## IMF Technical Note _cr16311 — Insurance Sector (Ireland) — Executive Summary & Assessment ## Source details **Canonical URL:** [IMF Technical Note _cr16311 — Insurance Sector (Ireland) — Executive Summary & Assessment](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16311.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16311.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16311.pdf.json) --- ### Insurance sector overview and scale - Insurance in Ireland is well developed, diverse, and with a large international business presence. - Insurance penetration in Ireland is almost three times the EU average; average premiums per capita is four times the EU average. - The sector accounts for 3.6 percent of the total EU insurance premium, and the assets held by the sector amount to EUR 321.3 billion. - Total insurance premium: EUR 76 billion. - Premium on risks outside Ireland: EUR 61.9 billion (81.5 percent) (assuming that reinsurance business is all international). - Unit-linked products comprise almost 75 percent of Irish life insurers' balance sheet assets. - The reinsurance sector is the third largest in Europe; seven of the world’s top ten reinsurers have a presence in Ireland with a global market share of 4.7 percent in 2014. - Employment: around 8,000 people. ### Supervisory framework, implementation status, and resources - Solvency II is now the new solvency regime in Ireland. - Supervisory transition measures and documentation: - 51 Supervision Review Process (SRP) guidance papers prepared; 47 complete as of end-2015; remaining four relate to Group Supervision and Annual Reporting—two finalised in Q1 2016 and two scheduled for Q2 2016. - IMF Detailed Assessment Report (DAR) status: - 11 Insurance Core Principles (ICPs) assessed as observed. - 10 ICPs largely observed. - 5 ICPs partly observed. - A total of 46 recommendations were issued across 20 of the 26 ICPs. - Resource and independence issues: - The Central Bank faces important difficulties in attracting and retaining experienced supervisors. - Recommendation: develop a strategy to attract and retain experienced supervisors under current economic constrains. - ICP2 (supervisor’s independence and resources) will require statutory review of the Central Bank and improvement in the economic condition before necessary changes for full observance can be implemented. ### Solvency II transition, internal models, and ORSA - Transition risks: - Moving from Solvency I into Solvency II generates transitional risk due to complexity and day-to-day decision-making under the new regime. - Solvency II weaknesses noted: use of future profits qualifying as Tier 1 capital, zero capital charge for sovereign risk, one-year horizon, and operational risk treatment. - These weaknesses are expected to be captured in the Own Risk Solvency Assessment (ORSA). - Solvency positions and models: - Overall solvency position under Solvency II remains high, with few exceptions; introduction of Solvency II has reduced previously high calculated solvency ratios under Solvency I. - Insurers reporting during the preparatory phase show ratios above 100 percent under the new regime, including based on internal models and transitional measures. - An internal model (full or partial) or capital add-ons may be required when a firm’s risk profile is not appropriately addressed by the Standard Formula (SF). - Table 11 (Solvency II and Solvency I Comparison, in percentage, 2015): - VA Writers (6 Firms): Solvency II Coverage 260; Solvency I Coverage 921 - Life (14 Firms): Solvency II Coverage 209; Solvency I Coverage 827 - Nonlife (7 Firms): Solvency II Coverage 148; Solvency I Coverage 730 - Reinsurers (6 Firms): Solvency II Coverage 517; Solvency I Coverage 312 - Recommendation: formalize framework to monitor continued suitability of internal models and the approval of model changes, with due regard to resources and funding. - Recommendation: continue monitoring and, if necessary, take persuasive actions to ensure firms use the ORSA framework appropriately. ### Variable Annuity (VA) business risks and cross-border issues - Key risks and characteristics: - Legacy losses from the 2008 crisis continue to impact VA business; low yield environment requires additions to existing reserves. - Liquidity risk arises from hedging programs that may require immediate margin calls with higher market volatility. - EUR 20 billion of assets under management emanating from variable annuity business are in the balance sheet of Irish-regulated insurers. - Supervision of VA business is exposed to regulatory arbitrage due to Solvency II complexity and cross-border reinsurance/transfers. - Stress-testing and supervisory tools: - Central Bank developed VA National Specific Templates requiring annual stress testing reporting and quarterly hedging P&L attribution reporting. - Representative VA stress severities (CBI tests): - Equity Shock: 40% instantaneous fall + 0% growth for 5 years - Interest Rates: 100bps across all durations - Persistency: 50% change to best estimate assumptions in the direction of loss - Longevity: 20% decrease in base mortality + 25% increase to base mortality improvement assumptions - Exercise outcomes: firms met single-factor stresses but revealed high modelling sophistication needs, elevated operational risk in hedging effectiveness, market volatility as primary loss driver, and liquidity risk from margining. - Recommendation: Central Bank, working with other supervisors, should maintain the same level of reserving and liquidity requirements independently of the ultimate domicile of the VA business. - Recommendation: Central Bank should closely follow the FSB/IAIS framework on G-SIIs and introduce necessary host-supervisory tools for firms exposed to VA business. ### Nonlife sector profitability and investment quality - Profitability pressures: - External factors are putting pressure on nonlife sector profits, leading to an average return on equity in 2015 of just 3 percent (average ROE referenced elsewhere as -2 percent for nonlife in 2015 in detailed analysis). - Nonlife gross premiums (Euro millions): 2011 15,752; 2012 15,373; 2013 14,899; 2014 14,962; 2015 16,793. - Nonlife total assets (Euro millions): 2011 34,540; 2012 32,621; 2013 32,290; 2014 32,339; 2015 35,125. - Claims and market drivers: - Combined ratios above 100 percent except for property business; investment returns decreased substantially since 2011. - Factors increasing domestic claims costs include more cars on the road; increases in court award limits; Book of Quantum review delays; 2014 “Gill Russell” High Court case lowering discount rate from 3 percent to 1 percent. - Investment quality: - No observed deterioration in credit quality; portfolios remain with high credit ratings. - Recommendation: continued frequent reserve and credit risk exposure assessments of the nonlife insurers are recommended. - Recommendation: take advantage of Solvency II asset reporting granularity/frequency to develop a tool to track deterioration in credit quality. ### Reinsurance market structure and supervisory attention - Reinsurance premium growth and composition: - Reinsurance gross premiums (Euro millions, Total): 13,356 13,064 15,423 19,592 (series presented across years). - Reinsurers’ assets: 55,025 54,004 49,510 55,902 65,283 (Euro millions). - Reinsurers’ investments (Euro millions): 20,650 21,013 19,580 22,970 26,033. - Supervisory concerns under Solvency II: - Cost of capital for counterparty risk might be more attractive than cost for concentration risk due to insufficient risk calibration, potentially leading to excessive concentration of reinsurance. - Search for reinsurance jurisdictions presenting regulatory advantages without effective risk reduction or transfer. - Diversification benefits may be overstated through reinsurance structures, particularly when internal models are used. - Recommendation: Central Bank should analyze unusual reinsurance transactions where material to ascertain whether sufficient risk has been mitigated or transferred to justify capital benefits gained. ### Stress testing and systemic risk monitoring - Central Bank stress test framework needs further development. - Participation and results: - Central Bank participates in EIOPA stress tests and introduced a VA stress test. - Irish results of the EIOPA 2014 stress test confirmed strong resilience to interest shocks of the life business. - EIOPA exercises covered 19 scenarios; low yield satellite scenario had no material impact on SCR coverage for the 12 Irish participants in that exercise. - Recommendations: - Enhance forward-looking supervision and systemic risk monitoring by introducing Irish risk-specific stress tests (similar to VA stress test) for nonlife and life, domestic and cross-border, reinsurance and health. - Use ORSA submissions and Solvency II reporting to develop market-wide stress testing. - Ensure Key Reporting Indicators (KRI) under adapted PRISM allow comprehensive early warning indications of possible changes in the SCR; further enhance PRISM conduct risk. ### Governance, supervision scope, and other supervisory priorities - Reserving and conduct: - Under Solvency II reserves are calculated using best estimates; recommendation to continue close monitoring of claims reserves sufficiency, including random actuarial recalculations and onsite inspections. - Onsite inspection of “low impact” firms should follow a sampling approach rather than focusing heavily on captives with third party interests; supervision of captives should be complemented with assessment of financial soundness of their owner group. - Special attention recommended to any single captive management company that manages a significant number of captives. - Cross-border and winding-up: - Central Bank, working with EIOPA, should enhance coordination among Member State supervisors to avoid establishment within the EU of companies whose license/application was declined, revoked or withdrawn in another Member State before due diligence is carried out. - Consideration should be given to increase the role of the Central Bank in winding-up of insurers (e.g., powers to appoint an external administrator directly) and to expand the role and scope of the Insurance Compensation Fund (including possible extension to life). ### Consolidated list of key recommendations (selected, with timing) - Develop strategy to allow the Central Bank to attract and retain experienced supervisors under current economic constrains. — Central Bank and Government — I - Formalize framework to monitor continued suitability of internal models and approval of model changes, with regard to resources and funding. — Central Bank — NT - Maintain a flexible resources scheme to accommodate unforeseen need for additional supervisory work and elevate risk ratings where necessary. — Central Bank — I - Develop market-wide stress testing using ORSAs to monitor systemic risk and support thematic work. — Central Bank — NT - Continue monitoring and, if necessary, take persuasive actions to ensure firms use the ORSA framework appropriately. — Central Bank — NT - Develop a tool using Solvency II asset reporting to track deterioration in credit quality of insurers’ investments. — Central Bank — NT - Ensure PRISM KRI allow comprehensive early warning indications of possible changes in the SCR; further enhance PRISM conduct risk. — Central Bank — NT - Continue close monitoring of claims reserves sufficiency, including random actuarial recalculations and onsite inspections. — Central Bank — I - Onsite inspection of low impact firms to follow a sampling approach; complement captive supervision with assessment of owner group financial soundness; focus on single captive managers with significant numbers. — Central Bank — I - Enhance coordination among Member State supervisors to avoid supervisory arbitrage related to declined/revoked applications. — Central Bank and EIOPA — NT - Analyze unusual reinsurance transactions where material to assess mitigation/transfer of risk for capital benefits claimed. — Central Bank — NT - Maintain same level of reserving and liquidity requirements for VA business independently of ultimate domicile. — Central Bank and relevant supervisors — NT - Consider increasing Central Bank role in insurer winding-up and expanding ICF coverage to include life sector. — Government — NT - In host supervisory role, closely follow the FSB/IAIS framework on G-SIIs and introduce necessary tools to supervise firms exposed to VA business. — Central Bank — I --- ### Selected quantitative highlights and series (as reported) - Total gross written premium (end-2015): EUR 76 billion - EUR 39.6 billion life - EUR 16.8 billion nonlife - EUR 19.6 billion reinsurance - Total assets (sector-wide): EUR 321.3 billion - EUR 219.8 billion life insurance - EUR 35.1 billion nonlife business - EUR 66.4 billion reinsurance - Life gross premiums (Euro millions): 2011 26,627; 2012 27,360; 2013 31,710; 2014 37,028; 2015 39,600. - Reinsurance gross premiums (Euro millions) — Total: 13,356 13,064 15,423 19,592 (series). - Life investments (Euro millions): Assets 154,241 166,693 178,426 205,552 219,786; Investments 150,785 163,237 175,022 201,649 215,849. - Life investments supporting unit-linked (percent of total investments): 87 78 88 88 88. - Nonlife investments (Euro millions): Assets 33,674 31,828 31,432 31,450 34,109; Investments 24,541 23,783 23,543 24,022 25,498. - Reinsurers’ assets and investments (Euro millions): Assets 55,025 54,004 49,510 55,902 65,283; Investments 20,650 21,013 19,580 22,970 26,033. - Market concentration: - Top 5 insurers account for 48.5 percent of total assets held (life) and 70.8 percent of gross written premium (nonlife). - One nonlife insurer accounts for 53 percent of the market. *International Monetary Fund — Technical Note _cr16311 (Executive summary and selected findings from the IMF 2016 FSAP chapter on Ireland’s insurance sector).