Remarks by Director General, Financial Conduct Derville Rowland at the Deloitte Global Insurance Webinar

Remarks by Director General, Financial Conduct Derville Rowland at the Deloitte Global Insurance Webinar

Good morning everybody and thank you to Deloitte for the invitation to speak at this webinar.

Some people think of insurance as a relatively modern financial concept. But of course, as the insurance experts in this audience know, its origins can be traced all the way back to certain kinds of shipping loans in Babylon, through Ancient Rome and Greece, and into Medieval Europe. In the 17^th century, the French mathematicians Paschal and Fermat gave us the basis of probability, and the coffeehouses of London gave us the concept of underwriting, and of course, Lloyd’s. So the history of insurance is, in many ways, a short history of modern society and its very considerable turbulence – from ancient plagues to the Great Fire of London to 9/11 and more. Of course, to that list, we can now add the COVID-19 pandemic, which has caused such dreadful human suffering and which continues to create significant economic and business uncertainty globally.

Here in Ireland, while most of the COVID-19 restrictions are lifting, the effects of the pandemic are far from over. Today, I will discuss where the insurance industry finds itself at this natural point of inflexion, how the sector has handled COVID-19, and what we as a regulator want to see from it going forward. Our regulatory priorities include not just financial resilience of the sector but also behaviour and culture of firms and – critically – fairness to insurance customers. I will come to each of these points in turn.

The importance of insurance

Insurance serves a critical role in the functioning of a modern society, through reducing uncertainty by protecting people and businesses against the risks of future events. At some point in all our lives we are likely to buy some form of insurance product, whether it’s car, home, life or health insurance for consumers or the various commercial, liability or speciality insurance cover provided to businesses and employers.

The functions and services provided by the insurance sector help to facilitate economic activity and provide financial certainty and protection for citizens, businesses and financial markets, and can therefore also contribute to financial stability. A functioning financial services system that sustainably serves the needs of the community requires stable, functioning and trustworthy insurance markets and firms.

Our supervisory approach is always guided by serving the public interest by ensuring the insurance sector is financially stable; that it can deliver on the commitments made to its customers by ensuring it has the ability to pay valid claims into the future; and that it operates in a fair and transparent way so that consumers are treated fairly and understand the policies which they buy.

Our mandate is to deliver effective and purposeful supervision that safeguards the interests of policyholders and supports a robust insurance sector with firms that:

• Have sufficient financial resources including under plausible but severe stresses, are resilient, and can be resolved effectively in the event of financial distress;
• Have established robust governance and risk management frameworks;
• Behave well and have consumer-centric cultures; and
• That are proactively developing their business models in order to operate effectively in the future insurance landscape.

Supporting our regulatory approach, we also produce regular analysis and data on the insurance market to inform market participants, policymakers and the public, supporting the effective operation of the market. For example, the National Claims Information Database (NCID) has been developed to improve transparency around the cost of settling claims, and the impact this has on insurance costs.

Transparency on the functioning of the insurance market remains a key area of focus for national authorities and we will continue to support this. Indeed, while the initial scope of the NCID was limited to private motor insurance, this has been extended to also include employers’ liability, public liability and commercial property insurance. We will also continue to review, and enhance where necessary, the data we collect through the NCID to help inform the policy debates in Government, in the Oireachtas, in the firms and in wider society, as well as informing our own work in the Central Bank.

COVID-19 and financial resilience

Turning to COVID-19, the impact of the pandemic on economies and financial markets over the last 18 months has been significant. By and large, the Irish insurance sector has proved to be resilient. While the sector as a whole is well capitalised, and the benefits of vaccination programmes are contributing to economic recovery, these positives should not foster complacency. Looking ahead, significant uncertainty remains. We will continue to be focussed on the financial resilience of individual firms and the sector as a whole. While the exceptional fiscal and monetary policy response to COVID-19 has cushioned the full economic impacts, the recovery is likely to be uneven across countries and sectors and could be susceptible to unexpected setbacks. Firms should consider what might happen as these supports unwind and the potential impacts on their capital and reserving positions.

