Insights Blog

The Central Bank of Ireland has recently published its insurance newsletter for September 2023. The two main areas detailed in the newsletter were reserving practices and feedback on Own Risk and Solvency Assessments (ORSAs).

On reserving, the CBI noted the challenges that arise with reserving given the number of macroeconomic and geopolitical uncertainties (inflation, interest rates, war, climate change), while going on to highlight certain good practices and areas for further improvement:

  • Expert judgment logs are noted as an increasingly important part of the reserving process, setting out a concise list of the judgments made, providing the board with visibility of the key judgments that underpin reserves.
  • Manual processes in validation of technical provisions carry a greater risk of operational errors. Small changes in technical provisions can have a material effect on the solvency coverage ratio of life insurers, which highlights the importance of robust validation of technical provisions. Better practice appears to be to reduce the extent of manual processes in reserving by introducing automation. Significant use of manual processes may lead to the standard formula capital charge not fully reflecting the level of operational risk. The implication here seems to be that the CBI may consider imposing a capital add-on where life insurers are overly reliant on manual processes for calculation and validation of technical provisions.
  • Inflation risk – the CBI noted the enhanced reserving practices of non-life insurers in relation to inflation risk but recommended that they quantify the impact of higher-for-longer inflation scenarios.

On ORSA feedback, the CBI focused on two areas – climate change risk and reinsurance:

  1. The CBI noted that the assessment of climate change risk by some insurers has been too narrow, with little consideration given to secondary or indirect impacts of climate change, which may ultimately be more material than direct impacts of physical or transition risks. Better practice involved the assessment of indirect climate change impacts (e.g. on business strategy, product offerings, consumer behaviour, availability of parent capital support or intra-group reinsurance and climate litigation exposure). Overall there is a need to align climate change risk assessment with climate science, particularly as evidence indicates that climate scenario models in financial services significantly underestimate the impact of climate change.
  2. The CBI emphasises the significant hardening of the international reinsurance market recently, particularly the P&C market. As insurers rely on reinsurance to manage their risks, support business strategy and optimise capital, reinsurance availability and affordability should be a key risk for the ORSA. The CBI expects to see more in-depth consideration of this risk in 2023 ORSAs.

The newsletter also mentions some topics covered in more detail by some previous updates – the EIOPA supervisory statement on use of third country branches and the EIOPA peer review on Product Oversight and Governance.