* ### EXECUTIVE SUMMARY ___________________________________________________________________________ 6 ### EXECUTIVE SUMMARY ### Insurance sector overview and scale - Insurance in Ireland is well developed, diverse, and with a large international business presence. - Insurance penetration in Ireland is almost three times the EU average; average premiums per capita is four times the EU average. - The Irish insurance sector is a significant provider in the EU of unit-linked business, and its reinsurance sector is the third largest in Europe. - The sector accounts for 3.6 percent of the total EU insurance premium, and the assets held by the sector amount to EUR 321.3 billion. - Total insurance premium: EUR 76 billion. - Premium on risks outside Ireland: EUR 61.9 billion (81.5 percent) (assuming that reinsurance business is all international). - The majority of the insurers operating in Ireland are subsidiaries of large international insurance parents. ### Supervisory framework, implementation status, and resources - Under Solvency II, the responsibility of the home supervisor has increased through the Freedom of Establishment (FOE) and Freedom of Services (FOS) operating models, and through equivalence assessment of jurisdictions outside the EU. - Full reliance on the proper prudential supervision carried out by the home supervisor is encouraged under Solvency II to reduce supervisory costs, which have risen due to the complexity of the framework. - The Central Bank of Ireland faces important difficulties in attracting and retaining experienced supervisors; it is recommended to develop a strategy that allows it to attract and retain experienced supervisors under the current economic constrains. - As of the Detailed Assessment Report (DAR): 11 Insurance Core Principles (ICPs) were assessed as observed, 10 ICPs largely observed, and 5 ICPs partly observed. - A total of 46 recommendations were issued across 20 of the 26 ICPs. - Solvency II is now the new solvency regime in Ireland. - 51 Supervision Review Process (SRP) guidance papers have been prepared, setting out internal supervisory processes and procedures under Solvency II. Forty-seven of these were complete as of end-2015. The remaining four papers relate to Group Supervision and Annual Reporting—two were finalised in Q1 2016 with the two remaining papers scheduled for completion in Q2 2016. - From the 10 ICPs assessed as largely observed, for six the recommendations have been implemented. For the remaining four ICPs on governance, risk management for solvency purposes, AML/CFT, and cross border crisis preparedness, the Central Bank has made significant progress but implementation is still ongoing. - ICP2 (supervisor’s independence and resources) will require statutory review of the Central Bank and improvement in the economic condition of the country before necessary changes for its observance can be implemented. - From the five partly observed principles, for two—ICP 17 and ICP 20—the implementation of Solvency II, which now is in place, was required to improve observance. Also, on ICP 9 and ICP 23, important advancement towards their observance has been made. ### Solvency II transition, internal models, and ORSA - The move from Solvency I into Solvency II generates transitional risk due to complexity and day-to-day decision-making under the new regime. - Solvency II weaknesses noted: use of future profits qualifying as Tier 1 capital, zero capital charge for sovereign risk, one-year horizon, and operational risk treatment. - These weaknesses are expected to be captured in the Own Risk Solvency Assessment (ORSA). - Recommendation: continue monitoring and, if necessary, take persuasive actions to ensure that firms use the ORSA framework appropriately. - Overall solvency position under Solvency II remains high, with few exceptions; introduction of Solvency II has reduced previously high calculated solvency ratios under Solvency I. - Insurers reporting during the preparatory phase show ratios above 100 percent under the new regime, including based on internal models and transitional measures. - An internal model (full or partial) or capital add-ons may be required when a firm’s risk profile is not appropriately addressed by the Standard Formula (SF). - Recommendation: formalize the framework to monitor the continued suitability of internal models and the approval of model changes while having due regard to required resources and funding. ### Variable annuity (VA) business risks and cross-border issues - Supervision of VA business is exposed to regulatory arbitrage due to Solvency II complexity. - Legacy losses from the 2008 crisis continue to impact VA business; low yield environment requires additions to existing reserves. - Transferring VA risk to other jurisdictions via reinsurance and other mechanisms can change reserving and liquidity requirements and asset quality backing reserves. - In large transactions, insurers face counterparty risk that Solvency II might not sufficiently capture, particularly when internal models are used. - Recommendation: Central Bank, working with other supervisors, should maintain the same level of reserving and liquidity requirements independently of the ultimate domicile of the VA business. - Because of the large VA business presence, the Central Bank is recommended to closely follow the FSB/IAIS framework on Global Systemically Important Insurers (G-SIIs) and introduce necessary tools to supervise firms exposed to VA business in its host supervisory role, even though the Central Bank is not the global group supervisor for any G-SII. ### Nonlife sector profitability and investment quality - External factors are putting pressure on nonlife sector profits, leading to an average return on equity in 2015 of just 3 percent. - The nonlife sector, with traditionally high combined ratios, has been dependent on investment return for profitability; investment returns have continuously decreased. - Detailed analysis shows continued environment regarding both investment activity and underwriting. - No observed deterioration in credit quality of nonlife insurers’ investments; portfolios remain with high credit ratings. - Recommendation: continued frequent reserve and credit risk exposure assessments of the nonlife insurers are recommended. ### Reinsurance market structure and supervisory attention - The shifting model of reinsurers in light of Solvency II requires supervisory attention. - Potential concerns under Solvency II: - The cost of capital for counterparty risk might be more attractive than the cost for concentration risk due to insufficient risk calibration of Solvency II, potentially leading to excessive concentration of reinsurance. - Search for reinsurance locations that present regulatory advantages without effective risk reduction or risk transfer. - Diversification benefits may be gained through reinsurance structures in excess of actual diversification of risk, particularly when internal models are used. - Recommendation: Central Bank should analyze unusual reinsurance transactions where material to ascertain whether sufficient risk has been mitigated or transferred to justify the capital benefits gained. ### Stress testing and systemic risk monitoring - Central Bank stress test framework needs further development. - Central Bank participates in EIOPA stress tests and has introduced a stress test for companies that write VA business. - Irish results of the EIOPA 2014 stress test confirmed strong resilience to interest shocks of the life business. - The VA stress test has been useful to assess hedging, liquidity and operational risks specific to that business. - EIOPA-determined stresses leave important gaps on risks affecting the diverse Irish insurance sector. - Firms are required to submit an annual ORSA that includes stress and sensitivity testing of firm-specific risks. - Recommendation: enhance forward-looking supervision and systemic risk monitoring by introducing Irish risk-specific stress tests (similar to the VA stress test) for remaining sectors: nonlife and life, domestic and cross-border, reinsurance and health. - Recommendation: take advantage of increased granularity and frequency of assets reporting under Solvency II to develop a tool to closely and timely track possible deterioration in the credit quality of insurers’ investments. - Recommendation: as part of adapting PRISM to Solvency II, ensure Key Reporting Indicators (KRI) allow for comprehensive early warning indications of possible changes in the SCR; further enhance PRISM conduct risk. ### Governance, supervision scope, and other supervisory priorities - Given that under Solvency II reserves are calculated using best estimates, continue close monitoring of claims reserves sufficiency, including random actuarial recalculations and onsite inspections. - Onsite inspection of “low impact” firms should follow a sampling approach rather than focusing very heavily on captives with third party interests; supervision of captives should be complemented with assessment of financial soundness of their owner group. - Special attention recommended to any single captive management company that manages a significant number of captives. - Central Bank, working with EIOPA, should enhance coordination among Member State supervisors to avoid establishment of companies within the EU whose license or application has been declined, revoked or withdrawn in another member state before extensive due diligence is carried out. - Consideration should be given to increase the role of the Central Bank in the winding-up of insurers (for instance by providing powers to appoint an external administrator directly). Authorities should also consider expanding the role of the Central Bank with regard to the Insurance Compensation Fund, consider the most appropriate administrator and consider expanding the coverage to include the life sector. ### Consolidated list of recommendations (as presented in Table 1) - The authorities are recommended to develop a strategy that allows the Central Bank to attract and retain experienced supervisors under the current economic constrains. — Central Bank and Government — I - The authorities are recommended to formalize the framework to monitor the continued suitability of internal models and the approval of model changes, having due regard to the required resources and funding. — Central Bank — NT - Since PRISM is an absolute rating system rather than a relative risk rating system, there might be occasions when more firms need to be elevated to a higher risk category. To ensure that supervisors have an incentive to elevate risk ratings where necessary, the authorities are recommended to maintain a flexible resources scheme to accommodate for unforeseen need for additional supervisory work. — Central Bank — I - Taking advantage of the ORSAs to gain insights into the risks that are present in the market, the authorities should develop market-wide stress testing to monitor systemic risk, support the thematic work and take preventive actions both at firm level and market wide. — Central Bank — NT - Given that Solvency II does not capture all possible risks affecting the firms, the authorities are recommended to continue monitoring and if necessary take persuasive actions to ensure firms use the ORSA framework appropriately. — Central Bank — NT - The authorities are recommended to take advantage of the increased level of granularity and frequency of assets reporting under Solvency II to develop a tool to closely and timely track possible deterioration in the credit quality of insurers’ investments. — Central Bank — NT - As part of the adaptation of the PRISM to the supervision under Solvency II, the Central Bank should ensure the Key Reporting Indicators (KRI) allow for comprehensive early warning indications of possible changes in the SCR. The Central Bank is recommended to further enhance PRISM conduct risk. — Central Bank — NT - Given that under Solvency II reserves are calculated using best estimates, it is recommended to continue a close monitoring of claims reserves sufficiency, including random actuarial recalculations and onsite inspections. — Central Bank — I - The onsite inspection of “low impact” firms is recommended to follow a sampling approach rather than focusing very heavily on captives with third party interests. The supervision of those captives should be complemented with the assessment of the financial soundness of their owner group. Special attention should be paid to any single captive management company that manages a significant number of captives. — Central Bank — I - The Central Bank working together with EIOPA should enhance the coordination among supervisors of Member States to avoid the establishment of companies within the EU whose license or application has been declined, revoked or withdrawn in another member state before extensive due diligence is carried out. — Central Bank and EIOPA — NT - To avoid regulatory arbitrage, the authorities are recommended to analyze unusual reinsurance transactions where material, to see if sufficient risk has been mitigated or transferred to justify the capital benefits gained. — Central Bank — NT - The authorities working alongside other supervisors are recommended to maintain the same level of reserving and liquidity requirements independently of the ultimate domicile of the VA business. — Central Bank and relevant supervisors — NT - Consideration should be given to increase the role of the Central Bank in the winding-up of insurers, for instance by providing the Central Bank with powers to appoint an external administrator directly. The authorities should also consider expanding the role of the Central Bank with regard to the Insurance Compensation Fund, consider the most appropriate administrator and consider expanding the coverage to include the life sector. — Government — NT - In its host supervisory role, the Central Bank is recommended to closely follow the FSB/IAIS framework on G-SIIs and introduce the necessary tools to supervise firms exposed to VA business. — Central Bank — I (Note: “I-Immediate” is within six months; “NT-near-term” denotes up to 2 years; “MT-medium-term” denotes 2–5 years.) *International Monetary Fund — EXECUTIVE SUMMARY (Ireland financial sector surveillance).