Opening remarks at the 2020 Insurance Industry Briefing - Domhnall Cullinan, Director of Insurance Supervision

Opening remarks at the 2020 Insurance Industry Briefing

Good morning everyone. I would like to thank you for attending today’s industry briefing. In my remarks this morning, I will take this opportunity to touch on:

• the role that insurance can play in society;
• some of the reasons why the industry in Ireland is negatively perceived; and
• the areas of supervisory focus for the Central Bank moving forward.

2020 has been an unprecedented year in so many respects and the emergence of COVID-19 has already had a profound effect on our society, the economy and the way in which we work.  None of us can say when things will return to normal, or what “normal” will look like.

The Role of Insurance

In addition to COVID-19, Brexit, Government policy and even the environment around us are changing. With all of the changes that are taking place, some constants remain, including the importance of a well-functioning insurance industry. The insurance industry must demonstrate that it is charting a course towards a future where it will continue to play an important role in society.

Having a resilient and trustworthy insurance market that services the needs of its consumers will be essential to Ireland in its recovery from the COVID-19 crisis.  Currently, 185 insurance firms are authorised by the Central Bank, and approximately one third of these write business in the Irish market.  In addition to these, 205 firms write business in Ireland from other EU member states on a freedom of establishment or services basis.  Companies supervised by the Central Bank paid out more that €54bn in claims in 2019¹ and the sector is a significant employer here in Ireland^2.

Negative Perceptions of the Insurance Industry

Despite this, the industry is negatively perceived.

There are many reasons for this, but there are two in particular that I want to discuss this morning:

• first, corporate governance and culture; and
• second, the failure of the industry to engage effectively with stakeholders.

Over the past 10 years, five of the nine main non-life companies writing business in Ireland have had major corporate governance issues.  These issues have had serious consequences for these firms including fines being imposed by the Central Bank under our administrative sanctions regime. The root causes can be attributed to issues related to corporate culture and individual behaviour at the most senior levels.  Rather than acknowledge those failures, the industry has instead tried to rationalise and explain those failings away. The insurance industry must learn from these past mistakes and strive to become a corporate governance standard setter.

Secondly, the insurance industry, be it individually or collectively, has failed to effectively communicate the positive role that insurance can play in society, or engage constructively with stakeholders on the various issues that impact upon the cost and availability of insurance.  When issues have arisen in the past, it is the Central Bank’s view that the industry either did not respond at all or responded poorly, failing to seize opportunities for discussion to bring about meaningful and lasting change.

The recent publication of the second Private Motor Insurance Report³ under the National Claims Information Database (“NCID Report”), has provided an extensive dataset, having been extended this year to include further information on settlement channels, premium trends and information on claim development patterns. It is the Central Bank’s view that the availability of reliable, transparent data will contribute to an informed debate in relation to these issues, to the ultimate benefit of consumers. And as you may be aware, the scope of the NCID analysis will be extended to cover Employer’s Liability and Public Liability for the first time - a separate report will be published next year. These insights provide an opportunity to industry to renew its engagement with stakeholders on a positive basis. This is particularly timely, as insurance reform is high on the Government’s agenda.

It is widely known and has been demonstrated in the past that the industry is very capable of speaking with a strong voice. For example, when the Central Bank announced early this year that insurers should refrain from paying dividends due to the uncertainty caused by the COVID-19 crisis, the industry made a large number of representations, with many arguing that such an approach was unwarranted when so many Irish firms are paying dividends to group parents. It would be a positive move for policyholders if the industry would take the same approach to consumer centric issues such as the cost and availability of insurance and business interruption.

In relation to business interruption, you will be aware that there are a number of high profile court cases ongoing at the moment and the pain, suffering and stress caused to those involved has to be acknowledged.  The Central Bank will continue to work to protect policyholders on this issue. Where the Bank is of the view that ‘cover’ or ‘causation’ exists and claims are being rejected, those expectations will be clearly communicated to the relevant firms. Where those expectations are not met, supervisory actions will be escalated, in accordance with the Central Bank’s Business Interruption Insurance Framework⁴.

