The Central Bank of Ireland’s Regulatory Supervisory Outlook Report 2024 and accompanying Letter to the Minister for Finance were published on 29 February 2024.

The Central Bank highlighted five key sectoral trends and risks for the Irish (re)insurance industry:

1. Financial resilience – the Central Bank emphasises that although the capital held by (re)insurers is well above Solvency II requirements, reserving and underwriting will be a key focus of the Central Bank, particularly given the macroeconomic environment. The path of interest rates remain uncertain and could impact on solvency coverage ratios. The variability of asset values in unit-linked products will impact on fee income and lapse risk, while increased geopolitical tensions will impact on insurance risks.
2. Climate change – (re)insurers are exposed to climate transition risk in a number of areas, particularly physical risk, business model risk, market risk and litigation risk (in respect of climate litigation). The Central Bank refers to its Guidance for (Re)Insurance Undertakings on Climate Change Risk and emphasises the importance of firms engaging in an assessment of the materiality of a firm’s exposure to climate change risks in order to understand the impact of climate change and their possible responses Materiality assessments should inform strategy and business planning and this will be a focus of the Central Bank in 2024. Affordability and availability of natural catastrophe insurance coverage is also an increasing concern and, as well as addressing supply-side issues in the protection gap, insurers should try to educate consumers about natural catastrophe risk to deal with demand-side issues.
3. Consumer detriment – policyholders need to be able to trust that their insurer will honour the policy in the event of a valid claim. A fundamental requirement is that insurers place the best interests of consumers at the heart of their decision making, whether in relation to pricing practices, product suitability, customer service, use of data and technology or marketing.
4. Cyber risk – (re)insurers face greater cyber risk, either as targets of cyber attacks and underwriters of the risks of other businesses. Increased digitalisation has lead to massive growth in the cyber risk insurance market, but there remains significant uncertainty in this line of business, given its novelty, the rapidly changing digital environment and issues with vulnerable, legacy infrastructure.
5. Operational resilience – The Central Bank views the major expansion in the use of third-party cloud service providers as presenting a substantial outsourcing and concentration risk. In addition, recruitment and retention of staff in all areas of operations including technical areas, IT/cyber security, operations and customer support staff, remains a threat to operational resilience.

The Central Bank’s key supervisory activities for 2024/2025 for the (re)insurance sector flow from these key trends and risks, and are as follows:

• Reviewing reserving assumptions in light of high interest rates and inflation
• Reviewing governance and underwriting practices in high growth lines of business or those whose risk profile has changed significantly
• Integration of climate change and sustainability – in particular, firms’ assessment of the materiality of their climate risk exposures
• Researching the flood insurance protection gap in Ireland
• Reviewing governance arrangements where third country branches of Irish insurers are used to conduct regulated functions or activities (see our previous post on the EIOPA supervisory statement on this issue)
• Reviewing oversight of outsourcing and operational resilience
• Examining the impact of the hard reinsurance market on insurance business models
• Targeted reviews on consumer protection, health insurance renewals and customer service
• Value-for-money of unit-linked investment products (see our previous post on EIOPA’s methodology for assessing value for money of unit-linked products)
• Innovation and digitalisation in the insurance sector