* ### INTRODUCTION ### INTRODUCTION ### Scope and context - This technical note (TN) covers the insurance sector supervised and regulated by the Central Bank of Ireland (Central Bank) in Ireland. - The analysis was carried out as part of the 2016 Financial Sector Assessment Program (FSAP) of Ireland, and was based on the regulatory framework in place, the supervisory practices employed, and other conditions, as they existed in March 2016. - The work was carried out by Dr. Rodolfo Wehrhahn, IMF consultant. - The TN is not a full assessment on the observance of International Association of Insurance Supervisors (IAIS) insurance core principles (ICPs); the focus was determined by the findings of the last ROSC carried out in 2015, particularly principles rated as partly observed and aspects relevant to Ireland as an important domicile for international insurers. - The TN focuses on: - Elements related to the rating of the IAIS principles as assessed in the ROSC 2014/2015. - Action taken to implement IMF recommendations on all ICPs. - An assessment of the resilience of the sector based on a risk assessment of the sector including the results of any current existing stress test results. ### Acknowledgements - The assessor thanks the Central Bank, trade associations, professional bodies, market participants, and experts for extensive material received in advance of the mission and for open discussions. ### Status of implementation of the IMF 2015 ROSC recommendations - A full assessment of the IAIS principles was carried out during the 2014/15 ROSC. A total of 46 recommendations were issued as part of the DAR across 20 of the 26 ICPs. - To improve supervision and respond to the assessment, in total, 51 Supervision Review Process (SRP) guidance papers have been prepared, setting out the Central Bank’s internal supervisory processes and procedures under Solvency II with reference to the Technical Standards, Guidelines and the PRISM framework. - Forty-seven of these were complete as of December 31, 2015. - The remaining four papers related to Group Supervision and Annual Reporting will be finalized in Q1 and Q2 2016. ### A. Observed Principles without Recommendations - ICPs assessed as fully observed under the IMF 2015 DAR have maintained their observance status; relevant regulations and supervisory practices remained unchanged. - ICP 3 Information Exchange and Confidentiality Requirements. - ICP 4 Licensing. - ICP 6 Changes in Control and Portfolio Transfers. - ICP 12 Winding-up and Exit from the Market. - ICP 18 Intermediaries. - ICP 21 Countering Fraud in Insurance. - Recommendations to improve policyholder protection despite full observance of ICP 12: - Consider increasing the role of the Central Bank in the winding-up of insurers, for instance by providing the Central Bank with powers to appoint external administration under specific circumstances, to allow for immediate action. - The Insurance Compensation Fund (ICF) would benefit from an insurance specific administration and extending the coverage to life insurance: - The ICF covers nonlife policyholders in relation to Irish risks in the event that an Irish or EU nonlife insurer goes into liquidation and is under the administration of the High Courts. - Authorities should consider expanding the role of the Central Bank beyond performing an annual assessment of the financial position of ICF and determining an appropriate contribution to be paid by nonlife insurers, to allow subject-matter expert administration. - The inclusion of life insurance policyholders under the scheme should be evaluated. - The interaction and responsibilities of the ICF and the Motor Insurance Bureau of Ireland (MIBI) in case of winding-up of insurers underwriting motor insurance need to be clarified.2 ### B. Observed Principles with Recommendations ICP 1 Supervisory Objectives - Findings: - The Central Bank Act 1942, as amended by, inter alia, the Central Bank Reform Act 2010 (CBRA), provides clear power and mandate to Central Bank as the primary regulator of the insurance industry in Ireland. - The passage of the Central Bank (Supervision and Enforcement) Act 2013 (CBSEA) enhanced supervisory and enforcement authority, including the power to issue regulations in specified areas. - For contraventions after the commencement of the CBSEA, the Central Bank may impose a monetary penalty upon a body corporate or an unincorporated body of the greater of €10,000,000 or an amount equal to 10 percent of the turnover of the body for its last complete financial year before a finding is made and a monetary penalty of €1,000,000 upon a natural person. - Central Bank opines that the current supervisory objectives apply similarly to group supervision. - Recommendation: - Consider establishing explicit objectives for the supervision of insurance groups in the primary legislation. - Action taken: - While group supervision is not explicitly specified as an objective in primary legislation, current regulation (including regulations 248 and 249, and Part 17 of the EU (Insurance and Reinsurance) Regulations 2015, S.I. 485) prescribes responsibilities and functions of the Central Bank where it is the group supervisor. - The 2015 Regulations specify the main objective of insurance supervision as the protection of policyholders and beneficiaries, taking into account the impact on financial stability in the EU, and require proportionate application of requirements. ICP 8 Risk Management and Internal Controls - Findings: - The Fitness and Probity (F&P) regime does not cover the risk management, compliance, actuarial and internal audit functions at the group level, particularly for an insurance group headed by a non-regulated company. - Recommendations: - Establish clear supervisory expectations of Pre-approved Control Functions (PCFs) at the group level. - Clarify expectations for the actuarial function, taking into account the changing nature of the actuarial function (i.e. Appointed Actuary, Signing Actuary, Chief Actuary, SOLVENCY II actuarial function, etc.). - Action taken: - Solvency II implementation: Regulations 261 and 262 reflect requirements of Article 257 of the Solvency II Directive and apply to “persons who effectively run” the insurance holding company or mixed financial holding company; holding companies must ensure such persons are fit and proper and have regard to the Central Bank’s F&P Standards. - The Central Bank developed the ‘Domestic Actuarial Regime and Related Governance Requirements Under Solvency II’ (the Requirements), imposed as a Condition of Authorization for all (re)insurance entities under the 2015 Regulations, clearly setting out expectations for the Actuarial Function under Solvency II. ICP 11 Enforcement - Findings: - Central Bank enforcement options include action under the F&P regime; administrative sanctions procedure (ASP); referrals to other enforcement agencies; and summary criminal prosecutions. - Central Bank policy is to pursue prescribed contraventions pursuant to the ASP in preference to bringing a summary prosecution. - Recommendation: - Regularly review the adequacy of enforcement resources to support a strategy of credible threat of enforcement. - Action taken: - The Enforcement Division regularly reviews resource adequacy and procures temporary additional staff when needed. - Enforcement’s approved headcount for 2015 was 52 staff members. - Following a successful bid for resources, approved headcount will be increased in 2016 to 72 staff members. - Currently, Enforcement’s complement is 58 staff members. ICP 24 Macroprudential Surveillance and Insurance Supervision - Findings: - It was not self-evident that all sources of risk information available to the Central Bank fed into an integrated Central Bank ERM process from which risk strategies could be decided and activated at overall Central Bank level as well as prudential and market conduct supervision strategies. - Recommendation: - Better integrate internal ERM processes to improve focus on emerging prudential and market conduct issues, better manage Central Bank risks and improve Central Bank planning. - Action taken and additional recommendation: - Central Bank analyses plausible adverse macroeconomic conditions and how they could affect different financial sectors, including insurance; findings are used to enhance supervision and systemic risk monitoring and are published on a biannual Macro-Financial Review. - The ISD has established an Advisory, Analytics and Actuarial Division consisting of three teams: Supervisory Strategy & Projects, Prudential Analytics, and Actuarial Services. - Supervisory Strategy team defines and shapes the supervisory agenda and coordinates with supervisory, onsite, analytics, actuarial, and Policy divisions. - Prudential Analytics team is a multi-disciplinary team (covering insurance, IT and analytical capabilities) to automate/accelerate analysis of regulatory returns, produce detailed pricing/reserving reviews on a routine basis and produce market reports on areas with large Central Bank risk exposures. - The 2016 planning process is based on a new Supervisory Engagement model designed as part of the Central Bank’s Solvency II Program, incorporating all existing sources of information and an “Environment” risk category to determine firm-specific actions. - The Central Bank is recommended to further develop macroprudential supervision by introducing regular market-wide stress testing and using macroeconomic analysis to define extreme but plausible stress scenarios in addition to EIOPA’s stress testing. ICP 25 Supervisory Cooperation and Coordination - Findings: - The Central Bank has taken steps to put in place coordination arrangements involving supervisors on cross-border issues on a legal entity and group-wide basis, and has implemented written internal procedures for information sharing and crisis management. - Recommendation: - Develop and implement a group supervisory framework that identifies roles and interactions at the group level and agree coordination agreements with members of colleges led by Central Bank. - Action taken: - A group supervisory framework and agreed coordination agreements have been developed under Solvency II. - New recommendation: The Central Bank, working together with EIOPA, should continue to enhance coordination among supervisors of Member States to avoid supervisory arbitrage and the establishment of companies within the EU when the license or application has been declined, revoked or withdrawn in another member state before extensive due diligence is carried out. ### C. Largely Observed Principles ICP 5 Suitability of Persons - Findings: - Significant Owners are not explicitly covered by the Central Bank domestic F&P regime. Central Bank requires Significant Owners to provide information on financial soundness and probity as part of authorization or acquisition/change in qualifying shareholding, but no requirement exists on ongoing suitability of Significant Owners. - Recommendation to achieve full observance: - Extend the F&P regime to include Significant Owners; establish clear requirements for (re)insurers to notify Central Bank of any circumstances that may materially adversely affect the suitability of persons appointed to PCF and Significant Owners. - Action taken: - With Solvency II now in force, Solvency II F&P requirements include Significant Owners. - The Central Bank domestic F&P regime, which goes beyond Solvency II requirements, has not been extended to cover Significant Owners. - Article 42 of the Solvency II Directive requires (re)insurers ensure that persons who effectively run the undertaking or are responsible for other key functions are fit and proper and to notify supervisory authority of replacements. - Section 21 of the 2010 Central Bank Reform Act requires regulated financial service providers not to permit a person to perform a controlled function unless satisfied they meet standards of fitness and probity; providers must investigate concerns and notify the Central Bank without delay. - Pursuant to Regulation 18(3) of the 2015 Regulations (effective January 1, 2016), the Central Bank requires (re)insurers to provide information necessary to monitor on a continuous basis whether a person who has close links (e.g., a Significant Owner) would prevent effective exercise of supervisory functions. - Regulation 72 of the 2015 Regulations requires (re)insurers to notify the Central Bank, at least annually, of the names of Significant Owners. - Regulation 73 of the 2015 Regulations provides that the Central Bank may, where it believes that control exercised by a Significant Owner is inconsistent with prudent and sound management, apply to the High Court for an order directing disposal of the shareholding. *Source: _cr16311 - INTRODUCTION* ### 27. The IMF findings that lead to the largely observed status of ICP 7 state: ### 27. The IMF findings that lead to the largely observed status of ICP 7 state: ### ICP 7 — Corporate Governance (findings) - With respect to insurance groups, the specificity of outcome on corporate governance (CG) expected at the group level is unclear. For example, while the CG Code is directed at insurers, there is fairly general language with respect to groups (e.g., Section 6.3 of the Code states––“All institutions shall have robust governance arrangements ... both on a solo basis and at group level”). In addition, PRISM itself lacks clarity of supervisory outcome expected at the group level. Despite this lack of clarity, actual Central Bank supervisory practice, especially for Irish based cross-border groups, does include some assessment of CG at the group level for some groups. - The Central Bank’s CG framework regulation is not as explicit as ICP 7.4 in stating the responsibility of individual directors to act in the best interests of both the insurer and policyholders. - Despite the presence in Ireland of approximately EUR 6.3 billion of with-profits funds, PRISM and Central Bank generally assume no role in the assessment of customer fairness for these customers. ### ICP 7 — Recommendations to achieve full observance - It is recommended that the Central Bank secures the