The pace of change in the insurance industry over the past few years has been almost frantic at times. The next 12 months promises to be equally busy as (re)insurers face a change agenda that impacts them right across the value chain. In this note we take a look at some of the key areas of focus right now for Irish-domiciled insurers and reinsurers.

Capital management

The upward shift in the yield curve, brought about as a result of the heightened inflationary environment of the last couple of years, has had the beneficial effect of reducing technical provisions and overall solvency capital requirements amongst insurers and reinsurers alike. This has led to improvements in the overall level of free capital. In addition, higher yields have generally meant that there are now more attractive opportunities available to achieve a decent return on that capital. The combination of these two factors has begun to sharpen the focus once more on efficient capital management. Given the improved range of investment opportunities, it can make a meaningful difference to shareholders to extract surplus capital (where all regulatory and internal requirements are met) and potentially deploy it for other uses. Where this is the case, shareholders may push for greater capital efficiency in order to maximise free assets. This can be achieved using a variety of approaches, from unit underfunding¹ to mass lapse reinsurance, to the use of ancillary own funds, to traditional reinsurance-based de-risking techniques, and many alternatives in between. Further options include hedging of market and/or demographic risks or the development of (partial) internal models. In some instances, firms have been able to implement undertaking-specific parameters. In our note Capital management activities by Irish (re)insurers (milliman.com) we look at general industry activity over the past couple of years. We expect this to continue apace.

Solvency II 2020 review

A further driver of focus on capital management will come in the form of the expected changes to the Solvency II Directive—see Amendments to the Solvency II Directive (milliman.com)—and to the Delegated Regulations arising from the Solvency II 2020 review. Although the earliest anticipated implementation date for changes is currently early 2026, now that there is greater clarity in relation to the expected changes themselves firms can start to properly plan for their implementation. The key areas include:

• The risk margin
• The Solvency Capital Requirement (SCR), including symmetric adjustment, interest rate risk and treatment of long-term equity investments
• Long-term guarantee measures (extrapolation of the risk-free curve, the volatility adjustment and the matching adjustment)
• Pillar 2 issues (such as such as cyber, liquidity and sustainability risk management)
• Pillar 3 issues (including the Solvency and Financial Condition Report)
• Proportionality

Harnessing the potential of generative AI

Generative artificial intelligence (AI) has the potential to be a game-changer for both the insurance and reinsurance industries. Companies are actively investigating use cases which can help achieve efficiencies right across the value chain. This can range from claims handling to underwriting, customer interactions to coding support and reporting writing to fraud detection, amongst many other uses. Insurers and reinsurers are only beginning to really understand what generative AI may mean for their businesses. Much has already been written about potential uses of this new technology—see The potential of large language models in the insurance sector (milliman.com) and Data science–potential uses in risk management (milliman.com). Of course, it doesn’t come without health warnings. Understanding and managing risk exposures which are brought about through use of generative AI will be an active area of involvement for risk functions over the coming years. One of these exposures includes the emergence of persuasive misinformation (i.e., generative AI has the potential to produce highly persuasive but factually incorrect text, which can lead to misinformation or misinterpretation, with naturally undesirable consequences). Perhaps even more concerning is the potential introduction of discrimination into decision-making (if models have been trained on biased data sets, for example).

Automation and process improvement

In the aftermath of the transformational change brought about by the introduction of both Solvency II and International Financial Reporting Standard (IFRS) 17, (re)insurers are now starting to turn their attention to the area of process improvement and efficiency. See Process improvements & efficiencies: Getting more with less (milliman.com). Technological advances in both hardware and software, the emergence of generative AI and a focus on cost-cutting in the aftermath of a spike in inflation, have combined to make a compelling argument in support of such activities. The advantages are many, including:

• Cost and resource savings
• Reducing operational risk
• Improving operational resilience
• Facilitating faster and better-informed decision-making

Enhancements can range from incremental to transformational, depending on the ambitions of the undertaking and the current state of systems and processes, with many firms already having dedicated projects underway.

