2022 in Review - Insurance Regulation

The dominant themes of 2022 in Irish insurance regulation were financial sanctions, customer protection, culture and conduct, and sustainable insurance. We examine the key regulatory developments of 2022 in these areas as well as what the industry can expect to see in 2023.

Financial sanctions

While the tragic events unfolded in Ukraine at the beginning of this year, insurers had to be mindful of the ramifications the crisis would have on the (re)insurance industry.

From February, the EU introduced several financial sanctions on Russia in response to its invasion of Ukraine. The broad and wide-ranging EU Council Regulations have a direct effect in Ireland and, therefore, must be complied with by all Irish natural and legal persons.

The Central Bank of Ireland (CBI) is a competent authority for EU financial sanctions and is responsible for the administration, supervision, and enforcement of financial sanctions in Ireland. In late February, the CBI issued a “Dear CEO” to the industry to remind (re)insurers that they must have processes in place to operationalise the sanctions as they relate to their business activities. It also highlighted the need for firms to monitor the situation closely given the potential for further sanctions.

In light of the Russia/Ukraine sanctions, (re)insurers needed to act urgently to ensure that they had robust systems and controls to avoid providing prohibited services to a sanctioned entity or designated person under the new regimes.

Consumer protection

In June 2022, the Insurance Miscellaneous Provisions Act signed into law and the majority of the legislation has now commenced. The 2022 Act provides for the following measures:

• It enables the collection by the CBI of certain information regarding deductions by insurance undertakings from amounts paid for claim settlements, and for that purpose, amends the Central Bank (National Claims Information Database) Act 2018.
• It introduced a new requirement on the CBI to provide a report to the Minister for Finance about steps taken to address the practice of price walking, and related measures, following the CBI’s review of differential pricing and subsequent regulations.
• It provides for technical drafting amendments to the Consumer Insurance Contracts Act 2019 in order to clarify certain issues that arose following the enactment of this legislation. It further amends this legislation to provide a new provision for disclosure of information by insurance undertakings for deductions from amounts paid on claim settlements.
• Amendments to the European Union (Insurance and Reinsurance) Regulations 2015 that established the temporary run-off regime (TRR) in light of the UK’s departure from the EU. The amendments provide for technical changes in order to ensure that certain insurance firms that provide reinsurance, and firms in liquidation, can use the TRR to run-off their existing Irish insurance contracts.

Culture and conduct

The Central Bank (Individual Accountability Framework) Bill 2022 (IAF Bill) was published in July 2022 by the Department of Finance, following the publication of the General Scheme of the IAF Bill (General Scheme) in July 2021. With the publishment of the IAF Bill, the scope for personal exposure and director/manager liability within Irish-regulated financial firms will expand dramatically.

The main purpose of the IAF Bill is to improve accountability and trust in the financial sector by creating a framework that contributes to bringing about cultural and practical change in the insurance sector and throughout the financial services industry at large. The IAF Bill mirrors to a great extent the content of the General Scheme, although it includes important changes to the scope of the conduct standards and the CBI’s investigative powers.

The draft IAF Bill is currently being examined by the Dáil and is at the third stage of the legislative process. Once enacted, which might be as soon as Q1 2023, the IAF will introduce significant changes to the insurance sector and persons performing controlled functions (CF) and pre-controlled functions (PCF), through, among other things, the introduction of:

• The Senior Executive Accountability Regime (SEAR)
• Business and conduct standards, and
• An enhanced fitness and probity regime.

The CBI's administrative sanctions regime will also be adjusted, removing some of the difficulties that currently exist for enforcement in respect of individuals.

Sustainable insurance

On 3 August 2022, the CBI published its Consultation Paper on Guidance for (Re)insurance Undertakings on Climate Change Risk. This Guidance sought to clarify the CBI’s expectations for the assessment and ongoing management of climate change risk by (re)insurers.

In the Guidance, the CBI discusses the results of its thematic review, where 39 (re)insurers were selected from the life, non-life and reinsurance sectors. During its review, the CBI observed limited examples where climate change risk had been integrated into a (re)insurer’s business planning and strategic thinking, as is expected under Regulation 47(7) of the European Union (Insurance and Reinsurance) Regulations 2015.

Examples of good practices observed included:

• Embedding the consideration of climate change risk into risk management processes within the (re)insurer, e.g. updating risk management. policies based on conclusions of assessments carried out
• Developing a sustainability strategy to define the (re)insurer’s objectives in respect of climate change, and
• Identifying potential opportunities that arise and ways to develop business models in the future as a result of climate change.

The CBI expects (re)insurers to integrate the Guidance from risk and scenario analysis into their future strategy to ensure a sustainable business model. This can be done by updating their risk appetite and setting key performance indicators in respect of climate change risk.

Looking Ahead

With the conflict continuing in Ukraine showing no signs of stabilising in the near future, we expect that financial sanctions will likely remain at the forefront of the Irish insurance industry’s focus for 2023. The CBI has never, to our knowledge, conducted thematic reviews or specific on-site inspections of financial institutions in Ireland under financial sanctions laws. We are also not aware that it has ever imposed fines under its administrative sanctions process for breaches of sanctions laws. However, we think it is highly likely, given the huge publicity that has been generated by the Russia/Ukraine sanctions, that institutions could face scrutiny of their systems and controls in this area in the year ahead. Therefore, (re)insurers would be well advised to conduct a thorough review and verification of their sanctions compliance programs to ensure they are fit for purpose.

We can also expect to see a focus on cybersecurity risks in 2023. This comes in the wake of geopolitical developments such as the war in Ukraine and controversies regarding alleged Russian state interference in the French and US elections. These international events have elevated concerns that major state-backed cyber-attacks could result in catastrophic losses for (re)insurers. In response to the cyberwarfare, Lloyd’s of London announced that it will require its underwriters to include exclusion clauses for state-backed cyber-attacks in all cyber-risk policies underwritten at Lloyd’s from 31 March 2023.

From the Irish context, an obvious case in point was the cyberattack in 2021 on the Irish Health Service Executive (HSE) which paralysed the national hospital system for several weeks. We, therefore, expect cyber resilience to be a key priority for the CBI and the insurance industry in 2023 given the potential to have serious implications for prudential soundness, consumer protection, financial stability and the reputation of the Irish (re)insurance sector.

We expect the focus on culture and conduct will continue through 2023. Alongside the draft IAF Bill, the CBI issued a statement accompanying the publication confirming that it will launch a public consultation on the implementation of the IAF once the legislation has been passed. Therefore, insurers will have a final opportunity to feed into the development of the relevant regulations and guidelines which will be necessary to implement the regime before when the legislation is signed into law next year. Likewise, we expect consumer protection to remain a priority for the insurance sector in 2023 as the CBI launched its Discussion Paper on its review of the Consumer Protection Code in Q4 of 2022.

If you would like to discuss any of the points highlighted, please contact a member of the Financial Regulation team.

The content of this article is provided for information purposes only and does not constitute legal or other advice.