necessary powers to supervise corporate governance at the group level, even for non-regulated companies. - It is recommended that the Central Bank enhances the Corporate Governance (CG) framework regulation in accordance with ICP 7.4 (Duties of individual Board members) to further explicitly state the responsibility of individual directors to act in the best interests of both the insurer and policyholders. - It is recommended that the Central Bank defines its role in the assessment of the fair treatment of with-profits customers. ### ICP 7 — Action taken - Action has been taken mainly on the second bullet recommendation. EIOPA, working together with the NCAs of the Member States, including the Central Bank, should enhance the Solvency II Directive to provide for additional powers for the supervision of corporate governance at group level to cover holding companies that are outside the EU. - With the transposition of the Solvency II Directive, additional powers for the supervision of corporate governance at group level have been secured. However, the Central Bank will have the necessary powers to supervise corporate governance at the group level encompassing unregulated holding companies, in instances where a group supervised by the Central Bank is headed by an insurance holding company or a mixed financial holding company only if based in Ireland. In case of the parent insurance holding company or a mixed financial holding company based in another Member State, the Central Bank will liaise with the supervisory authority of that Member State in order for that authority to take the necessary actions addressing any findings related to that holding company. Also, while the Corporate Governance Code applies to all regulated (re)insurance undertakings based in Ireland, which belong to a group supervised by the Central Bank, it does not apply to unregulated holding companies. - Solvency II further provides that the board of directors is ultimately responsible for an insurer’s compliance with the requirements, to include policyholders’ protection. While this is a collective responsibility, whenever an individual member of the board has led an insurer to contravene these requirements, the Central Bank may pursue that member through the administrative sanctions procedure. - A review of how to supervise enterprise-wide conduct risk is planned for 2016 which may include the treatment of with-profit policyholders. ### ICP 10 — Preventive and Corrective Measures (findings) - There is no explicit provision and related penalties for unauthorized insurance activities. Central Bank considers that unauthorized insurance activities constitute a general offence under the Insurance Regulations, which is subject to summary legal action in the District Court. However, the maximum penalty under such an action is too low to serve as an effective deterrent. Central Bank has investigated several suspected cases but considered that none merited enforcement actions. ### ICP 10 — Recommendation - It is recommended that the Central Bank seeks legislative amendments to enhance the sanctions available for unauthorized insurance activities. ### ICP 10 — Action taken - The legislation transposing the Solvency II Directive (Directive 2009/138/EC) (the 2015 Regulations) has enhanced the sanctions applicable to unauthorized insurance activities. Regulation 12 of the 2015 Regulations provides a specific prohibition against a person carrying on insurance or reinsurance business or claiming themselves to be or representing themselves as an insurer or reinsurer, unless the person holds the appropriate authorization. Contravention of this provision is an offence attracting penalties, on summary conviction, of a fine up to EUR 5,000 and/or imprisonment for up to 12 months and, on conviction on indictment, to a fine of up to EUR 500,000 and/or imprisonment for up to 3 years. ### ICP 13 — Reinsurance (findings) - Central Bank uses the authorization conditions to impose the Reinsurance Guidelines. Currently, (re)insurers “shall adopt all of the obligations of the CG Code for Captive Insurance and Reinsurance Undertakings.” On the other hand, for other Guidelines, the conditions of authorization less clearly state that a (re)insurer’s “compliance strategy will make provision for adherence to, in addition to all primary and secondary legislation, any and all guidance issued by the Central Bank and its predecessors to date and any future guidance issued by the Central Bank.” - The Reinsurance Guidelines do not explicitly address liquidity implications arising from reinsurance arrangements and the need for binding documentation in a timely manner. - Central Bank’s assessment of insurers’ reinsurance strategy is limited to those rated Medium Low and above. ### ICP 13 — Recommendations to achieve full observance - Establish enforceable regulatory requirements for reinsurance (whether in rules, regulations, etc.). In addition, the wording used in the conditions of authorization with respect to Guidelines should be aligned so that the intent is clear for all Guidelines. - Establish clear regulatory requirements on: cedants to control their liquidity positions to take into account the structure of their risk transfer contracts and the likely payment patterns arising from them; and the need for timely documentation of reinsurance contracts at time of inception. - Formulate proportionate (not just reactive) risk-based supervision over Low impact (re)insurers regarding their use of reinsurance due to its importance as a tool in managing risk exposures. - Establish clear regulatory requirements for reinsurance at the group level. ### ICP 13 — Action taken - With the implementation of Solvency II and the delegated regulation, enforceable regulatory requirements for reinsurance have been established. The Commission Delegated Regulation (EU) 2015/35 (the Delegated Regulation) supplements the Solvency II Directive and contains detailed requirements in Section 10 in relation to risk mitigation techniques. The Delegated Regulation is directly applicable in Ireland, i.e. it is a binding requirement on (re)insurers without further implementation, and has been designated as a “designated enactment” meaning that the Central Bank may make use of its supervisory powers to ensure compliance and, where necessary, sanction non-compliance. - The following requirements in the Delegated Regulation apply to risk mitigation techniques: - Article 208 outlines the applicable methods and assumptions; - Article 209 outlines the qualitative criteria (including that the contractual arrangements and transfer of risk are legally effective and enforceable in all relevant jurisdictions); - Article 210 outlines the effectiveness of risk transfer requirements (and includes the issue of basis risk); - Article 211 outlines the requirements in relation to reinsurance and SPV contracts which mitigate risk; - Article 212 outlines the requirements in relation to financial risk mitigation techniques; - Article 213 outlines the requirements in relation to the status of counter-parties; - Article 214 outlines the requirements in relation to collateral arrangements; and - Article 215 outlines the requirements in relation to guarantees. - Liquidity management is required to be addressed in a firm’s risk management framework under Solvency II; this includes liquidity risk issues relating to risk mitigation techniques employed by a firm. - Article 209 of the Delegated Regulation specifically deals with documentation and the legal enforceability of any risk mitigating contracts is one of the qualifying criteria for credit for such techniques in the solvency and technical provision calculations under Solvency II. - The risk mitigation technique requirements under Solvency II apply to all firms irrespective of their impact status. - The risk mitigation technique requirements under Solvency II apply irrespective of whether such techniques are provided by Group entities or external parties. ### ICP 14 — Valuation (findings) - The current nonlife reserving method requires provisioning for both a current estimate and a margin over current estimate (MOCE). However, the nonlife requirements permit broad means of determining the MOCE, on the advice of the Signing Actuary, but subject to management judgment. This approach differs from the approach used for life insurance valuation and also from the specificities detailed in the guidance to ICP 14.9. - While each of the methods for valuing the component parts of the balance sheet for solvency purposes can be described as economic, the overall effect of the methods does not enhance a consistent economic view of the solvency position of the insurer. This is expected to be rectified as IFRS for insurers (IFRS 4) and financial investments (IFRS 9) further develops more market based valuation methods for both liabilities and assets, as well as the advent of SOLVENCY II. ### ICP 14 — Recommendation - The current shortcomings in the valuation of TPs are expected to be addressed by SOLVENCY II as of January 1, 2016. ### ICP 14 — Action taken - Solvency II, as transposed into Irish law by the 2015 Regulations, addresses each of the points raised in the IMF findings: - Regulation 82(1)(a) requires all assets to be valued at market value; - Regulation 84 requires TPs to consist of a best estimate and a risk margin. The best estimate corresponds to the current estimate from ICP 14. The risk margin is the cost of holding the capital required for un-hedgeable risks over the lifetime of the portfolio, which is one of the methods specified in the guidance to ICP 14.9 as acceptable for the MOCE. - Regulation 84 (8) requires that assets and liabilities are valued using similar methodologies and allows liabilities which can be hedged by freely available assets, to be valued at the market value. This provides a consistent approach to assets and liabilities and provides a consistent economic view of the solvency position. ### ICP 15 — Investments (findings) - Guidelines are not legally enforceable (they are intended to guide and not to compel). Central Bank uses its conditions of authorization to compel (re)insurers to adopt Central Bank Guidelines. However, even if the authorization conditions are used in this way, they may be subject to legal challenge. The wording used in Central Bank’s conditions of authorization with respect to Central Bank Guidelines is not the same for all types of Guidelines (e.g., CG versus others such as the Asset Management Guidelines). - Certain areas of the Asset Management Guidelines do not provide sufficient direction as intended by ICP 15, e.g., standard 15.3 with regards to asset security and diversification; standard 15.4 with regards to cash flow matching; and standard 15.6 with regards to the general issue of more complex and less transparent classes of assets (i.e. beyond derivatives to other types of complex assets). - There are no explicit requirements regarding investments at the group level. ### ICP 15 — Recommendation - It is recommended that Central Bank develops and implements explicit investment requirements both at the insurer and group level. ### ICP 15 — Action taken - Investment requirements, otherwise known as the prudent person principle, are set out in the 2015 Regulations and the Commission Delegated Regulation (EU) 2015/35. In addition, a SRP on the review of the prudent person principle has been developed for Central Bank supervisors. These Regulations replace the Central Bank Guidelines and hence are fully enforceable. - Regulation 141 of the 2015 Regulations requires (re)insurers to invest all of their assets in accordance with the prudent person principle. To comply with the prudent person principle, (re)insurers must address all the flaws indicated in the IMF findings. - Further, the investment rules of the 2015 Regulations and Commission Delegated Regulation (EU) 2015/35 apply at the level of the group. ### ICP 16 — Enterprise Risk Management for Solvency Purposes (findings) - ERM requirements are not yet defined at the group level. - Standard 16.4 is only partly observed due to the complexity involved with fully exploring the relationships mentioned in this standard. In addition, this standard makes reference to risk tolerance limits. These limits are not covered by the 2013 CG but are briefly mentioned in Guideline 13 of the SOLVENCY II CG Guidelines. ### ICP 16 — Recommendations - It is recommended that the Central Bank establishes ERM requirements at the group level. - It is recommended that Central Bank enhances the CG Code as necessary to reflect the new developments of the SOLVENCY II Governance Guidelines as well as introduces the need for risk tolerance limits. ### ICP 16 — Action taken - The 2015 Regulations establish, via regulations 44–51, ERM requirements which apply to insurance and reinsurance undertakings individually and, pursuant to Regulation 247, at the level of the group. These requirements include: governance, fit and proper, risk management, own-risk and solvency assessment, internal control and internal audit. The EIOPA ”Guidelines on the System of Governance” provide further detail on exactly how these areas should be covered, with all guidelines again applying mutatis mutandis to groups. In addition, these guidelines specify a number of group-specific requirements that include: Risks arising from intra-group transactions and risk concentrations, including contagion risk; Interdependencies between risks stemming from conducting business through different entities and in different jurisdictions; Risks arising from third country, non-regulated, and ‘other regulated’ entities. - The 2015 Regulations, which transpose the Solvency II Directive (Directive 2009/138/EC), include at Regulations 44–51, ERM requirements which apply to insurance and reinsurance undertakings individually and, pursuant to Regulation 247) at group level. - The requirement that (re)insurance undertakings implement risk tolerance limits is implemented via Solvency II. In 2016 further consideration will be given to update the Corporate Governance Requirements in light of the introduction