Insurance: 10 Areas of Focus

3. Climate Action Agenda

It is clear that climate risk has moved from emerging risk to a current risk. The increased frequency and severity of repeated weather related events linked to climate change is already having a significant impact on the insurance sector. There has been a substantial increase in claims arising from physical events, which is impacting catastrophe risk modelling underwriting and pricing.

While there is a broad willingness in the industry to act there is still uncertainty on how to act moving forward and individual insurance firms are at different maturity stages in relation to their management of climate change risk.

Climate Risk and Sustainable Finance Forum

The Central Bank has launched a Climate Risk and Sustainable Finance Forum, to bring together industry stakeholders and climate scientists with the Central Bank; the aim of the Forum is to build shared capacity and understanding of the implications of climate change and to share best practices.

In 2022, the Central Bank developed a heat map for climate risk within insurers; and they expect to utilise this to focus supervisory efforts on the firms in 2023 that the Central Bank view as having the highest climate exposure.

Last year, the Central Bank of Ireland consulted on guidance on how insurers can address climate change moving forward. Following this consultation, final guidance was issued which was largely unchanged from the proposed guidance and aims to clarify for (re)insurers the Central Bank’s expectations to address climate change risk in their business and assist them in developing appropriate governance and risk management frameworks, which consider and address climate change risk.

A further area of focus for the Central Bank is its natural catastrophe project; which aims to assess whether NatCat modelling is adequate overall, whether it is properly modelled for Irish specific risks, and whether NatCat modelling takes climate risk into account.

5. Digital Transformation:

Consumer demands are constantly evolving to reflect the changing world around us. Consumers want their insurance policies to be easy and accessible 365 days of the year. As the era of digitalisation and technology enhancement is rapidly developing, it presents both great opportunities and certain risks for insurance firms.

There is a risk that firms may fail to keep pace with the constant change in technology, which may affect its capacity to compete with new entrants into the market such as insurtechs. While on the one hand the adoption of digital business models allows insurance companies to become more engaged and consumer focused, on the other it may also present new risks on how vulnerable and existing customers are treated and it is key that this is taken into consideration when evaluating business models.  

The use of Artificial Intelligence (AI) is likely to come under stricter regulatory scrutiny in Ireland, as the reliance on it grows more and more within the area of insurance distribution. The EU Artificial Intelligence Act is a legislation expected to come into force in late 2023, which will essentially be the GDPR for artificial intelligence and will establish strict rules for insurance firms that use artificial intelligence technologies.

There is always the risk of relying too heavily on AI and the errors it can possess such as providing advice through an automated system “robo-advice”. If a customer relies on robo-advice to choose an insurance product, there’s a more heightened risk that they make an unsuitable decision if an error was to occur with the system itself and if any incorrect advice was provided.

It will be important for insurance firms to have a robust regime in place if AI is being used and to ensure that customers benefit from the use of the technology available and are not penalised by it.

7. Inflation and increased cost of living:

The increase cost of living in Ireland and globally is impacting all aspects of the economy, with the changing external environment, it has brought a new focus on inflation and the repercussions it is having on the insurance industry itself.

Historically, prolonged high levels of inflation tend to give rise to changes in customer behaviours, which combined with the economic downturn, may have implications of unintended under-insurance and a higher tendency to claim. Insurance companies should continue to be proactive in their claims investigation to guard against fraudulent or exaggerated claims.

Whilst it has since shown signs of easing, few industries have experienced the recent supply-chain induced inflation in same way as the auto industry; the worldwide shortage of semiconductor chips had a ripple effect on prices within the new, used and rental car market.

The future path of inflation for insurance firms is uncertain and given the differences in risk profiles between the insurers in Ireland, there is unlikely to be one approach that suits all. The Central Bank has stressed that insurers have to be mindful of the impact of inflation on costs, claims, operating expenses and allowances must be made for reserving in existing business.