As a sector insurance has proven to be remarkably resilient despite the recent global events that have affected our global economy and the Irish Insurance market: from the Russian war on Ukraine, the lingering effects of the Covid-19 pandemic and climate change. The insurance industry has adapted and is evolving as we now move into H2 2023.
Below we take a look at 10 key trends that will impact the Irish Insurance market over the next 12 months.
This is not unique to insurance undertakings, but will be front and centre as an area of focus as the Central Bank of Ireland progresses through the consultation phase(s) and on to implementation with the following proposed:
A second consultation period focused on changes to the Administrative Sanctions Procedures has been published.
The Central Bank has issued cross-industry guidance on operational resilience and is expecting firms to be able to demonstrate progress towards meeting their expectations by the end of this year.
DORA entered into force in January, and will apply in full from January 2025, aiming to harmonise digital resilience in the European Union. DORA will apply to all (re)insurance undertakings within the scope of Solvency II and larger (re)insurance intermediaries.
Neither, should be viewed as regulatory compliance exercises, focusing on operational resilience is an opportunity to improve decision-making and add value by targeting investment into the services that are most critical, ensuring attention is on the right areas, i.e. those that could have the most material impact if unavailable.
Nevertheless, as the Central Bank will be engaging with firms on their progress in understanding and implementing the various elements of the Guidance as part of its supervisory and industry engagement throughout 2023, action is needed to progress Operational Resilience Projects sooner rather than later.
It is clear that climate risk has moved from emerging risk to a current risk. The increased frequency and severity of repeated weather related events linked to climate change is already having a significant impact on the insurance sector. There has been a substantial increase in claims arising from physical events, which is impacting catastrophe risk modelling underwriting and pricing.
While there is a broad willingness in the industry to act there is still uncertainty on how to act moving forward and individual insurance firms are at different maturity stages in relation to their management of climate change risk.
The Central Bank has launched a Climate Risk and Sustainable Finance Forum, to bring together industry stakeholders and climate scientists with the Central Bank; the aim of the Forum is to build shared capacity and understanding of the implications of climate change and to share best practices.
In 2022, the Central Bank developed a heat map for climate risk within insurers; and they expect to utilise this to focus supervisory efforts on the firms in 2023 that the Central Bank view as having the highest climate exposure.
Last year, the Central Bank of Ireland consulted on guidance on how insurers can address climate change moving forward. Following this consultation, final guidance was issued which was largely unchanged from the proposed guidance and aims to clarify for (re)insurers the Central Bank’s expectations to address climate change risk in their business and assist them in developing appropriate governance and risk management frameworks, which consider and address climate change risk.
A further area of focus for the Central Bank is its natural catastrophe project; which aims to assess whether NatCat modelling is adequate overall, whether it is properly modelled for Irish specific risks, and whether NatCat modelling takes climate risk into account.
More broadly, the insurance industry plays an important role in promoting economic, social and governance issues and has committed to prioritising sustainability in the coming months and years ahead. For 2023 we see ESG as still a significant priority for the insurance industry.
After the COP 26 conference in November 2021, the UN climate change agenda launched its first global insurance industry guide to tackle a wide range of sustainability issues. Many industries including the insurance sector signed up to the sustainable strategy commitments and agreed to play their part in tackling the issues the world faces.
Consumer demands are constantly evolving to reflect the changing world around us. Consumers want their insurance policies to be easy and accessible 365 days of the year. As the era of digitalisation and technology enhancement is rapidly developing, it presents both great opportunities and certain risks for insurance firms.
There is a risk that firms may fail to keep pace with the constant change in technology, which may affect its capacity to compete with new entrants into the market such as insurtechs. While on the one hand the adoption of digital business models allows insurance companies to become more engaged and consumer focused, on the other it may also present new risks on how vulnerable and existing customers are treated and it is key that this is taken into consideration when evaluating business models.
The use of Artificial Intelligence (AI) is likely to come under stricter regulatory scrutiny in Ireland, as the reliance on it grows more and more within the area of insurance distribution. The EU Artificial Intelligence Act is a legislation expected to come into force in late 2023, which will essentially be the GDPR for artificial intelligence and will establish strict rules for insurance firms that use artificial intelligence technologies.
There is always the risk of relying too heavily on AI and the errors it can possess such as providing advice through an automated system “robo-advice”. If a customer relies on robo-advice to choose an insurance product, there’s a more heightened risk that they make an unsuitable decision if an error was to occur with the system itself and if any incorrect advice was provided.