Many insurers will be in the process of developing comprehensive recovery plans in line with the Regulations published by the Bank earlier this year.¹ Having robust pre-emptive recovery plans in place is an important step in strengthening firms’ risk management frameworks and serving the best interests of customers.  Recovery plans should document the firm’s evaluation of the most appropriate and effective mitigation across a range of possible adverse situations. Firms should be able to deploy the recovery plans quickly and effectively in the case of a financial crisis. Assessing the quality of those plans will be an area of considerable focus for us next year.

While on the topic of recovery planning and financial resilience, you will be aware that the Department of Finance, in collaboration with the Central Bank, published a consultation paper earlier this month, seeking views on what a robust national resolution framework should look like.² The objective of such a framework is to make our financial system more resilient by enhancing protections for policyholders, maintaining financial stability and minimising costs to the public should insurance firms fail in the future. A national or EU-led solution to this issue should have long-term benefits for the sector and system as a whole, and should not result in additional costs to consumers. We look forward to hearing your views on making this happen.

Behaviour and Culture

In addition to resilience, we have been particularly focused on issues related to conduct, culture and customer treatment, particularly around Business Interruption Insurance and Differential Pricing.

Before discussing our work on those specific issues, it is important to set out why conduct and consumer risk is so central to our supervisory approach. Many of the challenges and reputational issues the insurance sector is dealing with are grounded in conduct and culture. Indeed, this is the case for many of the issues that we see across the financial sector.

We set out our expectations regarding behaviour and culture regularly to firms through our supervisory engagement, through public engagement and events such as this webinar, and through our annual outlook reports, which set out the key risks and challenges for the financial sector alongside our areas of supervisory focus. We have established our expectations but the responsibility to deliver a strong customer-focused culture rests with you and your firms.

As the Financial Stability Board has noted, a firm’s culture “plays an important role in influencing the actions and decisions taken by employees within the firm and in shaping the firm’s attitude toward its stakeholders, including supervisors and regulators”.³

Firms are responsible for selling their customers products that meet their needs and to do so fairly. This should avoid behaviour and practices that unfairly take advantage of consumers’ behavioural biases. Firms are expected to take a consumer-focused approach in pricing decisions and practices and ensure that consumers and investors are at the heart of all decisions. Firms must also have strong internal governance arrangements and oversight of algorithms - ensuring transparency, accuracy, and robustness.

Practices must be grounded in fairness. We will intervene on practices which we think are, or have the potential to be, unfair on consumers and investors. I will turn to two such areas now in more detail.

Differential Pricing

We recently published the outcome of our Review of Differential Pricing Practices.⁴ The Review was conducted through a multi-phase approach, using data gathered from almost 11 million policy records and consumer insights from a survey of approximately 5,500 consumers. The Review found that some pricing practices can lead to unfair outcomes for car and home insurance consumers. Therefore, we are proposing a series of actions:

Firstly, we are proposing to ban price walking. This is where consumers are charged higher premiums, relative to the expected cost, the longer they remain with an insurance provider. Banning the practice will remove the “loyalty penalty” on these consumers and will mean that at the point of renewal, insurers could not charge customers who are on their second or subsequent renewal a premium higher than they would charge a year one renewal customer with similar risk and cost of service.

Secondly, we propose to require providers of motor and home insurance to personal consumers to review their pricing policies and processes annually, to ensure that insurance providers maintain focus on their pricing practices and the impact of such practices on their customers, while also ensuring adherence to new pricing provisions and the fair treatment of consumers.

Thirdly, we propose to introduce new consumer consent and disclosure requirements to ensure the automatic renewal process is more transparent for all personal non-life insurance products.

In all of the above, we expect boards to have strong governance and oversight of their pricing practices and understand the impact of their practices on consumers. In addition, firms should have fully embedded conduct risk management frameworks in place promoting positive behaviours in firms and fair outcomes for consumers.

