Address by Director of Insurance Supervision, Sylvia Cronin, at the Irish Brokers Association Annual General Conference

17 November 2016

Good morning to you all, I would like to extend my gratitude to the Irish Brokers Association for inviting me today. It is a pleasure to address the conference of such an active and diverse association that represents everyone from the independent to the corporate broker firms and everything in between.

The theme of the conference today is the evolving insurance environment and indeed there has been much evolution since I arrived in the Central Bank in October 2014, not least the implementation of Solvency II. When I was preparing today I cast my mind back a bit further and I began exploring where insurance as we know it evolved from, what its origins were.

At its core, insurance is about spreading risk and as human beings we have been practising this from the dawn of time, from storing our crops in multiple locations to hunting in groups. The first known written reference to a type of insurance transported me to 18 Century BC Babylon, when the Code of Hammurabi enacted into law an ancient form of maritime protection. Moving along in time, in the Middle Ages craft guild members would contribute to a fund which could be used to compensate craftsmen in the event of robbery or fire – so it was a form of group cover. From then, the age of discovery, the industrial revolution and the increased economic agency in society have all contributed to the evolution of the insurance environment into what we know now. And today, is a far cry from the primitive cover available in Babylon, you can now insure almost anything; indeed, Michael Flatley once insured his legs for a reported £25 million with Lloyds and Richard Clayderman, his piano playing fingers.

So with the increased complexity of society, has come the increased complexity of the product offerings. This is combined with an increased focus on the appropriateness of the regulations required to support the sustainability and development of the industry. Both we the Central Bank and you as insurance brokers hold great responsibility in such as fast-paced, evolving environment.

From our perspective, we address this responsibility through our mandate: safeguarding stability and protecting consumers. We aim to fulfil our mandate through, among other actions: policy development, policy implementation, supervision and inspection.

One major development in this evolving insurance environment we find ourselves in has been the implementation this year of Solvency II. The practices brought in by Solvency II are robust and comprehensive and it heralds a new phase in insurance supervision. These new regulations will hold firms to more rigorous standards and intend to stimulate risk based decision making in these firms. Solvency II is a clear example of how regulations have been developed and implemented to meet the challenges presented by a changing marketplace.

In discharging our duties, we aim to ensure that the undertakings we supervise are operating in a sound and prudent manner and we take remedial action when we observe otherwise. So what does that mean for you? This means that you can be assured that the undertakings you partner with are we subject to advanced, relevant supervision. Indeed, Solvency II is creating regulatory convergence among all insurance regulators across Europe meaning that every company operating from a European country will be supervised using a common methodology.

As the Central Bank we are heavily involved across the board in the European System of Financial Supervision. This system includes three supervisory authorities who are responsible for micro-prudential supervision in the EU. One of these authorities, EIOPA, the European Insurance and Occupational Pensions Authority, is where we in Insurance Supervision direct our focus. We actively contribute to many committees and working groups in EIOPA. I am currently the member representing Ireland on the Board of Supervisors of the authority. The overarching aim of this work is to reduce the risk and severity of future financial crises through further integration of European supervision. One EIOPA initiative that will be of particular relevance to you is their preparatory guidelines on Product Oversight and Governance Arrangements by Insurance Undertakings and Insurance Distributors which were published in April this year. The guidelines outline the requirements for manufacturers and distributors when introducing an insurance product or making a significant alternation to an existing product.

There are two key aspects to the guidelines:

• The first part, for product manufacturers, describes the governance requirements for product changes, the identification of the target market; skills, knowledge and expertise; product testing; product monitoring, remedial actions, and distribution channels.
• The second, which is most pertinent for you as brokers, outlines requirements for the distributors of insurance products on the establishment and review of product distribution arrangements; obtaining information about the target market; distribution strategy; and the provision of sale information to the manufacturer.

The guidelines will apply from 3 January next year and will support the implementation of the product oversight requirements under the Insurance Distribution Directive (IDD) which is due to be transposed by 23 February 2018. The Central Bank regards these product oversight and governance requirements as a significant step in improving consumer outcomes by ensuring consumers receive clear, objective information about their insurance products. An additional benefit that we expect from these requirements is that incidents of mis-selling will reduce. We anticipate this reduction will emerge from the correct identification of target markets and the use of this information to adopt the most appropriate distribution strategies.

