On 1 February 2020, the Central Bank of Ireland (CBI) published an Impact Review (the Review) of its risk-based Supervisory Framework (Probability Risk and Impact System or PRISM). The CBI introduced PRISM in 2011 and in February 2016 published an explanatory paper, PRISM Explained, setting out its risk-based approach to supervision of regulated firms. Adopting a risk-based approach to supervision means that the CBI concentrates its supervisory resources on higher impact firms relative to those deemed lower impact.
Under PRISM, “the prudential risk of a financial service provider is determined by assessing its “impact” – that is the degree of damage that would be caused to consumers and/or the economy were it to fail. This is combined with an evaluation of the “probability” or likelihood of its failure at any given time to give an overall supervisory risk rating for the firm.” The supervisory risk rating of a firm is used by the CBI to determine the level of supervision applied to that firm. The higher the impact of failure, the higher the risk rating of the firm and the more intensely it will be supervised by the CBI.
The Review of PRISM involved an assessment by the CBI of its approach to supervisory activities and allocation of internal resources to capture prudential impact in a number of sectors, including insurance and reinsurance, as discussed in further detail below.
Prudential Impact Models – Additional insurance models added
Prudential Impact Models (PIMs) are used by the CBI to capture the prudential impact of supervised financial service providers with similar business models and to enable the CBI to rank these firms based on their impact within the relevant sector. There were previously 28 PIMs across the prudential sectors in-scope of the Review (Asset Management, Credit Union, Fund Service Providers, Insurance, Payments and e-Money plus Market Infrastructure sectors). Following the Review, there are 16 PIMs. From an insurance sector perspective, there are now 5 PIMs in total; the Life, Non-Life and Reinsurance PIMs have remained while Health and Captives PIMs have been added to that sector. The CBI has outlined that these provide a more meaningful representation of prudential impact, as they reflect the relevant impact dimensions for each area of the insurance sector.
Impact – What this means for supervised firms
The level of supervision by the CBI of a firm is dependent on its PRISM impact rating (High, Medium High, Medium Low or Low). The higher a firm’s impact rating, the more hands-on and intense the scrutiny from the CBI. As part of the Review, a Prudential Horizontal Assessment (the Assessment) was carried of the current PRISM impact ratings (High, Medium High, Medium Low or Low) of the firms across all 16 PIMs. The Assessment analysed the business models, competitive landscapes and the economic & regulatory issues affecting firms in each of the PIMs. Data collected from 2017 and 2018 shows that, out of a total of 2.1% of supervised firms in the “High” impact category, the vast majority (1.8%) of these are in the insurance sector. This is an indicator of the significant levels of influence that the large insurance firms have on the Irish economy.
The implications of the Review from a practical perspective are that firms whose current impact category is revised upwards (e.g. from Medium High to High) following the Review will have more engagement with the CBI. The CBI confirmed that they would be communicating with all of the firms concerned to inform them of the change to their impact category following the Review. Insurers, reinsurers and credit unions were to be the first sector of firms informed.
Metrics – Changes made to how impact is assessed
The Review also resulted in a revision of the metrics used by the CBI to assess the impact of financial service provider failure within each PIM. Previously, the key metric was size however, the CBI concluded that too much emphasis was being put on size as it is not the sole determinant of a firm’s impact. This has led to changes in the metrics used across all insurance models to incorporate other aspects of impact. For example, a metric based on a firm’s Solvency Capital Ratio in the insurance PIM was removed (as it captured probability risk of a firm’s failure rather than its impact) while a market share metric representing the substitutability of firms in the Non-Life Insurance PIM was added.
Industry Funding Levy – No immediate changes envisaged
Firms should also be aware that the higher the impact category it is assigned, the more it will have to pay for the industry funding levy. By way of example, the CBI’s 2019 Consultation Paper for Insurers outlines proposals for High impact firms to pay 75% of a minimum fee component requirement, in comparison to the 12% required for Medium High impact firms. The CBI confirmed that no immediate changes are planned to the industry funding levy methodologies on foot of the Review in the 2020 billing cycle. The CBI continue to pursue full recovery of regulatory costs from regulated firms and to exclude the taxpayer from paying the costs of financial regulation. However, they intend to test alternative systems in various sectors, including insurance, in the future and have indicated that any changes in this regard will be clearly communicated.
Contributed by Art O’Connor