of Solvency II. - Risk tolerance limits have been introduced by Solvency II, though these are not reflected in the CG code. ### ICP 19 — Conduct of Business (findings) - The CoB regime established under the CP Code, MC Code and the Insurance Regulations is comprehensive. However, there are no explicit requirements relating to group-wide market conduct or product development and communication of claims procedures. ### ICP 19 — Recommendations to achieve full observance - It is recommended that Central Bank establishes clear requirements for: - group-wide market conduct; - insurers to take into account the interests of different types of customers in developing and marketing insurance products; - insurers and intermediaries with respect to replacement of policies; and - insurers to inform claimants about the claim procedures; - In addition, there is scope for fine-tuning the CoB regulatory returns e.g. persistency rates of insurers and to provide guidance to insurers and intermediaries on their obligations under the Data Protection Act. ### ICP 19 — Action taken and planned work - Action has been taken on the third and sixth bullet recommendations. Work to assess the need to implement the remaining recommendations and ensure they are planned or have started: - The group-wide market conduct will be covered as part of ICP 23 ongoing enhancements. - The proposed Insurance Distribution Directive (expected to be implemented late 2017/early 2018) will include requirements on product oversight and governance. The European Commission is expected to have powers to adopt delegated regulations in this area. - In May 2015 the Central Bank reported on the Central Bank review of the sale of pensions by intermediaries to consumers who already held a pension policy (i.e. where a policy replaced an existing policy). The review identified issues. As a result of this review, the Central Bank highlighted practices that it considers to be unacceptable and practices it deemed appropriate. The Central Bank expects all firms to review their processes and procedures in light of the published findings from this review. - General Principle 2.6 of the Consumer Protection Code requires firms to make full disclosure of all relevant material information in a way that intends to inform the consumer. In 2016/2017 the Central Bank will be conducting inspections on the claims process and will include the area of communication on how to make a claim part of the inspection. Following these inspections, the Central Bank will establish if the current requirements need strengthening. - Commencing in H2 2016, the Central Bank plans to conduct a series of conduct risk assessments on insurers. As part of this, the Central Bank would review how firms monitor persistency in terms of conduct risk. Depending on these findings, the implementation of the recommendation will be assessed. - The Data Protection Commissioner (who has statutory responsibility for data protection issues) issued guidance in the form of a Code of Practice to the insurance industry in 2013. These guidelines were designed to give operational meaning to the principles of data protection set out in European and Irish domestic law. - While PRISM has been updated to better reflect the Solvency II framework, it remains a prudential-focused rating system. As a next enhancement for PRISM, the Central Bank is recommended to further enhance PRISM conduct risk. _Compiled from the IMF assessment text in the supplied content unit._ ### 48. The IMF findings that lead to the largely observed status of ICP 22 state: Enforceable ### 48. The IMF findings that lead to the largely observed status of ICP 22 state: Enforceable ### Findings on AML/CFT enforceable rules - Rules on AML/CFT have not been approved/issued. - Scope for reviewing the AML/CFT inspection cycle, particularly with respect retail intermediaries with Low impact under PRISM. - Central Bank has implemented a risk based approach to supervising firms for AML/CFT compliance in line with the Financial Action Task Force (FATF) Recommendations issued in February 2012. - As part of the Central Bank Risk Assessment (CBRA), the inherent risk of ML/TF in the insurance sector has been assessed as Medium Low. - Consideration given to ML/TF risk in the nonlife insurance sector concluded there was no need to request the Department of Justice to extend the AML/CFT regime to nonlife insurers. ### Recommendations to achieve full observance - Empower Central Bank to issue enforceable rules on AML/CFT obligations consistent with the FATF Recommendations and establish guidelines to facilitate compliance by insurers/intermediaries. - Review the AML/CFT inspection approach for retail intermediaries. - Periodically analyze the Money Laundering/Terrorist Financing ML/TF risks of the nonlife insurance sector and reconsider whether the AML/CFT regime should apply to the nonlife sector. ### Implementation status - Only the first recommendation has been determined as necessary. - Issue of statutory guidelines raised with the Department of Finance in April 2014 and November 2015. - Department of Finance and the Department of Justice and Equality are considering enforceable rules in the context of current legislation and legislation required to transpose the EU’s fourth anti-money laundering directive. *Source: IMF assessment text.* ### ICP 26 Cross-border Cooperation and Coordination on Crisis Management ### Findings on cross-border crisis preparedness - Scope for further development: - Development within the Central Bank of its own plans and protocols for dealing with an insurer cross-border crisis. - Development within the Central Bank of a mock scenario of an insurer in difficulty to test resilience of plans and protocols. - Request that the top cross-border insurers complete their own detailed study of their firm and group crisis management and recovery plans. ### Recommendations to achieve full observance - Central Bank should establish clear requirements for High/Ultra-High insurers/groups to maintain and test contingency plans and procedures for use in going- and gone-concern situations. - Central Bank should regularly review practical barriers to efficient and internationally coordinated resolutions and collaborate with relevant supervisors to resolve these issues. ### Implementation status and Solvency II linkages - Action ongoing as part of Solvency II requirements. - Under Solvency II system of governance requirements, all undertakings and groups must take reasonable steps to ensure continuity and regularity in performance of activities, including contingency plans. - One duty of the Central Bank as group supervisor is coordination of gathering and dissemination of relevant information for going concern and emergency situations, and planning/coordination through regular meetings (held at least annually) or other appropriate means (refer to Regulation 249(1) of the 2015 Regulations). - Central Bank developed revised processes, SRPs, including SRPs on Group Supervision. - SRP for Group Supervision Systems of Governance includes requirement supervisors check undertakings have effective business continuity plans in appropriate functions and that these are periodically tested. *Source: IMF assessment text.* ### D. The Partly Observed Principles ### ICP 2 The Supervisor — Independence Findings - No evidence of political and commercial interference over Central Bank’s operational autonomy. - Legal framework for Central Bank’s governance arrangements may introduce political considerations with implications for independence: - Minister appoints all non-executive Commissioners and sets remuneration and allowances of Commissioners. - Secretary General of Department of Finance is one of the Commissioners. - Governor may be requested to consult the Minister as regards performance of Central Bank’s functions (except ESCB functions). - CBA stipulates circumstances for removal of Commissioners, the Governor and Deputy Governor (Financial Regulation), including where “...in the Minister’s opinion it is necessary or desirable to do so to enable the Commission to function effectively.” - General ground for removal may be open to interpretation and there is no legal obligation to publicly disclose reasons for removal. - Commission needs consent of the Minister to appoint the deputy governors. Recommendations - Reconsider Department of Finance’s involvement in the Commission and the role of the Minister in approving the Deputy Governors. - Remove or provide more clarity on the general ground for removal of a Commissioner. - Establish a legal provision on public disclosure of the reasons of the removal of a Governor or Commissioners in the CBA. - Review the Minister’s statutory power relating to Central Bank’s regulatory functions, including extent of consultation for rule-making and approval for industry levy structure. Implementation status - Recommendations on independence have not been implemented but will be considered in any future review of the statutory basis of the Central Bank. - Main concerns remain in areas of independence and resources of the supervisor. *Source: IMF assessment text.* ### ICP 2 The Supervisor — Resources Findings - Central Bank’s supervisory resources have increased significantly since 2008. - Important challenge remains in attracting and retaining experienced supervisors of high caliber. Recommendation - Authorities should address significant challenges in attracting and retaining skilled, competent and experienced staff, including improving competitiveness of staff remuneration and exempting Central Bank from the FEMPI Act. Implementation status and metrics - Some action taken; remains an important challenge. - Central Bank restructuring to better supervise under Solvency II led to recruitment of over 30 positions. - Staff count remained relatively stable during 2015, with a lower level of attrition of 8.3 percent compared to 13.4 percent in 2014. - Further recruiting for 2016 is underway as part of division restructuring. - Increment in resources enabled additional activities: onsite inspections to low impact firms, intensive supervision of groups through colleges, expanded supervision of pillar two and three, compliance, internal model approval and continuous monitoring. - Attraction and retention of experienced staff has not been successful: only 4 percent of the staff has ten or more year’s supervisory experience. *Source: IMF assessment text.* ### ICP 2 The Supervisor — Data Protection Findings - Central Bank and employees legally obliged to safeguard confidential information. - Scope for enhancing data protection governance framework including staff training. Recommendation - Central Bank should implement measures to enhance data protection governance framework. Implementation status and actions (implemented) - Appointed a dedicated Data Protection Officer. - Revised the Data Protection Policy. - Implemented a new Data Security Breach Management policy. - Issued revised Data Protection Procedures. - Ensured Data Protection reports to the Operations Committee. - Commenced a data protection compliance assessment. - Enhanced Data Protection training for staff including re-launching of eLearning. - Provided all new starters with Data Protection advice in the New Starters information pack. - Over 70 percent of staff (100 percent for Insurance) completed the Data Protection eLearning module. *Source: IMF assessment text.* ### ICP 9 Supervisory Review and Reporting ### Findings on PRISM and reporting gaps - PRISM impact assessment is purely quantitative; no supervisory assessment of potential risks (e.g., due to governance lapses) from 126 Low rated insurers that could have prudential and consumer protection implications. - Qualitative assessment of risk probability is important for ongoing monitoring of Central Bank’s risk appetite; Low impact insurers should be encompassed proportionately rather than excluded. - Proportionate coverage of Low rated insurers via independent supervisory verification of returns (rather than complete carve out) would provide better assurance. - Central Bank has wide powers to obtain information from insurers, but no explicit requirements for insurers to report: - off-balance sheet exposures; - material outsourcing functions and activities; and - material changes or incidents that could affect their condition or customers. - Coverage of summary risk assessment of 74 insurers with Medium-Low impact ratings may take about 10 years to complete one cycle, although regular meetings are conducted on a cycle of seven meetings over an 18-month period. ### Recommendations to achieve full observance - Central Bank should review PRISM framework, particularly the one-size-fits-all reactive approach for Low impact insurers. - Update PRISM to incorporate appropriate risk-based supervision for insurance groups. - Strengthen regulatory reporting by establishing consistent and more comprehensive regulatory reporting by insurance groups. - Strengthen regulatory reporting by explicit requirements for reporting off-balance sheet exposures, material outsourcing functions and activities; and material changes or incidents that could affect their condition or customers. - Regularly review adequacy of supervisory resources to support a more proportionate supervisory program for insurers with a Medium-Low/Low impact rating and effective supervision of insurance groups (see ICP 2). ### Implementation status and planned changes - Action started and scheduled for completion during 2016. - Lack of evidence on implementation and use of new model at time of assessment prevented change in rating. - PRISM engagement model for (re)insurers adapted to supervision under Solvency II, including group supervision; reporting requirements enhanced under pillar three. - Low impact insurers now being supervised onsite, with strong focus on captives with third party interests. ### Further recommended improvements - Ensure current Key Reporting Indicators (KRI) allow for comprehensive early warning indications of possible changes in the Solvency Capital Requirement (SCR). - Onsite inspections of low