As the Central Bank, however, our influence can only stretch so far, you as insurance brokers also play a vital role in the evolving insurance environment.

I have spoken about the concept of the culture in insurance undertakings on a number of occasions this year and many of my colleagues around the Central Bank have done similar for their functions. The reason we are doing it is not because it’s the hot topic du jour, it’s because it really matters. Culture is about attitude, it’s about behaviour. Some might like to believe that thinking about culture is only the preserve of Board members and CEOs. However, your attitude and your behaviour as insurance brokers and indeed any actor in the financial services industry is just as important as the attitude and behaviour of those in the boardroom.

You might ask: what culture do we want you to have? The simple answer is that is up to you. We cannot and do not wish to be prescriptive about culture as each organisation is so unique. What we do want however, is positive outcomes. That’s positive outcomes for your businesses in that they are well capitalised and solvent and also positive outcomes for your customers.

So how do you do this? You do this by having a transparent, robust business model, you keep informed of developments and regulatory changes in the sector and you engage in continuous professional development. With these foundations you will be a strong position to operate a sound, prudent business. Regarding the treatment of your clients, I would like to borrow the phrase coined by my Consumer Protection colleagues; it is about getting it right for consumers. That means the right product for the right consumer at the right time.

You get it right by adhering to the letter and the spirit of the Consumer Protection Code, by providing meaningful choice and independent advice. You get it right by ensuring that you use plain English to explain an insurance policy and all that goes along with it. When a customer is adequately briefed on their insurance policy and the relevant documentation, they will see whether the company they are dealing with is regulated by the Central Bank for prudential and conduct of business purposes or solely for conduct of business purposes and it will then be evident to them from the outset, where their cover is originating from.

Another way to show commitment to your customers is to actively engage with the product producers. Many of you have the opportunity to meet your clients face to face and really get a sense of how products are working for them or indeed how they are not working for them. For instance, do they really need that level of cover on that policy, could the cost be reduced if some unnecessary element in the cover was removed? This is really rich feedback that you need to be passing on to the insurance companies and they should be extremely receptive to this. After all, we also expect them to get it right for consumers and tapping into knowledge from key stakeholders such as the network of brokers in the IBA should be one of their key data collection methods.

When you get it right, you reap the rewards. As brokers, you are in the business of guiding people towards one insurance policy or another. That policy, that piece of paper gives them piece of mind, it affords them the opportunity to protect what is essential to them and their livelihoods and it can also allow them to safeguard what is valuable to them – like Michael Flatley and his legs. Therefore, being the person who sells them this piece of mind, this protection, is a considerable responsibility. They are trusting you to guide them down the path that gives them the best cover for their needs, when they need it. The numerous scandals and failures during the financial crisis have led to society’s trust in financial institutions being significantly eroded. As insurance brokers you can play a very important part in rebuilding the trust in the insurance sector. Due to the level of engagement you have with clients, you are in a position where you can really make a difference for people. If you act in the best interests of the consumer, and get it right for them, you will earn their trust and encourage loyal, dependable business.

At present, one of the major topics in insurance is rising motor premiums and I’m sure for many of you it is a daily conversation you have with clients. As you know we as the Central Bank do not have control over the setting of premiums however, in a recent address to the Oireachtas Committee on Finance and Public Sector Reform we proposed a number of suggestions, that although outside our remit, we believe could assist in the reduction in the premiums being charged. Firstly, 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 also noted that the cohort of uninsured drivers around the country are a factor in the increases people are feeling. We also referred to how fraudulent claims and the cost associated with these are a key influence in the rise in premiums.

This final point, is where you as advisors to clients can intervene and make a difference. When one of your clients is involved in a collision, it is essential that they are adequately informed and counselled when deciding the appropriate course of action to take. This may be admitting liability; it may be engaging meaningfully with the services of the Injuries Board or it could be pursuing a personal injury case. Whatever the course of action, it needs to be proportionate and appropriate. It should be an option that limits a client’s exposure to unwarranted legal costs and leaves them with a fair and speedy outcome. Insurance fraud impacts all of us. This point needs to be driven home with the public. If you can assist in any way in the prevention of such cases, it is your duty to do so. And in doing so, it helps us all out.

