This week, the Central Bank of Ireland (CBI) published its feedback statement to the consultation on requirement for insurers to develop pre-emptive recovery planning while the final requirements were also published. This was a material consultation for Insurance Ireland members and we worked closely with them in developing our response, establishing a CP131 Working Group as a subgroup of our Prudential Regulation and Reporting Committee (PRRC). We are pleased to see that a number of our points raised in the submission and in meetings with the CBI policy team were taken on board and the guidelines have been updated as a result of our engagement.
The CBI took steps to set out the ability for firms to take a more proportionate approach to pre-emptive recovery plans, including reducing the minimum content requirements and changing the obligation to submit to the CBI regularly for Low and Medium Low rated firms.
We are also pleased to note that the CBI has removed the proposed requirement for a written guarantee from a parent entity to provide financial support in future times of stress. This could have amounted to a contingent liability on the parent, which is over and above EU discussions in this area and would potentially deter investment in the Irish insurance market. We welcome that the CBI took steps to clarify that Irish domiciled entities which are part of wider multinational groups can rely on group recovery plans in designing the solo recovery plan for the entity. The final rules as published this week also see the removal of the proposed requirement for a scenario limiting the provision of capital or liquidity from an entity within the same group – instead requiring consideration of alternative measures the entity would take if financial support from the group was not forthcoming.
In the final rules, the CBI acknowledges that there is a level of duplication between the proposed pre-emptive recovery plan and the scenario stress testing required under the ORSA. The ORSA is a key element of pillar II of Solvency II and the requirements of SII are considered by the CBI to be ex-post obligations. These differ to the recovery planning, which about being prepared for a severe stress. It is ex-ante and is concerned with undertakings developing options in advance to be used when under severe stress. The feedback statement notes that where relevant information is covered in other documents then the recovery plan could include a summary of that information, however the recovery plan is designed to be a stand-alone document and any cross-referencing would defeat this objective. The final rules also clarify that the identification of preparatory measures is optional and will depend on whether potential issues have been identified which the insurer believes need to be addressed to improve its overall recovery capacity.
Insurance firms are required to have completed and submitted (where relevant) the pre-emptive recovery plan to the CBI by 31 March 2022. The CBI intention is that High and Medium-High Impact insurers will be requested to submit their recovery plans as a matter of course, whereas Medium-Low and Low Impact firms will only be required to do so when specifically requested.
We are disappointed that although the CBI acknowledged the risks of proceeding ahead of the creation of a common EU-wide framework on the exact same issue, it did not recognise that this presents a substantial risk to the industry that may well result in regulatory fragmentation and competitive disadvantages due to increased costs and increased regulatory burden. In consequence, the pre-emptive nature of the CBI policy will have a negative impact on the attractiveness of Ireland as an international insurance hub and the consistency of the protection of Irish consumers.
While we acknowledge that a well-regulated sector is a benefit to firms and can increase consumer trust in insurance, regulation must be effective and proportionate and not pose a barrier to domestic and international growth in the sector. The CBI states that these requirements are broadly in line with the principles agreed at international level, however we remain of the view that they go far beyond these principles. If regulation results in overly onerous requirements on Irish domiciled firms which are not appropriately balanced with the consumer benefit/protection, or results in regulatory divergence from the EU, this poses a negative impact on the reputation of Ireland as an international insurance hub compared to other EU jurisdictions.
We are also disappointed that the exemption for Captive Undertakings does not appear to be reflective of the reality of how Captives operate in practice. While the CBI did take heed of the calls from Insurance Ireland to consider the lower risk posed to the objectives of the recovery planning work from Captive Undertakings, the resulting exemption is very narrow and would not apply to most Captives regulated by the CBI. The feedback allows for Captives to be exempt from the Regulations where they do not write motor, liability or credit and suretyship business and which do not otherwise have an exposure to claims from persons outside of its group. There is no clarification as to why these conditions apply and the sole purpose of many Captives is to insure these risks for policyholders (not consumers) so the risk of consumer harm and to the stability of the market is much lower for these entities.
Overall, Insurance Ireland believe that the existing safeguards under the already applicable regulations are sufficient for the vast majority of market players. The (potential) harm of an inconsistent approach with European and international partners will create an unlevel-playing-field and competitive disadvantage for Irish insurers. For Irish consumers, it will mean that the level of regulatory safeguards depends on the question if an insurer is domiciled in Ireland or passporting into our jurisdiction from another EU Member State. Competitive disadvantage and an inconsistent regulatory framework will present threats to Irish insurers and consumers alike.
We will be discussing the final rules with our members over the coming weeks and will seek to provide detailed feedback to the CBI on the operation of these rules. Insurance Ireland will also monitor the evolution of European rules on recovery and will proactively engage with our regulatory and policy stakeholders as this issue develops. If there are any specific areas you would like to discuss on this topic please do not hesitate to get in touch with the team in Insurance Ireland.