It will be important for insurance firms to have a robust regime in place if AI is being used and to ensure that customers benefit from the use of the technology available and are not penalised by it.
Many insurance companies are undertaking data migration projects as a result of the evolving insurance industry market and to move away from legacy systems.
This is partly also as a result of IFRS17 implementation which is a pinnacle moment of change for insurance accounting requirements and will have a profound impact on systems architecture, data governance, reporting processes and transparency disclosures across entire organisations.
Data migration can be complex and requires careful planning; a comprehensive data management and governance strategy is key in order to adhere to IFRS 17 guidelines, any other upcoming requirements and to ensure the quality and validity of one of an insurer’s most valuable assets – their customer’s data.
The customer’s needs and best interests should be the core focus of these projects and any changes in the insurance service being provided from a legacy system to a new system should be completed in a prudent, and consistent manner to avoid any errors, data breaches or lost policies.
The increase cost of living in Ireland and globally is impacting all aspects of the economy, with the changing external environment, it has brought a new focus on inflation and the repercussions it is having on the insurance industry itself.
Historically, prolonged high levels of inflation tend to give rise to changes in customer behaviours, which combined with the economic downturn, may have implications of unintended under-insurance and a higher tendency to claim. Insurance companies should continue to be proactive in their claims investigation to guard against fraudulent or exaggerated claims.
Whilst it has since shown signs of easing, few industries have experienced the recent supply-chain induced inflation in same way as the auto industry; the worldwide shortage of semiconductor chips had a ripple effect on prices within the new, used and rental car market.
The future path of inflation for insurance firms is uncertain and given the differences in risk profiles between the insurers in Ireland, there is unlikely to be one approach that suits all. The Central Bank has stressed that insurers have to be mindful of the impact of inflation on costs, claims, operating expenses and allowances must be made for reserving in existing business.
Following the uncertainty of the last few years and coming out of the pandemic, the insurance industry’s role is at a high level unchanged – protection. The Central Bank’s role always comes back to ensuring that the best interests of the consumer are adhered too while boosting more confidence and trust in the financial sector through effective regulations. Given the rapidly changing financial services landscape, the Central Bank of Ireland is conducting a comprehensive review of the Consumer Protection Code 2012. The Public Consultation phase is now open for firms and individuals to provide input.
Regardless of the outcomes of the review, the Central Bank will continue to focus on ensuring that the insurance sector operates to support the interests and needs of the consumer and ensuring the system remains vigorous and stable and providing support for vulnerable customers as technology and systems get more advanced.
The introduction of the price walking ban on home and motor insurance renewals is a step in the right direction for existing consumers to show they are not being penalised by their insurer that they may have been with for a number of years.
The Central Bank recently introduced a price walking ban from the 1st July 2022, so that when a customer renews a home or motor insurance policy for the second time or more, the insurer can no longer charge more than a first time customer (with the exception of new business discounts).
In the life insurance sector, the topic of Value for Money will remain an area of Central Bank focus and scrutiny; following on from the work on unit-linked products last year, a supervisory review to assess if there are any outliers in terms of charging is expected.
Additionally the Central Bank have indicated that they will carry out a thematic review on the Eiopa supervisory warning on credit protection insurance.
Covid-19 has proven that insurance companies remained resilient throughout the strict restrictions and were still able to operate successfully with employees working from home. However there has been a talent shortage in the insurance sector; younger people may not have considered an insurance career and retaining employees now is more crucial than ever. The Insurance Practitioner Apprenticeship program aims to address this and should be an area of focus to grow talent from junior levels.
The Central Bank’s focus on diversity and inclusion is unlikely to diminish and it is now worth reassessing practices against the outputs from the 2020 thematic assessment of Diversity & Inclusion in insurance firms to determine where progress has been made and where gaps still remain.
The European supervisory and regulatory system Solvency II has provided many of its intended benefits. It introduced a risk based approach to solvency capital, implemented higher risk management and governance standards and extensive supervisory reporting. Whilst the system does overall function effectively, it was considered that certain elements need to be improved.
Key proposed improvements include: changes to long-term risk exposure to address excessive capital and volatility; a review of proportionality, so that smaller and less risky insurance companies benefit from a simplified framework; introduction of new requirements on long-term climate change scenario analysis; and a new insurance recovery and resolution framework, which includes provision for the designation of a national resolution authority empowered to apply resolution tools and exercise resolution powers in each Member State.
Separately post Brexit the UK government is expected to implement Solvency II reforms, having stated it would introduce a "simpler, clearer, and much more tailored regime". This is likely to result in divergence between the EU and the UK in the future.