(Digital) operational resilience

Operational resilience guidelines, issued by the Central Bank of Ireland (CBI), came into effect in December 2023, with firms having had a two-year lead-in time to prepare for implementation. Now that this deadline has passed, the CBI will expect to see ongoing improvement in operational resilience, with the regulator having raised it as an area of focus for 2024. Following hot on the heels of the broader operational resilience requirements, the Digital Operational Resilience Act (DORA), and its associated regulations and technical standards, is due to come into effect in January of next year. The workload involved in compliance with these new requirements is significant. See Digital Operational Resilience Act (DORA): Next steps for (re)insurers on the implementation journey (milliman.com). The nature of the requirements themselves—being quite technical in nature (i.e., matters specifically related to information and communication technology)—potentially posing a challenge for some compliance teams to oversee.

Sustainability and climate change

This is currently a key area of focus at global, European and local levels. While the potential impacts of climate change can often be more easily seen when considering the non-life industry, there is also significant exposure for life (re)insurers, particularly to the extent that transition risk can impact investment returns. Climate risk scenario modelling, particularly as part of the Own Risk and Solvency Assessment (ORSA), is a crucial area for continued focus and development, as both insurers and reinsurers grapple with understanding the full extent of the potential impact of climate change on their businesses over the short, medium and long terms. There is also much change taking place in the broader sustainability space, for example The 2024 sustainability agenda for UK life and health insurers: The AAA sustainability pivots (milliman.com), as firms continue to develop their diversity, equity and inclusion (DEI) agendas, address greenwashing and consider how best to continue to enhance and protect their reputations as responsible corporate citizens.

Value for Money

Over the last few years, the European Insurance and Occupational Pensions Authority (EIOPA) has become increasingly active in relation to one particular aspect of product oversight and governance, namely addressing perceived shortcomings in the Value for Money (VfM) of insurance products (and, in particular, unit-linked products), as documented in our note Bang for the buck – a practical guide to insurance product Value for Money (milliman.com). After an initial consultation in 2021, EIOPA proposed a definition of VfM, bringing in key concepts from the Insurance Distribution Directive and framing the definition in relation to proportionality of costs to benefits and a comparison with other retail products in the market in which the product is written. The consultation was followed up by a 2021 Supervisory Statement, which outlined a framework and common approach to be taken across supervisors for addressing VfM risk. The following year, EIOPA set out a VfM assessment methodology for supervisors, the aim being to enable supervisors to drill down through markets and providers to individual products, coming to a conclusive decision as to whether or not they offer VfM to their identified target markets. Meanwhile, the Financial Conduct Authority (FCA) in the UK has also published its Consumer Duty requirements for firms to produce good customer outcomes (see Consumer Duty | FCA), which has led to some quite significant impacts on insurers. For those insurers still at the early stages of the VfM journey, 2024 is set to be a busy year. Developing a VfM policy, especially if starting from a blank sheet of paper, is a task not to be underestimated.

Digitalisation, customer engagement and the Consumer Protection Code

On 7 March the CBI launched a public consultation on proposed changes to the Consumer Protection Code (the Code), aimed at clarifying, integrating and modernising the Code, as well as making it more accessible. See Code Review Consultation Paper March 2024 (centralbank.ie). New and updated provisions of the Code include digitalisation, in particular the desire to make digital platforms more user-friendly. In the words of the CBI’s Deputy Governor “one of our key goals in revising the Code is to assist firms to effectively incorporate customers’ interests into their overall business model and commercial decision making. This is addressed through an obligation on firms to secure their customers' interests. Guidance will support firms to effectively implement all their consumer protection obligations, in part by describing what firms need to consider and the actions they need to take to deliver positive consumer outcomes.” Understanding these obligations, the actions needed to fulfil them and what is required in order to implement these actions will be key next steps for many insurance firms.