I will move on now to discuss our Future Areas of Supervisory Focus including

• cultural change;
• the viability of business models in the face of disruptive change; and
• the financial and operational resilience of firms.

Cultural Change

In our view, cultural change, combined with greater transparency and individual accountability is fundamental to rebuilding consumer trust in the industry. The Central Bank’s work in 2021 will be focussed on achieving this and will:

• seek the introduction of a Senior Executive Accountability Regime, placing obligations on firms and senior individuals within those firms to set out clearly where responsibility and decision-making lies;
• develop a Behavioural & Culture Framework, building on the foundations of previous reviews undertaken by the Bank in this space; and
• build on the recent Thematic Assessment of Diversity & Inclusion⁵ in insurance firms.Improving diversity & inclusion at senior levels is a tangible and effective means of improving the culture and functioning of individual firms and the industry as a whole.

Ultimately, cultural change will have to be brought about within and by the insurance industry itself.  It is time that the insurance industry engaged in meaningful discussion as regards the actions that it needs to take.

Disruptive Change

Looking to the future, it is extremely difficult to predict how and where the next crisis will arise. But broader trends are perhaps easier to discern and include the growth of cyber risk, changes in technology and shifting demographics.

The proposed introduction of Sláintecare could have major implications for the private health insurance industry.  Meanwhile, a large component of the life industry in Ireland comprises of costly unit-linked pensions business that could be greatly disrupted by the introduction of auto enrolment.  Indeed, unit-linked business more generally is one that is particularly exposed to disruption given the potential for low cost alternative solutions.  In the longer term, if competitors from rival industries are offering lower cost products that perform very similar roles, the competitive position could be eroded.

Climate change, and the accompanying shift to a more sustainable, low carbon economy, has the potential to affect the stability of the financial system in a profound way. The Central Bank is actively involved in work both internally and externally vis-à-vis our engagement with EIOPA, and through membership of the other bodies such as the Sustainable Insurance Forum and the Network for Greening the Financial System. And as my colleague Gerry Cross announced last week, the Central Bank is in the process of establishing a centralised Climate Change unit, which will enable coordination of this important work across the organization.

Recently, the Central Bank has contributed to, and leveraged the results of, EIOPA analysis of climate related asset exposures, and has assessed Own Risk and Solvency Assessment (“ORSA”) submissions by firms in relation to climate risks. In this regard, the Central Bank recognises that some firms have begun to consider the implications of climate change for their investment and underwriting activities. But these represent only initial steps, and more work is required, by both supervisory authorities and the insurance industry. In this regard, the Bank has recently issued a Climate & Emerging Risk Survey, in order to:

• capture the level of awareness of the risks amongst undertakings;
• identify the exposure to the risks; and
• collate possible actions to manage/mitigate the risk.

The overarching aim of this exercise is to provide a clear picture as to the “current state” of risk management, and areas of potential vulnerability on which to focus future engagement. Following assessment of responses, feedback will be provided to the industry in the early part of 2021.

Firms should devote time and resources to assessing their own key risks and opportunities, so that they can make informed choices about how they are going to adapt, and ultimately safeguard the long term viability of their business models. In particular, focus should be on:

• ensuring that appropriate consideration is given to the assessment of climate related risks and to adopt a longer-term perspective than typical business planning and strategy setting processes. Given the breadth of the challenges posed by climate change, this should not be an issue restricted to risk management professionals. Engagement should extend across the organisation, including at board level; and
• developing technical capabilities and understanding of individual risks and integrating these within processes, systems and internal controls. Risk management frameworks, and the ORSA in particular, should reflect these considerations. Where an undertaking has a material exposure to climate related risks, the Bank will expect to see evidence of robust analysis and discussion within the ORSA report.

