have the approval of the Board and be managed within carefully selected risk appetites and the prudent person principal.

Giving consideration to these factors, Companies have to set appropriate and realistic strategies. A clear vision for your company is imperative to ensure you are competing effectively in this challenging environment. Strategy and Business Model Analysis is a key supervisory focus for 2017 and will be examined through PRISM meetings, the ORSA, SFCR and a number of targeted risk assessments (TRAs).

Look Ahead – Year-end & 2017

We do not have a crystal ball to guide us into 2017 but we do have a range of additional areas that will be of particular focus and interest in 2017.

IT and Cyber Risk

The first is IT and Cyber risk. Given IT systems central role in the operation of insurance undertakings and the role of digitalisation in shaping the future of insurance, there is a heightened risk when it comes to IT systems failure and/or Cyber ‘trigger events’ e.g. data theft or destruction. The Central Bank issued Cross Industry Guidance in respect of Information Technology Cybersecurity Risks in September 2016 with respect to these risks. In conjunction with this, the Central Bank is utilising the auditor assurance framework for High Impact firms, and a questionnaire was issued to all Medium High & Medium Low firms.

• For year-end 2016, 10 high impact undertakings are required to prepare a report setting out the description of the internal governance arrangement performed by the Board of Directors and Senior Management over IT and Cyber risks. The relevant auditor then undertakes an examination and prepares two reports, an assurance report and a review & recommend report, for submission to the Central Bank. The supervision team will assess the strengths and weakness faced by these insurers from review of these submissions.
• An IT and Cyber risk questionnaire has been circulated to medium high and medium low firms and responses were received by 2nd December. The responses are being reviewed and the intention is to develop an understanding of the common issues faced by undertakings.

Revision of the General Protocol

The second area of focus centres around the significant amount of insurance business carried out on a freedom of service (FoS) and freedom of establishment (FoE) basis out of Ireland (e.g. Zurich Insurance) and into Ireland (e.g. Aviva branch), and the general protocol is very relevant.

Over the coming months, EIOPA are set to agree a number of changes to the General Protocol with the aim of aligning it to Solvency II. Some of the key changes are likely to include:

• An increase in information and co-operation between national supervisory authorities (NSAs). Home NSAs will make available to host NSAs annual quantitative data on premiums, claims and commissions on an undertaking-by-undertaking basis (at present, the information is prepared in aggregate form and using different templates) in a timelier manner; and
• Cooperation platforms to be established between home and host NSAs.

The timing is apt given the public issues identified in Ireland recently; Maltese supervised ‘Setanta’, who provided insurance on a freedom to provide services basis and the Gibraltar supervised ‘Enterprise’ passporting into Ireland.

Outsourcing

Outsourcing will continue to be a key theme and priority into 2017. Solvency II has reinforced the importance of a solid governance framework over the relationship between firms and outsource providers. Through 2017 there will be a range of onsite reviews of third party providers and the focus will be on governance risk and the inherent operational risks arising as a result of outsourcing arrangements.

Conclusion

To conclude; we all need to be vigilant to the risks posed by the evolving and often volatile environment we operate in.

As the annual reporting cycle is kicking off for the majority of you, it is imperative through this busy period you give sufficient time and resource to the topics mentioned this evening and ensure appropriate governance within each process.

Facilitated by our move in early 2017, we at the Bank will be working together and collaborating as ‘one bank’ through all our interaction with you in 2017; whether we are meeting for regular PRISM meetings, thematic, actuarial, targeted or onsite reviews.