impact firms should follow sampling approach rather than focusing very heavily on captives with third party interests; supervision of those captives should be complemented with assessment of financial soundness of their owner group. - Because PRISM is an absolute rating system, occasions may arise when more firms need elevation to a higher risk category; elevated attention will require additional resources. Central Bank recommended to maintain a flexible resources scheme to accommodate unplanned additional supervisory work. ### PRISM modifications under Solvency II (significant modifications) - Reclassification of risk categories. - Use of intensification matrix — addition of a ‘risk’ dimension to complement ‘impact’ as a driver of supervisory engagement level. - Enhanced engagement for low impact firms. - Enhanced model for Group firms. Details of modifications - PRISM risk categories (and subcategories) modified to reflect key risk areas under Solvency II. Supervisory engagement based on intensification matrix proportional to both Impact and Risk Profile. A dedicated Targeted Risk Assessment (TRA) will be completed for each firm at a risk subcategory level. Implementation scheduled for 2016. - Low impact insurers supervised under bespoke model on PRISM with increased supervision under Solvency II. Key components operated on PRISM: - annual supervisory engagement planning; - targeted reviews in the form of an onsite inspection on ten percent of the firms with a strong focus on captives with third party interests; - automated regulatory returns analysis; - continuous PRISM updating; - model approval as required; and - possible reviews by skilled persons to deal with complex issues. - Onsite inspections for low impact firms will cover end-to-end assessment focusing on quality of reporting, governance and quality of controls; and thematic reviews across firms. - Supervisory engagement for groups enhanced on PRISM consistent with Group Supervision Framework. Group Holding Company of all groups requiring supervisory action under Solvency II will be added to PRISM. These firms will have a risk assessment model and be assessed under six risk categories: Governance, Strategy/Business Model, Investments, Operational Risk, Environmental Risk, and Capital Risk. Group firms requiring enhanced or intensive supervision will be subject to TRA reviews. ### Reporting requirements under Solvency II - 2015 Regulations establish, via regulations 34, 44(5)–(8), 47, 52, 55, 56, 247, 255, 258 and 260, consistent and comprehensive regulatory reporting by insurance undertakings at group level: - Groups must submit ten quarterly and 42 comprehensive annual QRTs to their group supervisor. The technical standards upon which these QRTs are based are specific to groups. - Pursuant to Regulation 247, parent undertakings must submit a Group ORSA supervisory report to the Central Bank. This may be a ‘single group wide’ report covering the entire group and its subsidiaries, or a ‘Group ORSA’ in which risks pertaining to subsidiaries are taken into account via an ORSA at the subsidiary level rather than in the Group supervisory report. - The Group RSR must provide detailed information on group financials: how consolidated information has been prepared; terms and conditions of significant intra-group transactions; any significant risk concentration at group level; and Group Technical provisions. - The Group SFCR must provide information on material differences between scope of the group used for different reporting basis’ and on the Group own funds. SFCR must include a clear and concise summary highlighting any material changes to business and performance, system of governance, risk profile, valuation for solvency purposes and capital management over the reporting period. ### Preparatory phase engagement on reporting and ORSA - Central Bank specified that during preparatory phase, groups must submit one set of 20 annual QRTs with reference date of December 31 2014, and one set of quarterly QRTs with reference date of September 30, 2015. Templates set out in Technical Annexes of EIOPA Guidelines on Submission of Information to National Competent Authorities, with Central Bank guidelines elucidating specific requirements for pre-application internal model firms and firms with ring-fenced funds. - Central Bank’s approach to implementing ORSA integrated a forward looking assessment of own risks (FLAOR) based on ORSA principles: - Firms treated depending on PRISM impact categorization and, for group companies, groups having greater than EUR 12 billion in total assets (those “above the threshold”) are treated the same as Medium High/High undertakings for the FLAOR. - Groups below the threshold were treated as Low/Medium low undertakings for reporting purposes. - For all groups the Group-specific FLAOR requirements applied. *Source: IMF assessment text.* ### 70. The new reporting requirements require insurance and reinsurance undertakings to ### _cr16311 - 70. The new reporting requirements require insurance and reinsurance undertakings to ### Reporting requirements and SFCR disclosures - Insurance and reinsurance undertakings must submit annually the following templates that implement the bullet four recommendation: - S.03.01.01 – includes general information on off-balance sheet items; - S.03.02.01 – includes a list of off-balance sheet unlimited guarantees received; - S.03.03.01 – includes a list of off-balance sheet unlimited guarantees provided. - The SFCR must include: - a description of the outsourcing policy of the insurance or reinsurance undertaking; - that undertaking's outsourcing of any critical or important operational functions or activities; - the jurisdiction in which the service providers of such functions or activities are located (Art. 294(8) of Commission Delegated Regulation (EU) 2015/35). ### ICP 17 Capital Adequacy — Findings - IMF findings leading to "partly observed" status: - Lack of explicit regulatory framework references to the use of a total balance sheet approach; - Lack of sufficient regulatory criteria for the assessment of capital resources. ### ICP 17 Capital Adequacy — Recommendation and Actions - Pertinent recommendation to achieve full observance: - "It is recommended that, in preparation for SOLVENCY II (which will bring about a total balance sheet approach and a PCR), the Central Bank develops and implements any necessary capital adequacy support processes/tools that the Central Bank will need to put in place in readiness for SOLVENCY II. These may include expectations for regular insurer stress testing, capital target setting, definition of capital resources, etc." - Action taken: - Implementation of Solvency II has been completed. - Under the new regime, a total balance sheet approach for solvency calculations is required and the determination of the capital is clearly defined. - The Solvency II Directive has been transposed into National law and the necessary supervisory tools that include ORSAs, extensive reporting templates and the processes for internal models approvals are in place. - Ongoing recommendation: - The Central Bank is recommended to continue monitoring and, if necessary, take persuasive actions to ensure firms use the ORSA framework properly. - Complementing first pillar risk assessment under Solvency II, risks not well captured under the first pillar—such as ultimate losses beyond the one-year Solvency II horizon, liquidity risks, and diversification benefits—should be reflected in the second pillar. The correct use of the ORSA framework is relevant in this context. ### ICP 20 Public Disclosure — Findings - IMF findings leading to "partly observed" status: - There are no explicit public disclosure requirements, although (re)insurers have to make disclosures in accordance with IFRS or Irish GAAP. - IFRS disclosures are not fully aligned with the requirements of the standards of this ICP. ### ICP 20 Public Disclosure — Recommendation and Actions - Pertinent recommendation: - "To improve its assessment against this ICP, the Central Bank should engage with its insurers and their audit firms on possible changes in disclosure, which could be undertaken individually by insurers, collectively as an industry in Ireland and/or through Central Bank requirements which would result in more meaningful and useful public disclosures by insurers." - Action taken: - Introduction of Solvency II requires insurance and reinsurance undertakings, and groups subject to group supervision, to disclose publicly and submit to the Central Bank, on an annual basis, a Solvency and Financial Condition Report (SFCR) (Regulations 52 and 258 of the 2015 Regulations). - The SFCR must follow the structure set out in the Commission Delegated Regulation (EU) 2015/35 and disclose the information referred to in Articles 292 to 298 of that Regulation. - The SFCR must contain narrative information in quantitative and qualitative form supplemented, where appropriate, with quantitative templates (Article 290 and 359 of Commission Delegated Regulation (EU) 2015/35). - The disclosure requirements under Solvency II implemented by Delegated Regulation comply with the ICP requirements. ### ICP 23 Group-wide Supervision — Findings - IMF findings leading to "partly observed" status: - The Central Bank’s approach to supervising groups is in line with supplementary supervision under EU Directives, but in practice there are gaps: - Gaps in the identification of groups; - Gaps in the extension of legal entity requirements at the group level including group solvency assessment; - Lack of an effective group supervision framework. - Key weaknesses of the Central Bank’s group supervisory framework: - Limited references within PRISM to the supervisory outcomes expected at the group level; - Lack of market conduct supervision at the group level; - Limited focus of PRISM on Medium high (or below) rated groups; - Inconsistent supervision of non-regulated heads (holding companies) of insurance groups. ### ICP 23 Group-wide Supervision — Recommendation and Implementation - Pertinent recommendation: - "It is recommended that the Central Bank develops and implements a group supervisory framework." - Implementation progress and components (significant progress scheduled to be completed during 2016): - Enhancements to legal powers available to the Central Bank via transposition of the Solvency II Directive into Irish law (2015 Regulations), including the power to supervise unregulated holding companies. - Development of a Group Supervision Framework as part of Solvency II, defining types of groups supervised and their classification; scope includes all insurance groups based in Ireland (as defined under Regulation 216 of the 2015 Regulations) where the Central Bank will be group supervisor (as defined in Regulation 248). Further work to refine operating processes and procedures was scheduled for 2016. - Development of Supervisory Review Processes (SRPs) in respect of group supervision: - Group Supervision Framework SRP: pre-conditions for Group Supervision, the Group Supervision Framework, PRISM Group Supervision, and other components. - College of Supervisors SRP: the College, operation in practice, assessing significance of branches and related undertakings, co-ordination agreements, college work plan, information exchange and communication. - Supervision of Intra-Group Transactions SRP: understanding Intra-Group Transactions, types, supervisory threshold levels, supervisory steps to review, potential misuses, and case studies. - Supervision of Risk Concentration SRP: addresses requirements of Article 244 of the Solvency II Directive, including review of risk concentrations in the group. - Group ORSA: addresses requirements relating to Group ORSA. - System of Governance SRP: assessment of mechanisms regarding group solvency to identify and measure material risks, relation of eligible own funds to risks, sound reporting and accounting procedures to manage intra-group transactions and risk concentrations. - Recovery & Resolution SRP: scheduled to be addressed during 2016. ### Financial Stability of the Insurance Sector — Market structure and activity: Key statistics - High-level observations: - "Insurance in Ireland is well developed, diverse with a large international business." - "Insurance penetration in Ireland is almost three times the EU average and four times more premium per capita is spent than the EU average." - The international sector is concentrated in variable annuity (VA), Italian unit linked, captive and reinsurance sectors; a significant proportion of the nonlife sector is foreign-risk focused. - A number of multinational groups have established their head office in Ireland while operations are done through branches and/or subsidiaries outside the country. - Table 2 highlights (2014 context; FX and GDP notes included in source): - Life — Ireland: US$ bn 35.87; % share 3.8; As % of GDP 14.28; US$ per capita 7,781. - Life — EU: US$ bn 944.31; % share 100; As % of GDP 5.13; US$ per capita 1,878. - Nonlife — Ireland: US$ bn 19.93; % share 3.2; As % of GDP 7.93; US$ per capita 4,323. - Nonlife — EU: US$ bn 616.03; % share 100; As % of GDP 3.34; US$ per capita 1,225. - Total — Ireland: US$ bn 55.80; % share 3.6; As % of GDP 22.22; US$ per capita 12,105. - Total — EU: US$ bn 1,560.34; % share 100; As % of GDP 8.47; US$ per capita 3,103. - Footnote: The FX EUR to USD used is 1.3285; the nominal GDP is USD 251.147611 billion; the population is 4.609 million. ### Insurance sector size and composition (end-2015 and series) - Total gross written premium at the end of 2015: EUR 76 billion - EUR 39.6 billion life - EUR 16.8 billion nonlife - EUR 19.6 billion reinsurance - Total assets (sector-wide): EUR 321.3 billion - EUR 219.8 billion life insurance - EUR 35.1 billion nonlife business - EUR 66.4 billion reinsurance - Employment: around 8,000 people - International exposure and market share: - From the total insurance premium of EUR 76 billion, EUR 61.9 billion (81.5 percent) are on risks outside Ireland (As of 2014; reinsurance business is assumed to be 100 percent international). - Unit-linked