On 28 June 2019, the Central Bank of Ireland (the ‘Central Bank’) published its Insurance Quarterly Newsletter (the ‘Newsletter’) for Q2 2019.
In the foreword to the Newsletter, the Central Bank highlights the importance of diversity in the insurance sector, noting that in its 2018 demographic analysis of pre-approval controlled function (‘PCF’) roles, 22% of PCF applicants in the insurance sector were female, a decrease on the 2017 figure of 23%. The Central Bank also notes the importance of operational resilience within Irish regulated firms, reminding Irish insurance undertakings that they are obliged to demonstrate that they have the appropriate safeguards and processes in place to manage operational risk relating to outsourcing arrangements and IT failure. The foreword also states that the Central Bank expects Brexit-related activities to increase in the coming weeks and that regulated firms are expected to continue to plan for all plausible contingencies, including the possibility of a hard Brexit.
Evolutions in (re)insurers' asset allocations
Solvency II requires that (re)insurance undertakings invest assets in accordance with the prudent person principle. Figures for Q4 2018 demonstrate that the overall asset allocations for the insurance industry show a landscape of investment well-aligned to the prudent person principle with fixed income exposures (c.60%) and cash (c.20%) dominating the overall portfolio.
However, recent Solvency II returns demonstrate a slow but noticeable shift towards a riskier asset allocation at industry level. There has been a marginal shift from sovereign debt towards corporate debt while the overall level of fixed income investments has been stable at c.60% of non-linked investments. The Central Bank notes that the shift from sovereign to corporate debt is understandable as it allows undertakings to meet their profitability aim. However, the Central Bank emphasises the important role that boards and executive management play in ensuring that the shift towards a risker asset allocation does not come at an undue cost to the security, quality or liquidity of the undertaking's asset portfolio.
Public disclosures under Solvency II
The Central Bank notes that the Solvency and Financial Condition Report (SFCR) is an important element of a transparent market. The increased use of public disclosures facilitates heightened confidence and trust in individual undertakings and across the sector. The Central Bank created a dedicated repository for all SFCRs in 2017, and this will be updated during Q3 2019 to include SFCRs from year-end 2018. The on-going confidence that the information within the SFCR is accurate is critical to the Central Bank's ability to host the SFCR depositary. To facilitate the validation of SFCRs, the Central Bank reminds firms that it is imperative that the SFCR is in a machine-readable format.
Funding the cost of regulation
The financial services industry has moved from paying approximately half of the costs of financial regulation to two-thirds of the costs over the last three years. The Central Bank, with the approval from the Minister for Finance and Public Expenditure and Reform, Paschal Donohue TD, recently published the expected path towards 100% industry funding over the next five years.
2020 review of Solvency II
EIOPA and National Competent Authorities continue to work on the review of Solvency II in advance of the deadline for the submission of technical advice to the European Commission on 30 June 2020. The Central Bank urges stakeholders to engage with the consultations and stakeholder events that are taking place during the second half of 2019 with the first consultation scheduled for July.