No conversation about the evolution of our sector is complete without acknowledging the technology evolution that has occurred and indeed the considerable manner in which the field will continue to evolve. We have seen that business models and distribution channels can be altered drastically with modern technology being leveraged to increase efficiencies and reduce cost. Now more than ever with the variety of technology solutions on offer all practitioners, regardless of scale have access to some form of tool be it a simple website with a basic application form or a more sophisticated, interactive smartphone app. And it must be said, that as well as technology being beneficial for you as insurance practitioners, it can also offer a benefit to consumers and indeed there is a push from the public for more online, convenient access to services. However, at the risk of raining on the parade – although I’m sure there some who believe that the sole purpose of the Central Bank is to do just that – we must recognise that hand in hand with advancements in technology come a myriad of risks ranging from financial to consumer to reputational and legal risks. These risks can crystalise from either internal failures in a firm or external cyber-attacks resulting in stolen data, lost data, corrupted data or the unauthorised access and use of data.

I’m sure the use of technology and how it fits into your business model varies hugely among a group as diverse as is present here today. However, the risk posed by technology must be respected as one that is ever increasing in our industry and one that is here to stay.

At the Central Bank we have been researching and investigating these risks for quite some time and this September we published cross industry guidance in respect of information technology and cybersecurity risk. The focus of the guidance is on the components of effective IT and cybersecurity governance and risk management frameworks. It represents the Central Bank’s current position as to what is best practice in this field and so it will serve as a tool for our supervisors to assess a firm’s frameworks and procedures against best practice. This guidance does not purport to be a decisive account of all the potential IT related risks facing the financial services industry, rather, it presents an opportunity for industry players to take stock of where they stand now and where they need to be to adequate protect their business and their customers.

As with all our supervision activities, a proportionate approach will be adopted. However, it is essential that no matter how big or small your operation that IT related risk is a high priority for you. We are living an a very technically sophisticated world and it will continue to evolve whether we like it or not. Keeping abreast of technology developments and the risk these pose to you is now part of your business.

I’ll now move on to a topic that if you asked me a year ago I would never have imagined I would have to address: the decision by the UK in June to leave the EU, Brexit. I’m sure you were as shocked as I was when the result was announced. However, now that there has been time to digest it, we need to start figuring what this will mean for the insurance industry. I have a feeling we will have front row seats to the industry evolving before our eyes.

From the Central Bank’s perspective, we are ready, willing and able to engage with firms who are interested in establishing themselves here and we have already experienced an increase in enquiries. When any institution comes to the Central Bank seeking authorisation the key expectations we have of them is that they will have ‘Hearts and Minds’ in Ireland and that their decision making will be based here by locating their Board and management team in Ireland. We also need to have comfort that the institution is actively engaged in managing the risks they face. 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 their Irish based peers. 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.

So they have already come knocking on our door, are you prepared if they come knocking on yours? If not, then you need to be. You need to be prepared to showcase your professionalism, your knowledge of the local market and regulations and your commitment to delivering results for both your customers and your partners. You need to be ready for the possibilities that Brexit will unlock and no doubt, the IBA as your representative body will be there to support its members in capitalising on opportunities that will materialise.

Conclusion

I started out today by speaking about the journey the practice of insurance has taken since the days of hunters and gatherers. It has now morphed into a much more sophisticated beast. If we can learn anything from the past is that nothing remains static. Over time the rules, regulations and the expectations of the Central Bank will change, your customer base and their needs will change, the political climate will change and the technology we use will definitely change, this means that the way we all operate will need to keep pace with these changes and move with them.

So all of us: regulators, manufacturers, distributors must remain alert for two key reasons: we need to be vigilant to the threats posed by this evolving environment but crucially, we must also remain open minded to the opportunities that the future grants us. And finally we need to be mindful that what seems improbable right now, just might transpire.

Marcel Proust once said: "Time passes, and little by little everything that we have spoken in falsehood becomes true".