Irish Region

In its final Insurance Newsletter for 2022, the Central Bank of Ireland (Central Bank) published a particularly useful synopsis of the key prudential risks that it has identified during its risk assessment and scanning process of 2022. The Central Bank confirms that the output from this process will inform its supervisory priorities for 2023. As such, it is important that Irish (re)insurers and their Boards of Directors take heed to ensure that the risks identified by the Central Bank are closely monitored and their potential impact carefully considered as part of their risk management framework in the period ahead.  

The Central Bank identified the following key prudential risks: 

1.  Macroeconomic and Financial Risks: 

• Volatility in financial markets – owing to the uncertainty in economic outlook, inflation and geopolitical events. Insurers are exposed to various related risks through their significant investment assets.
• Economic downturn – the risk that a global downturn combined with an inflationary environment could reduce demand and increases lapses impacting life and non-life insurance.
• Increased inflation – noting that multi-decade high inflation is likely to remain until 2024, this will present numerous challenges for insurers across claims, pricing, reserve risk, reduced profitability and demand for insurance products.
• Geopolitical risks – arising from the ongoing conflict in Ukraine and through political and social unrest, the continued elevation of these risks may likely amplify the other macroeconomic risks above. 

2.  Operational Risks:

• Outsourcing Risks – a perennial 'hot button' for the Central Bank is the significant reliance by some insurers on third party or group support for key activities and the absence of governance / oversight in place to monitor appropriately.
• IT and Cyber risks - related to the risks of disruption to IT services, data and/ or financial loss arising from cyber-attacks and criminal data breaches. The Central Bank notes that business continuity and data integrity are increasingly important aspects of insurers' risk management frameworks. 

3.  Digitalisation and Technology:

• AI and the use of Big Data – the rapidly increasing use of both these technological advances poses prudential and consumer protection risks for insurers, and vulnerable consumers in particular.
• Technology impact on business model risk – the potential failure of insurers to keep pace with the adoption of innovative technology may affect their ability to compete.
• Cyber underwriting risks – more underwriting of intended and/or non-affirmative cyber insurance cover or multiperil policies and the risks related to insurers' clearly understanding their exposure.  

4.  Climate Change: 

• Described as a "key long-term challenge", the Central Bank identifies the risks relating to the transition to a low-carbon and climate resilient economy or from the physical effects of climate change. 

5.  Regulatory and Legislative Changes:

• Finally, the Central Bank identifies the risks arising from regulatory change in other jurisdictions as well as differences in interpreting existing regulation as remaining a prominent risk which may pose operational or strategic challenges for Irish insurers. In particular, the potential for a material impact on the business models of cross-border insurers is noted. 

Conclusion 

We can undoubtedly expect to hear plenty more from the Central Bank in 2023 on the various key prudential risks outlined above. The difficult macroeconomic landscape that has defined 2022 seems certain to present array of regulatory challenges for the Irish (re)insurance sector in the times ahead. 

Published by William Fry LLP on 21 December 2022