How boards and their businesses engage in innovative transformation, on both strategic and regulatory risk management fronts, will dictate whether they get ahead during this transitional period and ensure their sustainability and profitability going forward.
This trend extends to the global insurance industry also, which is experiencing technological advances, product changes, increasing consumer demands and increased competition through non-traditional channels. Against this backdrop, the regulation of the industry is evolving with boards now grappling with the implementation of Solvency II, the first annual reporting date this year and the advent of the Insurance Distribution Directive (IDD) and Packaged Retail and Insurance-based Investment Products Regulations (PRIIPs) next year. New products are also on the horizon, such as driverless cars and peer-to-peer insurance, which are being facilitated by price comparison websites, mobile internet transactions and telematics-based services.
The domestic landscape
On the domestic front, more than 430 international financial services companies operate in Ireland. Together, they employ over 38,000 people, hold €200 billion in assets and generate €32 billion in premium income from domestic and international customers. From a regulatory perspective, Ireland’s insurance sector has a ‘hub and spoke’ structure with 82% of business written by branches outside Ireland. There has been an 11% increase in the number of regulated insurance entities in Ireland since Q4 2015, according to the most recent Central Bank of Ireland annual report. The IMF Financial Sector Assessment Program (FSAP) indicated in July 2016 that Brexit is likely to have a negative effect on the Irish financial system, although it has undoubtedly created opportunities for the insurance industry to grow in Ireland with potential for new market entrants, new business opportunities and even the cessation of current partnerships.
Key themes to date
2016 was all about data and most notably, the risk management of cybersecurity. Cybersecurity remains firmly on the agenda of insurance entities as they seek to protect consumers’ data in line with the Central Bank of Ireland’s guidance, issued in September 2016. Insurance entities are required to demonstrate how they manage and mitigate cyber risk including stolen data, lost data, corrupted data and unauthorised use of data.
In 2017, the focus remains centred on risk management which is central to the sustainability of all insurance industries. In the words of Sylvia Cronin, Insurance Director at the Central Bank of Ireland, “The creation of long-term value can only be assured by practical and effective risk management which pro-actively anticipates the comprehensive range of risks underlying every business”. From a regulatory perspective, the first annual reporting deadline for Solvency II was May 2017, which included the auditor reviewing parts of the returns for the first time. Insurance entities are now required to ensure that their business models are aligned with their risk management to ensure that adequate capital provisions are maintained. The Solvency and Financial Condition Report (SFCR) required entities to demonstrate effective risk management including classification of own fund items, the ongoing compliance to the tiering criteria, obligations relating to own fund items and the related stress-testing. Boards of insurance entities are also required to approve and monitor medium-term capital management plans.
Consumer protection is also a key regulatory theme during 2017. In April of this year, the European Insurance and Occupational Pensions Authority (EIOPA) published a report on its thematic review of issues in the unit-linked life insurance market arising from business links between providers of asset management services and insurers. The Central Bank of Ireland also published a Consumer Protection bulletin in April, which focused solely on the motor insurance industry, and revealed that 62% of personal motor insurance policies are provided by companies incorporated in Ireland and prudentially regulated by the Central Bank of Ireland. The Consumer Protection Risk Assessment (CPRA) guide followed in July of this year and it outlines how the Central Bank of Ireland will assess the consumer protection risk management frameworks in place in all financial services entities. The guide requires that consumer protection not only be part of an entity’s strategy, business plan, policies and procedures, but – most notably – be part of the culture of the business itself.
Looking to future, insurance entities operating in Ireland will face a number of issues during 2018. The Central Bank of Ireland has established a team to deal with entities considering relocating to Ireland from the UK as a result of Brexit, and it will be interesting to see what entities will relocate here.
Looking beyond 2018, geopolitical uncertainty around Brexit and Trump could adversely impact asset values. Insurance entities’ stress-tests will need to be robust enough to ensure that the entity can withstand asset shock. From an economy perspective, the low interest rates experienced for the past 10 years are expected to increase gradually, which will no doubt impact on the investment strategy of insurance entities and ultimately, investment performance.
The overall solvency position of the insurance sector remains high but according to the International Monetary Fund (IMF) FSAP, several factors put pressure on long-term non-life sector profits. In the life sector, there is strong resilience to interest rate shocks as few products carry guarantees on principal rates of return. However, the non-life sector is more reliant on investment return for profitability and is facing an increase in the frequency and average cost of claims.
The regulatory view
From a regulatory perspective, the European Commission is expected to carry out an assessment during 2018 of whether Solvency II should be amended in relation to the prudential treatment of private equity and privately placed debt.
The implementation of PRIIPs was delayed in November 2016 and will come into force on 1 January 2018. Some insurance entities which are also MiFID firms will be affected by the implementation of MiFID II and MIFIR on 3 January 2018. The IDD will apply from 23 February 2018, with EIOPA required to submit the final draft regulatory technical standard under Article 10(7), which relates to the adaption of certain amounts in euro to the European Commission. Accounting developments will also have an impact on how insurance companies are required to report their results through their financial statements including IFRS 17, which will replace IFRS 4 from 1 January 2021.
Insurance entities have faced – and continue to face – an unprecedented level of change. Boards will need to adapt their business models to not only to meet the regulatory challenges, but to also build regulation into their culture. Those that engage in the ongoing innovative transformation of their entity with a focus on risk management will not only get ahead, but stay ahead and ensure their organisation’s ongoing adaptation to the changing nature of the industry and consumer demands.
This article first appeared in Accountancy Ireland December 2017