For the Finance Dublin yearbook James Maher, Partner and Head of Insurance at EY Financial Services, provides an overview of the issues, threats and opportunities arising for the insurance industry in Ireland. Read on for his perspective on the key considerations for the sector now, next and beyond.
The insurance industry in Ireland, which is admittedly a broad church, has been resilient in the face of the first level of impacts of the coronavirus. Operationally it was able to stand up to its business continuity plans reasonably well and financially it has been able to withstand the very significant market dislocations noting that the life sector, in particular, has been most impacted in that regard. The sector has been on the front foot in assessing its exposure and it has been on the front foot in communicating its intentions and actions in respect of premium rebates (specifically in the health and motor sectors) and in respect of forbearance in respect of premium receipts. That said, for the non life insurance sector, while it has been able to mitigate or is expected to largely mitigate the adverse claims effect of Covid-19 given the widespread exclusion of claims under business interruption policies it will have to address a period of significant adverse publicity and criticism, in particular from the SME sector.
Furthermore, there is, or at least there is expected to be, recognition that a legal defence in due course may well prove to be insufficient or incomplete and that the regulatory agenda will encompass fairness and expectations. In this there has been a reminder from the European Insurance and Occupational Pensions Authority (EIOPA) regarding the need for insurance companies to maintain consideration of the continuing value of policies sold as compared to original expectation. Thus it is fair to anticipate that there will be something of a tail to resolving the current issues.
In any case companies have been actively reviewing their financial plans and scenarios for the year ahead and into next year as they wrestle with changes in claims, expenses, volumes and market conditions with something of an expectation of a volume down and rates up scenario developing.
Next is pretty much about stepping into a new normal. For sure the sector does not expect to be getting back to offices any time soon and end of summer is perhaps the earliest target date we are hearing from our clients. The most immediate challenge being wrestled with is how to originate and source new business in a very uncertain environment. It is fair to say that April provided the first real view of how the life and pensions sector is being impacted as new business pipelines started to weaken and new business flow dropped considerably from that experience in quarter one.
That will then lead to a clear decision and outcome around how or whether to trim expenses associated with new business acquisition as the sector looks forward to an extended weaker period and to consider how it makes those sales processes a lot more resilient up to and including anticipating how to execute sales in a locked down or shut in economy.
There is also a prospect of attention pointing more fully towards the regulatory assessment of the performance of the sector in respect of the consumer and conduct agenda. Without judging the outcome it is fair to say there will likely be an assessment of performance through the lens of customer centricity, value for money and specifically responses in respect of rebates and reductions in premiums if not settlement of claims.
Possibly the first and foremost consideration for what happens next and beyond is an expectation regarding our economic context. In this there is a growing acceptance that we are in a “low for longer” interest rate environment and that brings a fundamental challenge to the life insurance sector in particular. In part this is mitigated in Ireland due to the low level of domestic guarantees and the preponderance of unit linked business but it does impact segments of the market, including annuities and some legacy aspects of the international market place such as old style Variable Annuities.
It is hard to see the upside of this crisis, it has certainly accelerated the digital transformation plans of all market players, or at least those who are and will remain committed to staying in the market place. We are seeing a recalibration of cost benefit analysis for transformation programs and see the case swinging back in favour of a renewed assessment of investments in digital capabilities. Equally we can anticipate a renewed cycle ofM&A as companies reassess their current portfolios. In this Ireland has become something of a hub for run off businesses and with the continued backing of their capital providers it is not hard to see a renewed period of expansion for this segment of the market.
Finally, its important not to forget inflight programs such as IFRS 17. In general we have not seen groups slow down their aims and aspirations for transitioning to IFRS 17 but it is fair to say there has been something of a local slow down over the immediate past. The IFRS 17 and related IFRS 9 transition and implementation timetables now appear to be locked in and it is hard to see any further delays. As such it makes sense for companies to not just consider the operational implementation of the changes but also to reinvestigate the impacts of transition options for establishing the day one balance sheets as recent market events will have considerably impacted the economics of in force portfolios.
