The dominant themes of 2021 in Irish insurance regulation were consumer protection, technology and outsourcing risk, culture and conduct and strengthening resilience. We examine the key regulatory developments of 2021 in these areas as well as what the industry can expect to see in 2022.
Business interruption claims arising from COVID-19 continued to burden the industry this year. In February 2021, in Hyper Trust Limited t/a The Leopardstown Inn & Others v. FBD Insurance plc the High Court decided in favour of all four plaintiffs who had challenged FBD’s refusal of their claims. Following the judgement, the Central Bank of Ireland (CBI) reaffirmed its expectations of fair treatment of customers, which are relevant across the industry spectrum and not limited to COVID claims. These include:
- Insurers must honour valid claims and pay them promptly
- Where there is doubt about the meaning of a term, the interpretation most favourable to the customer should prevail
- Where legal action results in an outcome that could have a beneficial impact for other customers in similar circumstances, firms must take swift action to ensure those customers benefit from the same outcomes, and
- Firms must make interim payments to policyholders who make or have made claims pending the final determination of the sums due.
The CBI completed its Review of Differential Pricing in the Private Car and Home Insurance Markets in July 2021. As a result, it has proposed to ban “price walking”. Price walking is the practice where existing renewing customers are charged higher premiums than new customers. The CBI also intends to require motor and home insurers to review their pricing policies on an annual basis and to obtain written consent from consumers to automatically renew insurance contracts.
Technology and Outsourcing Risk
The CBI issued a consultation paper with cross-industry guidance on outsourcing in February 2021. It expects regulated firms to “predominantly” apply the guidance in respect of outsourcing of their “critical or important” functions, though it will complement and not displace notification obligations under other legal regimes, e.g., Solvency II. The draft outsourcing guidance sets out the factors regulated firms should consider when deciding if an outsourced function is critical or important. It also lists key provisions for inclusion in written outsourcing agreements. Proportionality will be considered, whereby a regulated firm may apply the guidance differently by reference to the nature, scale, and complexity of its business. Consultation closed in July 2021 and the CBI is expected to publish the finalised guidance early next year.
The CBI published a Consultation Paper on proposed Guidance on the Use of Service Companies for Staffing Purposes in the Insurance Sector (CP144) in August 2021. Arising out of the CP144 guidance, insurers must:
- Have governance structures/processes in place that adequately reflect the staffing arrangement
- Integrate these procedures into the risk management system and internal control framework
- Demonstrate how the board has considered the arrangement
- Show compliance with all relevant legislation and supervisory expectations ensuring there is no adverse impact on policyholders, and
- Ensure that the arrangement does not create barriers to the supervision and resolvability of the re/insurer.
The CBI gave guidance to private motor insurers who use telematics-based products in the Irish market in September 2021. It stated that it expects “more effective disclosure” meaning insurers must give meaningful explanations to enable customers to make informed decisions when interacting with AI. Insurers should document their use of AI in a distinct and separate section of their standard policy wordings and the information communicated to consumers should be in clear language. Insurers may therefore need to review customer-facing documentation in light of the guidance.
Culture and Conduct
The General Scheme of the Central Bank (Individual Accountability Framework) Bill 2021 was published by the Department of Finance in July 2021. The Bill will create a framework to facilitate individual accountability and responsibility particularly for individuals performing senior executive functions within a regulated financial services provider. It will be easier for the CBI to establish individual breaches against these persons. Implementation of this accountability regime will be a major exercise for insurers, but the full regime is unlikely to be in place before 2023.
It was reported in August 2021 that the Irish Competition and Consumer Protection Commission (CCPC) had accepted legally binding commitments from six insurance industry participants following allegations of price-signalling in the private motor sector. The CCPC had alleged that industry participants had been openly signalling upcoming increases in motor insurance premiums and that this amounted to “unspoken coordination” in violation of competition law. On concluding the investigation, the CCPC wrote to the CBI “to outline broader cultural concerns in the industry which have come to light during the course of the investigation”. The CCPC letter shows the increasing tendency of regulatory bodies in the financial sector to cross-report their concerns and to co-ordinate their activities.
The Recovery Plan Requirements for Insurers Regulations 2021 commenced in April 2021 and require all (re)insurers, except certain captives, to prepare pre-emptive recovery plans by 31 March 2022. No such recovery planning requirements are yet in place at EU level, and several insurers drew attention to this divergence during consultation. The Central Bank responded: “Effective recovery planning is a priority for the Central Bank. As with other member states, such as France, Germany, Denmark and the Netherlands, the Central Bank wishes to introduce a recovery regime as early as possible notwithstanding if it is ahead of any EU-wide framework.”
The European Commission adopted a review of the (re)insurance rules under Solvency II in September 2021. This is the first major review of the directive since it was implemented in 2016. The aim of the reforms is to strengthen (re)insurers’ contribution towards the financing of the COVID-19 recovery and the European Green Deal. The reforms also intend to progress the Capital Markets Union, but the proposals are unlikely to be finalised before 2023/2024.
Proposed changes include:
- Introduction of a category of low risk-profile (re)insurer that will benefit from lighter touch requirements reflecting a more proportionate approach to supervision
- Insurance undertakings will be required to draw up and maintain liquidity risk management plans
- A new Insurance Recovery and Resolution Directive will be adopted
- Amendments to the long-term guarantee measures including the matching adjustment, volatility adjustment, and extrapolation of risk-free interest rates for calculation of technical provisions
- Changes to the risk margin for calculation of technical provisions, and
- Changes to the SCR formula - these will be detailed in amendments to the Level 2 Delegated Regulations.
The focus on consumer protection, culture and conduct will continue through 2022. The CBI will consult on a review of the Consumer Protection Code in H1 2022, with a particular focus on fair treatment of consumers in the evolving digital environment. The European Insurance and Occupational Pensions Authority (EIOPA)’s report on value for money risk in unit-linked life products must also be monitored. This is because EIOPA’s analytical framework is highly likely to influence the EU regulatory approach to customer value across the industry. We can also expect to see a continued focus on technology and outsourcing risk, with the CBI having published in December its Cross-Industry Guidance on Operational Resilience. Finally, as the individual accountability legislation moves forward, regulatory expectations in the culture and conduct area will only increase.
If you would like to discuss any of the points highlighted, please contact a member of the Financial Regulation team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.