Insurance Industry Newsletter – Central Bank of Ireland Spotlights Three Key Issues

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Insurance Industry Newsletter – Central Bank of Ireland Spotlights Three Key Issues

July 12, 2023

On 29 June 2023, the Central Bank of Ireland (CBI) released its quarterly Insurance Newsletter (Newsletter).

It was a bumper edition of the Newsletter with plenty of noteworthy feedback from the CBI on a variety of topics. In this article, we focus on three key highlights from the Newsletter:

CBI feedback on the thematic inspection of Product Oversight and Governance (POG) requirements;
the CBI’s observations based on supervision of reinsurance activities; and
financial sanctions compliance.

1. Thematic Inspection of POG Requirements

A thematic inspection of POG arrangements in a selection of six non-life insurance undertakings was conducted by the CBI in the latter half of 2022 (the Inspection). The aim of the Inspection was to assess the current level of controls, processes and systems in place in relation to POG arrangements as required by the Insurance Distribution Directive (IDD), the Solvency II Directive, related regulations and EIOPA guidelines. According to the CBI, the primary focus of the Inspection was from a prudential perspective; however, it also encompassed the undertakings’ compliance with Article 25 of the IDD (POG conduct of business requirements).

The Inspection focused on five key control areas:

POG Policies & Procedures;
Underwriting Controls;
Post Implementation Reviews;
Risk Management Oversight; and
Board Oversight.

The CBI emphasises that it expects (re)insurers to have robust processes in place to ensure they are continuously aware of the cover they provide and to have a full understanding of their exposures. Furthermore, the CBI expects that exposures that could arise because of new and emerging risks (such as silent cyber, climate change, and other systemic risks) are being continuously assessed by (re)insurers. In particular, the CBI states that insurers must ensure that

the POG process is not viewed just as a tick-box exercise but rather a meaningful process and control that is integrated with both the emerging risk and ORSA processes.

The key themes identified by the CBI arising from the Inspection are:

Board Oversight: The Inspection showed that there was not always board oversight of all new products and material changes made to existing products. The CBI expects boards to have a sign-off role for material new products and material product changes.
Risk Management: The Inspection showed that the risk function, and role of the chief risk officer (CRO), was not as strong as they need to be in POG arrangements. Consequently, the CBI issued risk mitigation programmes to enhance the role of the risk function in POG. This includes the risk function providing an opinion on the materiality threshold of new products and changes above which the board needs to be more engaged. The CBI makes clear its expectation that CROs must demonstrate an active approach to monitoring emerging risks as well as very close collaboration with the underwriting function.
Policy Wordings: The Inspection found that, in general, given the pandemic-related issues, insurers had taken steps to review policy wordings and strengthen POG frameworks addressing legacy policy wording issues. However, the CBI noted that this exercise was more difficult for some than others owing to a variety of factors, including resource constraints, which the CBI makes clear must be sufficient to mitigate against any potential customer detriment. The CBI also expects insurers to plan reviews of policy wordings on an ongoing basis.
EIOPA views on protection gaps: EIOPA has recently issued a number of supervisory statements relating to potential protection gaps arising from systemic events leading to potential customer detriment (see here) as well as relating to the application of POG supervision more broadly (see here). The CBI acknowledges that insurers do seem generally aware of EIOPA’s expectations in terms of approaching the POG process. However, the CBI expresses the view that the POG process should be reinforced to consider both prudential and consumer considerations and ultimately work to mitigate potential detriment to both undertakings and consumers. The CBI also found that all inspected insurers had taken steps to address any unintended exposure related to silent cyber cover. The CBI noted that the recent pandemic had reinforced the importance of ensuring any exposure gaps were mitigated by aligning policy wordings with the relevant reinsurance coverage.

In the Newsletter, the CBI helpfully provides a detailed list of POG ‘good practices’ that were identified during the Inspection. We recommend that all insurers review and consider these practices for implementation, as appropriate, in the context of their own POG arrangements.

2. Supervision of Reinsurance Activities

The Newsletter contains a very interesting piece setting out the CBI’s observations relating to its day-to-day supervision of reinsurance transactions. The CBI indicates that it is seeing increased engagement from insurers in this regard, and it encourages them to continue doing so. In particular, the CBI (and its European counterparts) are seeing a wider variety of types of reinsurance agreements and are seeking early engagement by insurers particularly where “non-traditional treaties” are concerned.

Other notable observations made by the CBI include:

Where reinsurance treaties were not signed by year-end (owing to last-minute negotiations as occurred during the January 2023 renewal season), this created an element of doubt as to whether these treaties were fully incontrovertible, as required for inclusion in the calculation of the Standard Formula SCR. The CBI notes that it plans to discuss this issue with insurers on a bilateral basis.
Good practice examples include insurers producing a document setting out appropriate justification against each of the requirements of Articles 208-215 of the Commission Delegated Regulation before allowing for the benefit of a risk mitigation technique in their SCR calculation.
Noting that the prudent person principle applies to reinsurance assets as set out in the recent CBI Guidance on Intragroup Transfers and Exposures, the CBI highlights that the Dutch regulator is considering introducing a prior regulatory consent requirement for insurers before entering into an “asset-intensive” reinsurance contract.
Where the CBI forms the view that an insurer’s consideration of “commensurateness” of capital relief to risk transferred was not sufficiently thorough (in line with the EIOPA Opinion on Risk Mitigation Techniques), it will ask the insurer to revisit it.

In addition, the CBI notes that EIOPA is continuing work in the area of risk mitigation techniques and it is currently considering whether to release some guidance on good practices relating to third country reinsurance. Since the Newsletter’s publication on 10 July 2023, EIOPA has issued a draft Supervisory Statement on the supervision of reinsurance concluded with third country (re)insurance undertakings which consultation process remains open until 10 October 2023. The CBI also notes that it may provide further commentary on this area if it thinks it is needed.

3. Financial Sanctions

Financial sanctions are clearly high on the CBI’s regulatory radar. In the Newsletter, the CBI highlights the various communications it has issued on the topic since the outbreak of the war in Ukraine. The CBI emphasises that compliance with financial sanctions must remain at the forefront of (re)insurers’ risk management agendas. In particular, the CBI reminds (re)insurers of its dedicated webpage on financial sanctions should they need refreshing of their obligations in this area.

Significantly, the Newsletter also highlights that information requests will be issued to some (re)insurers in the coming weeks as part of supervisory engagements, including the issuance of a financial sanctions questionnaire for determining (re)insurers’ awareness of and actions in relation to their obligations.