The insurance sector risks are not directly risks that will fall to the sovereign, absent sectoral failures which do not look obvious or apparent at this stage. For sure there are impacts where the sector is not supporting claims (legitimate or otherwise) and obligations fall back on banks and or the state sector and as such there is an inter-connectivity of risk and risk transfer that can’t be ignored. In this we have seen examples in other markets where there is consideration of how the sector could work as part of a transmission mechanism for transferring relief, for example by paying claims that are excluded with onward recovery from state backed funds. In this case the industry could work with government to mitigate and spread risk over time. This in particular is an approach that is recognised by international regulators and has been suggested as an area of investigation, if not for this event then for subsequent event planning.
The industry is in something of a bind as it looks to manage its solvency at the risk of its reputation for not responding at a moment of need. Undoubtedly there is a legal context for not meeting claims but this rings hollow in a court of public opinion and may yet ring hollow in our courts. Specifically, companies need to ensure there is not only an appropriate assessment of their legal obligations but a coherent consideration of implicit obligations or expectations that may have been created through presentation of purpose-led and customer-led vision statements. As such the industry needs to both go on the attack and the defence, working with regulators and industry bodies as well as its customers and shareholders to steer an assured course through the rest of the year and into next.
The best responses that we see now are joint responses where industry can work with Government to establish appropriate transmission lines that allow for the orderly funding of claims with an agreed basis of interpretation under a scheme or arrangements between stakeholders. One where definitions of claims are resolved, bases of settlement are agreed potentially on a parametric cash basis, rather than indemnity basis, and one that allows for spreading of recognition and recovery over time. The tools are there. It does however require the commitment of all parties to step into what is a fraught space. What is clear is the need to build a coherent approach for when the next event occurs and it certainly will occur and to pave a way for an industry that can respond to the looming climate crisis where an industry solution on its own will not be sufficient.
The EU has been clear enough in communicating an expectation around performance and behaviours of insurers, whether in treatment of customers or payment of dividends, and this has been promulgated by EIOPA for consideration and adoption by national competent authorities. A more formal assessment of the impact of Covid-19 will be taken up by EIOPA in its holistic assessment of Solvency II which has been extended to include a specific data ask of the sector based on Q2 2020 results. This reassessment of the Solvency II basis of Pillar 1 capital will likely pay specific regard to the treatment of capital for pandemic risks.
Finally, whereas the sustainability agenda came to the fore in 2019 and took something of a back seat during the first half of2020 due to Covid-19, we are now seeing renewed focus on Sustainability. Specifically, there is a clear line of sight on the sectoral considerations coming from EIOPA as they consult on stress testing for climate change and publicly respond to the European Commission on a renewed sustainable finance strategy. In this they have made it clear that there are lessons to be learned on the interconnectivity of risk as a result of Covid-19.
Whereas it has been a shock to the system, the upsides to come from this shock include: a) a proper basis to consider the establishment of proper crisis funding mechanisms at a national and international scale to accommodate such pandemic risks, b) an acceleration of change that was already under way in the sector to fully embrace an appropriate technological footing and to drive better digital customer interactions and to reduce the overheads and unit costs of the sector, and c) it will accelerate the codification of contract wordings and specification of covered risks beyond what is appreciated today and further allow for the adoption of new product structures such as one with parametric payouts of fixed cash amounts, as distinct from more complex indemnity coverages in certain areas.
“We can anticipate a renewed cycle of M&A as companies reassess their current portfolios. In this Ireland has become something of a hub for run off businesses and with the continued backing of their capital providers it is not hard to see a renewed period of expansion for this segment of the market.”
I think that the speed at which working from home has been taken up and embraced is and has been a game changer whether for front office or back office. What will need to change, rapidly and permanently, is the basis of face to face advised sales. We have worked with a number of clients to develop and implement remote in person experiences that can deliver customer execution of advised sales that meet stringent regulatory requirements for a locked down economy.
You may also find it useful to review our latest insights and thinking to support you in leading through these volatile times; don’t hesitate to reach out if you have a question.