products comprise almost 75 percent of Irish life insurers' balance sheet assets (compared with less than 20 percent for some EU Member States). - The reinsurance sector in Ireland is the third largest in Europe. - Seven of the world’s top ten reinsurers have a presence in Ireland with a global market share of 4.7 percent in 2014. - The Central Bank is the lead supervisor of four international groups that write much of their business outside Ireland. ### Market participants and concentration - Supervisory population (June 2015): - The Central Bank supervises 228 (re)insurers and around 2800 insurance intermediaries. - Approximately 58 insurance undertakings with Irish consumers operating in Ireland (41 with branches) and therefore subject to conduct of business supervision by the Central Bank. - The Central Bank is the lead/group supervisor of XL Group PLC and Beazley Group PLC, and at the sub-group level for MetLife, Inc. and Zurich, PLC. - The Central Bank is the host supervisor of 25 (re)insurers who are members of foreign insurance groups. - Market concentration: - The top 5 insurers account for 48.5 percent of total assets held (life) and 70.8 percent of gross written premium (nonlife). - One nonlife insurer accounts for 53 percent of the market, including foreign risks insured. Remaining nonlife insurers have market shares of less than 2.25 percent. - The life sector is dominated by one insurer with an 18 percent market share, followed by insurers with half of that market share or lower. ### Premiums and underwriting — Life insurance - Sector trends: - Domestic life insurance premium has been steady since 2012; stabilized in 2013 after 6 years of decline. - Bulk annuity demand drove growth in 2013 but fell in 2014 due to the low interest rate environment and conclusion of de-risking initiatives. - Growth in corporate market (group pension and group risk business) replaced reduction in single premium pension business. - International life business experienced strong growth of 28 percent from 2013 to 2014 and growth continued into 2015. - Overall life insurance premium income increment of around 7 percent from 2014 to 2015. - Table 3 highlights (Life series, Euro millions): - Life gross premiums: 2011 26,627; 2012 27,360; 2013 31,710; 2014 37,028; 2015 39,600. - Life total assets: 2011 154,241; 2012 166,693; 2013 178,426; 2014 205,552; 2015 219,786. - Table 5 (Life premiums by product, Euro millions): - Domestic risks gross premiums: 2012 9,070; 2013 10,138; 2014 9,790; 2015 10,268. - Foreign risks gross premiums: 2012 18,290; 2013 21,573; 2014 27,237; 2015 29,332. - Total gross premiums: 2012 27,360; 2013 31,710; 2014 37,027; 2015 39,600. ### Premiums and underwriting — Nonlife insurance - Sector trends: - Domestic nonlife premium has hardly grown; nonlife premium has grown 1 percent on average since 2012; 2015 shows an increment of 5 percent. - International nonlife sector remains flat with a slight growth of 2.5 percent in 2015, possibly due to a soft market cycle and excess available capital in a low interest rate environment. - Table 3 and Table 6 highlights (Nonlife series, Euro millions): - Nonlife gross premiums: 2011 15,752; 2012 15,373; 2013 14,899; 2014 14,962; 2015 16,793. - Nonlife total assets: 2011 34,540; 2012 32,621; 2013 32,290; 2014 32,339; 2015 35,125. - Nonlife gross premiums by risk (selected lines): - Domestic risks total: 2012 2,442; 2013 2,211; 2014 2,271; 2015 3,791. - Domestic Motor: 2012 919; 2013 898; 2014 952; 2015 1,035. - Domestic Accident & health: 2012 475; 2013 326; 2014 316; 2015 1,737. - Foreign risks total: 2012 12,930; 2013 12,688; 2014 12,691; 2015 13,002. - Total nonlife gross premiums: 2012 15,372; 2013 14,899; 2014 14,962; 2015 16,793. *Source: Excerpts from IMF country report content provided in the source content unit.* ### 88. Reinsurance premium has shown strong growth in the context of increased ### _cr16311 - 88. Reinsurance premium has shown strong growth in the context of increased ### Reinsurance premium growth - Business of Irish reinsurers is roughly evenly split between life and non-life lines. - Table 7: Ireland: Reinsurance Premium by Product (Euro millions) — Gross Premiums Written - Life: 6,372 5,670 8,074 9,824 - Life Non-linked: 5,890 5,396 7,882 9,644 - Other: 482 274 192 180 - Non-Life: 6,984 7,394 7,349 9,768 - Motor: 1,152 1,580 1,310 2,440 - Property: 2,461 2,362 2,485 3,422 - Liabilities: 576 708 675 847 - Accident & health: 457 523 445 479 - Others: 2,338 2,221 2,433 2,580 - Total: 13,356 13,064 15,423 19,592 - Source for table: Central Bank of Ireland. ### Investments — life sector - Total investments of the life insurance sector showed an annual increment of 7 percent in 2015. - Since 2011, the life sector investments have grown by 43 percent (Table 8). - 2014: life investments amounted to EUR 201 billion in 2014 as compared to EUR 175 billion in 2013; in 2015 the growth rate came down to 7 percent. - 88 percent of investments correspond to assets that support unit linked business. - Of the 12 percent of the investment belonging to the insurers, 82 percent are invested in bonds (61 percent government and 21 percent corporate). - Table 8: Ireland: Life Insurance Investments (Euro millions) - Assets: 154,241 166,693 178,426 205,552 219,786 - Investments: 150,785 163,237 175,022 201,649 215,849 - of which: in percent of total investments: - Investments supporting unit-linked: 87 78 88 88 88 - Investments hold on own account: 13 13 12 12 12 - Investments hold on own account (Euro millions): 19,352 20,854 21,359 24,512 25,067 - of which: in percent of total investments: - Government securities: 65 64 61 64 61 - Corporate securities: 36 15 17 21 21 - Equities: 4 5 5 4 5 - Real estate and real-estate related: 2 1 1 1 1 - Cash and bank balances: 26 23 18 13 13 - Source for table: Central Bank of Ireland. ### Investments — nonlife and reinsurance sectors - Investments of the nonlife and reinsurance sectors are stable; amounts and composition have not changed significantly over the last years. - Around 21 percent of investments are held in highly liquid instruments for liquidity consistent with business model. - Reinsurance investments have a stronger preference for corporate bonds, and less need for cash. - Table 9: Ireland: Nonlife Insurance Investments (Euro millions) - Assets: 33,674 31,828 31,432 31,450 34,109 - Investments: 24,541 23,783 23,543 24,022 25,498 - of which: in percent of total investments: - Government securities: 45 43 41 39 36 - Corporate securities: 26 30 31 33 32 - Equities: 4 4 5 6 7 - Real estate and real-estate related: 3 3 2 3 4 - Cash and bank balances: 22 21 20 20 21 - Source for table: Central Bank of Ireland. - Table 10: Ireland: Reinsurers’ Investments (Euro millions) - Assets: 55,025 54,004 49,510 55,902 65,283 - Investments: 20,650 21,013 19,580 22,970 26,033 - of which: in percent of total investments: - Government securities: 33 34 32 30 32 - Corporate securities: 52 50 51 55 53 - Equities: 2 5 6 6 5 - Real estate and real-estate related: 0 0 0 0 0 - Cash and bank balances: 13 10 10 9 10 - Source for table: Central Bank of Ireland. ### Solvency and regulatory transition risks - Overall solvency position under the new regime (Solvency II) remains high with few exceptions; Solvency II has reduced the high level of solvency ratios shown under Solvency I. - Insurers reporting during the preparatory phase show ratios above 100 percent under the new regime, including after using internal models and transitional measures. - Table 11: Ireland: Solvency II and Solvency I Comparison 1/ (in percentage, 2015) - VA Writers (6 Firms): Solvency II Coverage 260; Solvency I Coverage 921 - Life (14 Firms): Solvency II Coverage 209; Solvency I Coverage 827 - Nonlife (7 Firms): Solvency II Coverage 148; Solvency I Coverage 730 - Reinsurers (6 Firms): Solvency II Coverage 517; Solvency I Coverage 312 - Source for table: Central Bank of Ireland. - Note in source: 1/ No transitional measures. - The Standard Formula (SF) does not cover some risks; internal models may be needed where the SF is not appropriate. - Recommendation: Central Bank should formalize the framework to monitor the continued suitability of internal models and the approval of model changes having due regard to the required resources and funding. - Transitional risk exists moving from Solvency I into Solvency II due to complexity and certain prudential weaknesses of Solvency II (use of future profits qualifying as tier one capital, zero capital charge for sovereign risk, one-year horizon, simplistic operational risk) which are expected to be captured in the ORSA. - Recommendation: Central Bank is recommended to elevate the quality of the ORSAs to properly reflect risks not captured in the SF or internal models. ### Life insurance sector observations - Key driver of growth: long term saving for retirement with tax-optimization benefits. - Economic recovery supports domestic life sector growth; mortgage credit life protection has increased but remains low. - International life sector benefits from tax optimization investment products for retirement (mainly emanating from Italy) and bulk transactions of annuity business. - Investment products are exposed to operational, market conduct, expenses liquidity and AML/CTF risk; these risks are well managed through product simplicity (limited funds, simple assets, index tracking). - Longevity risk is transferred through reinsurance and investment risk is borne by the policyholder. - Table 12: Ireland: Life Insurers’ Profitability (Euro millions) - Net premiums: 24,899 25,791 29,690 34,757 37,108 - Investment income: 2,859 3,135 3,263 3,703 3,953 - Net claims incurred: 23,197 23,620 25,575 24,279 25,581 - Expenses: 2,433 2,719 2,953 3,199 3,350 - Net claim ratio (Percent): 103 102 96 97 97 8 - ROE (after tax) (Percent): -3 4 7 14 2 2 17 - Source for table: Central Bank of Ireland. (Note: table formatting in source contains alignment irregularities.) ### Variable Annuity (VA) business - Sustainability of the VA business is questionable. - Past VA products combined investment returns with appealing guarantees; these guarantees are no longer available due to inability to hedge at economic cost. - Uncertainty exists whether new products can be designed that are attractive to consumers and generate acceptable return while rectifying prior product risk flaws. - Important losses may remain in legacy VA business; liquidity and operational risks have increased. - 2008 crisis losses that affected hedging programs continue to impact legacy business; low yield environment requires increases in existing reserves. - Liquidity risk arises from hedging programs that may require immediate margin calls with higher market volatility. - Primary dealers in fixed income markets have reduced market making commitment; Merrill Lynch estimates secondary bond market liquidity has declined by 40 percent since 2008 (and by up to 60 percent for US Corporate Bonds). - Supervision of VA business is highly exposed to regulatory arbitrage as companies transfer risk to other jurisdictions via reinsurance and other mechanisms. - Recommendation: Central Bank, working with other supervisors, is recommended to maintain same level of reserving and liquidity requirements independently of ultimate domicile of the VA business. ### Nonlife insurance sector challenges - External factors are putting pressure on nonlife sector profits; average ROE in 2015 was -2 percent. - Nonlife sector has been dependent on investment return; investment returns have decreased as maturing assets are reinvested at lower rates. - Combined ratios (claims and expenses over premium) have been above 100 percent except for property business and worsened during 2015. - Table 13: Ireland: Nonlife Insurers’ Profitability (Euro millions) - Net premiums: 8,056 7,366 7,047 7,033 7,736 - Investment income: 800 778 616 620 543 - Net claims incurred: 6,005 5,526 4,822 5,052 6,256 - Net claim ratio (Percent): 75 71 56 68 72 81 - ROE (after tax) (Percent): 11 17 8 15 -2 - Source for table: Central Bank of Ireland. - Detailed analysis findings and actions: - Investment income in 2015 was down to two thirds compared with results in 2011 and losses on disposal of assets are taking place. - Nonlife companies have reacted by increasing rates; for motor insurance, rates have been increased by 20 percent in some cases during 2015. - Competition, domestic and cross-border, limits rate adjustment possibilities. - Factors increasing frequency and average claims costs in domestic market: - Increase in the number of cars on the road. - Increase in court award limits from EUR 6,000 to EUR 15,000 in the District Court, and from EUR 38,000 to EUR 60,000 in the Circuit Court. - Overdue review of the Book of Quantum leading to inadequate settlements by the Injuries Board being rejected, precipitating additional legal costs. - 2014 “Gill Russell” High Court case adjusted discount rate on large pay-outs from 3 percent to 1 percent, resulting in higher reserves for similar claims in the past. - Despite low yields, deterioration in credit quality of nonlife insurers’ investments has not been observed. - Rating quality moved away from AAA into lower rated instruments mainly during 2012, shifting into AA and A rated instruments. - Unrated bonds have slightly increased but remain under 8 percent. - Recommendation: Central Bank to take advantage of increased granularity and frequency of asset reporting under Solvency II to develop a tool to closely and timely track possible deterioration in credit quality of insurers’ investments. - Recommendation: Continued close monitoring of claims reserves sufficiency, including random actuarial recalculations and onsite inspection. ### Reinsurance sector observations and supervisory implications - Profitability of reinsurers remains stable but environment is continuously challenging. - Reinsurance industry posted average ROE of 12 percent in recent years; in 2015 ROE dropped to 8 percent. - Sector rated as negative by rating agencies due to competitive pressures. - Oversupply of capacity in global market has caused soft pricing