Address by Cyril Roux, Deputy Governor (Financial Regulation), to PWC Annual CEO Insurance dinner

It gives me great pleasure to be here in with you in the PwC offices, a stone throw from the offices of the Insurance directorate of the Central Bank and from the future abode of the Bank as a whole. I’m aware that today’s audience is drawn from many sectors of the Irish insurance industry. I will use this opportunity to focus on issues relating to the international insurance sectors – specifically the reinsurance and cross-border life sectors. Hence you will be spared my musings about why domestic insurers continue to write loss making business and imperil their capital base. That serious question will be for another day.

The recent PwC 18th global CEO survey was consistent with last year’s survey of DIMA members, highlighting that new regulation, increased competition, technological developments, and changes in distribution are factors which CEOs expect to be critical over the next five years. To these factors I would add the low interest rate environment, climate change, geopolitical, terrorist and cyber threats. Addressing all of those tonight would make for a very long speech indeed, and so I will limit my address to a few aspects of financial regulation.

The cross border Irish insurance sector is a major part of the Irish insurance sector with €43 billion in gross premium from foreign risk business underwritten in 2014 – representing two-thirds of total Irish insurance industry in 2014. As such, the impact of new regulation, as highlighted by the CEO survey, and how the industry in Ireland responds, is a key area of focus for us at the Central Bank. Before discussing the impact of new regulation, however, I would like to begin by acknowledging the positive engagement between the international insurers and the Central Bank of Ireland.

Engagement with the Central Bank

We are in the main satisfied with your engagement with the Central Bank. Examples of this include participation in full risk assessments, PRISM engagements, and adoption of Risk Mitigation Programmes where required. Cross-border life firms have volunteered participation to our surveys and thematic reviews, for example, the review on “Unit-Linked Fund Governance”, undertaken in Q4 2014.

The recent supervisory focus on thematic work, to which you have participated in significant numbers, will enable a more in-depth review of topical issues and better supervision. We will issue feedback on the general themes observed from the results of such reviews. This will assist firms in identifying and addressing key areas for improvement.

Another area worth noting is the quality of the dialogue with our supervision teams. Our supervisors acknowledge the positive nature with which most firms engage with the Central Bank. On the flipside, I have heard that you’d welcome more stability and more experience from the supervisors who deal with you. I can only concur, as indeed supervision’s effectiveness depends crucially on the depth of experience of the people who practice it. We know you like to hire them, but, as stressed by the IMF in its recent review, the Central Bank cannot serve principally as a training ground for your firms without insurance supervision suffering as a result.

On the whole, international firms generally file returns on time and respond reasonably promptly to our requests for information. This enables the timely investigation of any issues, and ultimately, better supervision. We do recognise that in recent times the volume of information requested by the Central Bank has grown considerably, reflecting a changing regulatory environment. We appreciate the effort that your firms go to in responding to requests for information in a comprehensive and timely manner. 

I also commend your general adherence to our Corporate Governance Code. Firms supervised in Ireland will already understand the importance that the Central Bank places on effective and robust Corporate Governance structures.

Areas for improvement 

I will now look at some areas where I see room for attention or improvement. There is potential for insurers and regulators to lose focus on current risks whilst we prepare for the implementation of Solvency II and the Central Bank, through the PRISM framework, continues to engage with supervised firms on the impact of current market changes. 

Another area of attention for the cross-border sector firms is Anti Money Laundering (AML) and Counter Terrorist Financing (CTF) legislation. I recommend that you continue to concentrate your efforts on compliance in these areas, where there have been recent changes and where on-going developments are afoot. AML and CTF compliance represents an increasing burden for the industry as a whole, and particularly in the cross border industry where companies may not have close proximity to the market place or direct day-to-day oversight of the distribution network. Firms need to remain vigilant in this area. 

Other examples of areas of current supervisory engagement include the impact of the increase in M&A in the non-life speciality sector, the impact of yield seeking capital into insurance linked securities on reinsurance and underlying insurance pricing, and the recent volatility in the currency markets from macro-economic imbalances.

I will now turn to some aspects of Solvency II. 

Solvency II

As you are all aware, Ireland has already developed a strong body of regulations that are consistent with Solvency II, including our corporate governance code and our Controlled Functions (CF) and Pre-Approval Controlled Functions (PCF) roles. The governance framework that Solvency II requires of insurance undertakings is very familiar to Irish insurers, but may on occasion require changes to be made. The Central Bank also expects experienced managers and directors to critically review the changes in reserving practices to be brought about by Solvency II. The assumptions behind the best estimates and the risk margins, including financial assumptions on interest rates and behavioural assumptions such as lapse rates, need to be made very explicit and critically debated within the firms. The differing realities of national insurance markets need to be taken fully into account when assessing insurance liabilities. 

In terms of risk management, those insurers who have actively embraced the risk management tools prescribed in the new regulations are the ones who will be best placed to meet the challenges ahead. These are the insurers who use the ORSA to critically assess their own solvency needs as an integral part of their capital management and business planning processes. This explains why the Central Bank is placing such emphasis on Board ownership of the ORSA in our recent industry feedback. The Board’s range of experience and perspective is critical in using the outputs from their risk management framework to lead and direct challenging discussions on a firm’s evolving risk profile. The Central Bank expects to see Boards actively directing the use of risk management tools in a Solvency II environment, such as stress or scenario testing, to look at emerging, intangible, or non-quantifiable risks to promote more informed decision making in the firm. 

Firms who use internal models will acknowledge that any model has its limitation. Poorly designed models or overtly complicated models or those overtly reliant upon expert judgement can offer a firm’s management a false sense of security. Boards need to understand the limitations of any model they rely upon and have sufficient knowledge and skill to challenge the model outputs. We like to see a Board direct the modellers in their firms to run specific stresses and scenarios prior to an item being discussed at the Board in order that Board members can ask more relevant and probing questions of their management teams. For all firms, including those operating as subsidiaries of international groups, the parameters used for Irish risks need to be tailored to our domestic market, and parameters for international risks need to be in line with country-specific experience. 

Another important development under Solvency II is the greater emphasis on group supervision. As most of the cross border firms here today operate within a group, the increased level of coordination of supervisors will be a welcome development in ensuring an integrated approach of the group’s risks and its supervision. Many of you operate within a group risk management framework and whilst this ensures a level of consistency, it also places a responsibility on the Boards and management of Irish domiciled firms to ensure that group policies and output, such as the ORSA, and internal model as the case may be, are tailored to the local risk profile. The importance of keeping the domestic focus to the fore, even under Solvency II, is a topic that the Central Bank would highlight to industry following its review of output from many group risk management processes. 

Conclusion

To conclude, the Central Bank is aware that embedding Solvency II within organisations will take much effort and will evolve over time. Changes such as new regulatory reporting requirements and data standards, among others, are challenging even for the most well-resourced firms. The Central Bank appreciates the efforts made by industry to date and understands the pressures that Solvency II implementation causes. This is why the Central Bank places such a high priority on continuing to engage with firms to ensure that both the Board and senior management are fully engaged in the Solvency II project and in directing its development to ensure that it best suits the challenges and risks ahead.