Financial and Operational Resilience

In the area of financial and operational resilience, you as leaders, must ensure that your respective firms remain financially and operationally resilient.  The Central Bank has clear views on the financial and risk management standards expected from firms, and I would draw your attention to the following areas:

• the ORSA should be a fundamental part of every firm’s business planning and decision-making process. However, in many of the examples the Bank has seen, the ORSA has not been fully embedded within decision making and planning processes, and there has been little evidence of engagement at board level;
• in addition, stress and scenario testing should be enhanced. The COVID-19 crisis has reinforced our view that the ORSA should consider a wide range of stresses, of different stresses occurring concurrently, and include their impact on solvency and liquidity. Analysis should consider risks arising from combinations of stresses not previously experienced and with a low likelihood of occurrence. These might cover group dependencies – such as intra-group reinsurance, lending and parental support - which are an important business model feature for many Irish insurance firms;
• firms must scrutinise technical provisions, to assess that they are set at an appropriate level. For many firms there will be greater uncertainty in the calculation of technical provisions than is normally the case, so careful thought must be given to the approach being adopted and assumptions made; and
• In addition, the Central Bank is proposing new Regulations which will require all insurers to draw up and maintain pre-emptive recovery plans, the objective of which is to increase awareness and allow firms to prepare for a range of possible adverse situations by considering and evaluating the most appropriate and effective recovery options. Such plans will allow firms to understand their overall recovery capacity (i.e. the point at which available recovery options would still permit the firm to restore compliance with Minimum Capital Requirements and Solvency Capital Requirements (“SCR”) within the timescales permitted under Solvency II) and to take more effective, comprehensive and timely measures if required.

Recovery plans should build on and be integrated into the existing risk management framework, particularly the ORSA and risk appetite statements. In order to facilitate best practice across the sector, the expectation is that plans will follow a structure that is broadly consistent with that proposed by the IAIS⁶.

Following completion of the consultation process⁷, the Bank anticipates finalising the Regulations in early 2021 with a view to having plans in place by late 2021.

Conclusion

Before I finish, it would be remiss of me not to touch on Brexit. Needless to say, the transition of Ireland’s largest trading partner outside of the EU continues to pose significant risks to Ireland. The Bank has prepared for this outcome from the outset, and will continue to engage with both the UK and EU authorities as issues arise.

Given that the transition period ends in around seven weeks, the Bank would echo EIOPA’s recent call for firms to finalise their preparations and be ready to implement suitable contingency plans. This includes not just regulation specific to insurance, but more widely, for example, on data protection. Ultimate responsibility for this remains with each individual firm.  Changes to structure, where required, should be implemented as early as possible during the temporary permissions period.

In closing, it is important that I acknowledge the positives for the insurance industry throughout the pandemic period.  Firms have continued to operate without significant issues, ensuring continuity of service to customers.

While some firms are more exposed than others to COVID-19 and remain vulnerable, the sector as a whole remains well capitalised. The sector entered the crisis with capital well above SCR levels. The good news for policyholders is that median SCR coverage ratios have now stabilized⁸, albeit at a level that is 9-10 percentage points lower than the figure at the end of 2019.  However, these positives should not be a cause for complacency. The ultimate duration, path and scale of COVID-19, and its legacy remains very uncertain, and it will take many months and years for the full effects on the insurance sector to emerge.

I strongly urge you to reflect upon how you can play a part in building lasting cultural change within the industry, and in meeting the challenges that the future will bring.

Thank you for your attention.

My thanks to Brian Balmforth, Peter Towers, Anne-Marie Butler and John Fitzgerald for their input into preparing this speech.

[1] Solvency II Annual Returns

[2] Insurance Ireland, Insurance Ireland Factfile, 2017 

[3] Central Bank of Ireland, Private Motor Insurance Report, November 2020

[4] Central Bank of Ireland,The Business Interruption Insurance Supervisory Framework (PDF 958.98KB), 5 August 2020

[5] Central Bank of Ireland, Thematic Assessment of Diversity and Inclusion in Insurance Firms (PDF 1.06MB), July 2020 

[6] IAIS, Application Paper on Recovery Planning, 18 November 2019

[7] Central Bank of Ireland, CP 131 – Regulations for Pre-Emptive Recovery Planning for (Re)insurers (PDF 1.46MB), June 2020 

[8] 185% at end Q2/2020, compared to 186% at end Q1/2020