Pre-emptive recovery plans

The Insurance Recovery and Resolution Directive (IRRD) was proposed by the European Commission in September 2021. It is a comprehensive framework for the insurance sector, covering elements such as recovery and resolution planning, resolution objectives and tools and cooperation and coordination. While it will introduce new requirements for firms across Europe, existing pre-emptive recovery plan requirements in Ireland already meet the requirements of the proposed IRRD. Hence, at this point it looks unlikely that the IRRD will result in any material changes for Irish firms. Instead, activity at Irish firms will be focussed on ensuring that any remaining points of feedback communicated by the CBI via its “Dear CEO” letter of December 2022 (as well as through its Insurance Quarterly Newsletter) have been fully addressed. Chief amongst these points are the CBI’s expectations in relation to overall recovery capacity, the severity of stresses considered, clarification on how selected recovery options can actually be implemented and the governance/escalation process. Details of the CBI’s feedback—outlining both good practice and areas for improvement—can be found here: Pre-emptive Recovery Plans: Take Two (milliman.com).

Interest rates – back to normal?

There has been a sustained increase in interest rates over the past couple of years, in the wake of the pandemic and in response to the surge in inflation. Although this has brought with it numerous challenges for insurers it has also brought opportunity. For the first time in over a decade, insurers can use higher interest rates in product development and pricing activities. The benefits for annuity business, and other long-duration products, are obvious. However, the prospect of earning higher returns on assets also facilitates more competitive pricing of other types of business. In addition, higher returns will encourage (potentially, at least) the reintroduction of heretofore expensive or capital-intensive guarantees as a product differentiator. See The new interest rate environment: Back to normal? – Part 1 (milliman.com). Similarly, there are implications for hedging programmes—see The new interest rate environment: Back to normal? – Part 2 (milliman.com)—as well as activities such as monitoring policyholder behaviour, assessment of standard formula appropriateness and stress and scenario testing. See The new interest rate environment: Back to normal? – Part 3 (milliman.com). Firms need to carefully consider the challenges and opportunities here and be prepared for any potential reversion to lower interest rates as inflation begins to settle down again. It remains to be seen whether the current, higher interest rate environment is actually the new normal or just a temporary blip.

Growth opportunities

Maintaining a growth trajectory for the business in the face of the cost of living crisis—see History repeating itself? The return of high inflation and its implications (including modelling) for life insurers (milliman.com)—is proving to be a challenge for many insurance firms. Cost-saving programmes and capital efficiency initiatives can certainly help to improve the bottom line and/or the overall level of solvency but do little or nothing for top line revenue growth—in fact, they can often be detrimental. Savings ratios and overall affordability have become a challenge, and so developing and/or maintaining an attractive proposition (either to attract new customers or to retain a higher proportion of the existing customer base) have become imperative. Pension fund de-risking activity, which is currently booming now that interest rates have recovered and funding positions amongst defined benefit pension schemes are quite healthy, offers huge opportunity for asset accumulation via bulk annuity buyout transactions and numerous direct writers are already very active in this space. This would be expected to generate significant opportunities to for reinsurers, as insurers seek to manage their newly acquired longevity exposure. New product offerings (as mentioned earlier) are also starting to emerge as insurers look to tailor their offerings to meet (or indeed to better meet) changing customer needs.

Embedding IAF and SEAR

The Individual Accountability Framework (IAF) of the CBI (see https://www.centralbank.ie/regulation/how-we-regulate/individual-accountability-framework), including the Senior Executive Accountability Regime (SEAR), enhancements to the current fitness and probity regime and amendments to the administrative sanctions procedure, are now firmly in the implementation phase. Firms are busy understanding the practical challenges posed by implementation and how best to address them. SEAR, along with its specific requirements, will give many key stakeholders pause for thought, as management responsibility maps are developed and formalised. Although much work has already been completed, much remains to be done ahead of final implementation later this year, with the exception of SEAR regulations that describe responsibilities of (Independent) Non-Executive Directors at in-scope firms, which will apply from 1 July 2025. Good record-keeping on the part of individuals is set to become a feature of life post-SEAR implementation, and this is bound to occupy the minds of those designated as (Pre-Approval) Controlled Function holders over the coming months.

¹ Unit underfunding is an accepted process, also known as unit shorting or unit (mis)matching amongst other terms. It allows companies to hold sufficient unit-linked assets to cover only the unit-linked portion of Solvency II technical provisions (plus a buffer) rather than holding the full surrender value of policyholders’ unit-linked funds. Read more about it here: A closer look at Solvency II unit matching (milliman.com).