conditions and industry consolidation. - Reinsurers are responding by changing business mix (including longevity and bulk annuity transactions), designing programs to optimize cedent capital use under Solvency II, and diversifying risk activities across jurisdictions. - Table 14: Ireland: Reinsurers’ Profitability (Euro millions) - Net premiums: 8,938 9,109 9,054 11,347 12,671 - Investment income: 1,415 1,798 500 1,878 565 - Net claims incurred: 6,837 7,588 5,193 9,755 11,618 - Net claim ratio (Percent): 76 83 63 86 92 - ROE (after tax) (Percent): 12 12 13 12 8 - Source for table: Central Bank of Ireland. - Supervisory attention required as reinsurers shift models under Solvency II: - Cost of capital for counterparty risk might be more attractive than cost for concentration risk due to insufficient Solvency II calibration, potentially leading to excessive concentration of reinsurance. - Search for reinsurance locations presenting regulatory advantages without actual risk reduction or risk transfer. - Diversification benefits may be overstated through reinsurance structures, especially when internal models are used. - Recommendation: Central Bank is recommended to analyze unusual reinsurance transactions if material to assess whether sufficient risk has been mitigated or transferred to justify capital benefits. ### Stress testing - Central Bank stress test framework needs further development. - Central Bank engaged in EIOPA stress tests and introduced a stress test for companies that write VA business. - Central Bank engagement with EIOPA stress test achieved over 65 percent market coverage (higher than 50 percent required by EIOPA). - EIOPA-determined stresses leave important gaps on risks affecting diverse Irish insurance sector. - Firms are required to submit annual ORSA including stress and sensitivity testing of firm-specific risks, but Central Bank has not introduced a stress test that would consistently impact all firms in the same sector. - Ireland participated in the 2014 EIOPA stress test. - 2014 EIOPA exercises covered 19 different scenarios including core and low yield modules. - Core module addressed financial market and insurance specific stresses. - Low yield module addressed impact of prolonged low interest rates and a snapback in yield curves on particularly exposed business. - All scenarios were undertaken on a ‘best efforts’ Solvency II standard formula basis. *Source: Central Bank of Ireland; material as presented in the provided IMF chapter content.* ### 106. The Irish results confirmed the strong resilience to interest shocks of the life sector and ### 106. The Irish results confirmed the strong resilience to interest shocks of the life sector and ### Core stress exercise results (Irish participants) - 5 of the 16 Irish participants in the “core” stress exercise recorded a “pre-stress” solvency deficit (based on coverage of an SCR computed in accordance with the Solvency II standard formula) at end- 2013. Two of these participants have submitted an application for internal model approval. - All 16 Irish participants applied the two market risk scenarios. Solvency deficits emerged in an additional 3 companies under at least one of the market risk scenarios. - 8 of the 16 Irish participants applied the nonlife stresses. Solvency deficits emerged in an additional 2 companies under at least one of the nonlife stresses. - Of the nonlife stress applied, the 3 percent provisions deficiency stress (inflation increases by 3 percent over assumed rate) had the most significant impact on all 8 companies. - 10 of the 16 Irish participants applied the life insurance stresses. The application of the life insurance stresses did not result in the emergence of any further solvency deficits. - The low yield satellite scenario did not have a material impact on the SCR coverage of any of the 12 Irish participants in that particular exercise. ### Variable Annuity (VA) stress testing framework and results - The VA stress test is used to assess business-specific risks for VA business; an ongoing stress testing requirement is implemented via a National Specific Template for Solvency II. - Initial VA stress test (2013/2014) design: - Included single factor stress/sensitivity across a range of risk factors and a cumulative stress test scenario. - Focused on firms’ claims paying ability to policyholders under stressed market conditions (not on meeting minimum capital requirements). - Risk factors included: Equity risk (level and volatility); Interest rate risk (level and volatility); Credit risk (sovereign and corporate); Demographic risk; Persistency risk; and Operational risk. - Scenario testing recognized nonlinear interactions when risks occur simultaneously; four scenario tests were considered (see Figure 5 in source). - Interest rate testing allowed for the use of the Solvency II ultimate forward rate. - Representative scenario severities from the VA stress test (as presented): - Equity Shock: 40% instantaneous fall + 0% growth for 5 years (CBI tests); 41% instantaneous fall (EIOPA tests). - Interest Rates: 100bps across all durations (CBI tests); 25-100 bps depending on duration (EIOPA tests). - Credit Spreads – Corporates: Severe shock e.g. 50bps (AAA) ... 610bps (≤ B); Adverse shock e.g. 24bps (AAA) ... 420bps (≤ B). - Credit Spreads – Sovereigns: Severe shock e.g. 84bps (France) ... 245bps (Italy); Adverse shock e.g. 44bps (France) ... 195bps (Italy). - Persistency: 50% change to best estimate assumptions in the direction of loss (CBI tests); Mass lapse stress – would have minimal impact on VA guarantees (EIOPA tests). - Longevity: 20% decrease in base mortality + 25% increase to base mortality improvement assumptions (CBI tests); 18% increase in life expectancy (EIOPA tests). - Exercise outcomes: - While all firms were able to demonstrate the ability to meet policyholder obligations under all single factor stresses, the exercise confirmed important inherent risks: - VA business model has a stronger linkage with the financial sector not present in traditional insurance products. - High level of modelling sophistication is required. - Operational risk is elevated with respect to the effectiveness of the hedging program for guarantees. - Market volatility risk is a primary driver of loss across the industry and is hard to effectively hedge unless simple investments are offered. - Firms rely on risk management mechanisms working perfectly under stressed conditions. - Liquidity risk exists because, under a market recovery scenario, VA firms to meet margin calls would be required to post collateral. ### Supervisory actions and reporting for VA business - The Central Bank has developed VA National Specific Templates that require annual stress testing reporting. - Templates require annual reporting of stress test results on the effectiveness of the dynamic hedging program under stress situations. - Templates are complemented with a retrospective analysis of the hedging program through quarterly reporting of the daily profit and loss attribution. - Recommendation: - The Central Bank is recommended to enhance its forward looking supervision and systemic risk monitoring by developing Irish risk-specific stress tests (similar to the VA stress test) for remaining business sectors: nonlife and life (both domestic and cross-border), reinsurance, and health. ### Interlinkages and spillovers to the financial sector - Hub-and-spoke structure and international footprint: - Ireland has long been used as the entry port for EU-wide operations using a hub and spoke structure (head office/hub in Ireland with branches across the EU). - Several companies write only business outside Ireland. - 81.5 percent of the insurance business is written outside Ireland. - Ireland is a significant provider in the EU of unit linked business and the reinsurance sector is the third largest in Europe. - Supervisory challenges and resourcing: - Under Solvency II the responsibility of the home supervisor has increased through the FOE and FOS operating models and equivalence assessments. - Allocating sufficient resources with necessary experience has been a challenge for the Central Bank: - 80 percent of its staff have less than four years’ experience. - Only 4 percent have ten or more years of experience. - Recommendation: - The Central Bank is recommended to develop a strategy to attract and retain experienced supervisors under current economic constraints. - Non-traditional non-insurance (NTNI) activity and VA concentration: - NTNI captures activities involving maturity transformation, liquidity mismatch or leverage. - Depending on the product, variable annuity (VA) business has been classified as NTNI. - EUR 20 billion of assets under management emanating from variable annuity business are in the balance sheet of Irish-regulated insurers, with some of that business reinsured to other jurisdictions. - Several international companies have consolidated their VA business in one company of the group located, in some cases, in Ireland. - Recommendation: - The Central Bank is recommended to closely follow the FSB/IAIS framework on G-SIIs and introduce necessary tools to supervise firms exposed to VA business in its host supervisory role (despite not being the group supervisor of any G-SIIs). ### Appendix I — Setanta Insurance and related compensation arrangements - Setanta liquidation facts: - Setanta Holdings was established in 2007; comprised Setanta Insurance Company Limited (Malta) and Setanta Insurance Services Limited (Ireland). - Setanta was subject to prudential regulation by the Malta Financial Services Authority (MFSA) and required to comply with Central Bank conduct of business requirements. - Setanta distributed products exclusively through a panel of insurance brokers in Ireland and only wrote business in Ireland on an FOS basis (private and commercial motor insurance). - At liquidation, Setanta had approximately 75,000 policyholders. - Two thirds of policyholders were commercial motor insurance policies and one third was private motor insurance. - Setanta went into liquidation in April 2014 and an administrator was appointed (in Malta). - As at April 2015, there were approximately 1,800 claims outstanding. - The Liquidator informed the Department of Finance in 2014 that, based on current claims estimates, he did not expect to be in a position to meet more than 30 percent of the insurance claims from the assets in liquidation. - There are potentially EUR 80 million to EUR 90 million in claims (preliminary projection based on information from Setanta’s liquidator at the Committee on Finance, Public Expenditure and Reform in 2015). - Insurance Compensation Fund (ICF) — background and funding: - The ICF was established under the Insurance Act 1964, as amended (including the Insurance (Amendment) Act 2011). - The ICF covers nonlife insurance only, with certain exclusions (no life insurance compensation scheme in operation in the State). - Compensation to a person under a policy shall not exceed 65 percent of the sum due to the policyholder or EUR 825,000 whichever is the less. - 2011 Act changes (post-Quinn Insurance collapse) included: - ICF funded by contributions from insurers who issue policies in respect of risks in the State, whether insurers are based in Ireland or in another member State. - Scope changed to cover all insured risk in the State, except specific excluded risks (marine & aviation, health, dental and reinsurance). - New offences introduced for undertakings that fail to make an appropriate levy contribution. - Funding mechanism: - ICF is financed ex-post through contributions from nonlife insurers on business written in respect of risks in the State, up to a maximum of two percent of Gross Written Premium (GWP). In practice, the levy is passed on to the policyholder. - The Revenue Commission is the collector for the ICF; insurers submit a quarterly statement outlining premiums paid and pay the appropriate contribution. - The ICF is maintained and administered under the control of the President of the High Court acting through the Accountant of the High Court; the High Court must approve and make payments from the Fund. - The Minister for Finance may, on the recommendation of the Central Bank, lend money to the ICF to enable payments to be made expeditiously. - The Central Bank carries out an annual assessment of the financial position of the ICF and determines appropriate contributions; the Financial Analysis Unit within Insurance Supervision performs this function. - Motor Insurance Bureau of Ireland (MIBI): - MIBI established by agreement between Government and companies underwriting motor insurance in Ireland in accordance with EU Motor Insurance Directives. - All insurance companies underwriting motor insurance in the State must be members of MIBI and contribute in proportion to market share. - Principal role: compensate victims of accidents caused by uninsured and unidentified vehicles (regulated under 2009 Agreement between MIBI and the Minister for Transport, Tourism and Sport). - MIBI does not operate a fund; claims are handled by one of four major insurers on behalf of MIBI and member companies are levied to make up amounts due when claims are settled. - MIBI claims account for approximately 7 percent of all motor claims paid by value. - MIBI and the Setanta liquidation legal outcome: - Following Setanta’s collapse, the Law Society argued MIBI was liable for outstanding claims. - MIBI contended it should not pay as it compensates victims of road traffic accidents caused by uninsured/unidentified drivers and argued claims should be covered by the Insurance Compensation Fund. - MIBI mounted a legal challenge to set aside a High Court decision that it must pay out in respect of claims against persons insured with Setanta at the time of its liquidation. - The High Court’s decision was upheld by the Court of Appeal on March 2, 2016. This decision may have significant implications for MIBI and the wider motor insurance industry. *Source: IMF staff report content provided in the supplied PDF chapter.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16311.pdf_