In setting out these proposals, we are conscious of the benefits that some pricing practices can provide, so we took care to ensure that our approach was balanced and proportionate. As we noted throughout the Review, we were always guided by the responsibility to avoid unintended consequences. Therefore, our proposals will mean that unfair practices are banned while ensuring customers retain the opportunity to shop around for better priced premiums.

We understand that innovation and developments in data analysis and modelling techniques can bring significant benefits and improvements to the insurance sector and for your customers. But it is important that financial firms do not lose sight of their obligations to their customers. Firms must avoid behaviour and practices that unfairly take advantage of consumers’ behavioural biases, and operate in a fair and transparent manner. These considerations, along with consideration of the impact on customers, must be taken into account before pursuing any new strategic approach.

The consultation on our proposals remains open for another three weeks, and we welcome evidence-based submissions. Taking into account the views of stakeholders, we intend to finalise these measures early next year and that they will apply to insurance providers from 1 July 2022.

Business Interruption Insurance

On the claims side of the insurance sector, our work has been focused on issues related to COVID-19 and Business Interruption Insurance (BII). From the onset of the pandemic, we identified this as an issue that could have a widespread impact, particularly for the SME sector, and prioritised it accordingly.

From March 2020, following the government-directed closure of businesses across Ireland, we engaged directly with insurers. We made clear that we expected all valid claims to be paid promptly, and that where there was a doubt about the meaning of a term, the interpretation most favourable to the policyholder should prevail. Through a system-wide supervisory examination, we engaged in robust review and engagement with the firms. We reaffirmed our expectations for insurers through the Business Interruption Insurance Supervisory Framework, published in August 2020.

Through the examination, we focused on identifying all groups of policies where, in our view, the relevant contractual provisions provided cover for COVID-19 related interruption or interference to businesses. Our aim was to ensure system-wide issues affecting groups of customers were identified and addressed. Our review of policies, and our engagement with firms on same, has been sustained and system-wide.

The examination commenced by identifying c. 140 firms that potentially provided business interruption insurance cover in the Irish domestic market, and 145,000 policies. Through further review, the Bank identified 27 firms that were actively providing business interruption insurance cover for infectious diseases across more than 200 individual policy wordings. Each individual policy wording was then analysed to determine whether the cover provided should operate in the specific circumstances of COVID-19. We made it clear to firms where our view that ‘cover’ or ‘causation’ existed did not coincide with theirs.

Our analysis found the policies fell into three categories:

• Clear that no cover applied under the wording;
• Cover applied in specific circumstances, e.g. an infectious disease must occur on a premises for cover to apply; and
• Cover expected under wording - i.e. the Central Bank believed cover for COVID-19 was provided for as policies generally covered for a notifiable and/or infectious and/or contagious disease (or its equivalent) at, or within, a certain radius of the insured’s premises.

By the end of this process we had identified 31,000 policies that were responsive to the circumstances of business interruption or interference related to the outbreak of COVID-19 in Ireland. We engaged with the relevant firms throughout in relation to responsive policies, making clear our expectation that firms identify and contact potentially affected policyholders, assist policyholders in making a claim, and were operationally ready to deal with claims and have adequate governance and oversight of the process.

As a result of our supervisory interventions, a number of insurers accepted and commenced settling valid claims early in the process. Others sought legal confirmation and clarification, which they were entitled to do. When the decision of the High Court was published, from February 2021, the remaining firms accepted that cover existed for these policies. We directed all the firms to contact the 31,000 policyholders who, in our view, held a policy which was responsive to business interruption, along with details of how they could make a claim if they believed their business suffered an interruption or interference related to the outbreak of COVID-19 in Ireland.

Of course, it must be stressed that while a policy may be responsive, it does not necessarily result in a claim. There will, accordingly, be a significant difference between the number of policies we confirmed through our analysis as being technically responsive, and the number of businesses who actually proceed to claim. Many policyholders will not make a claim as their business may not have been interrupted; they may not have been reliant on their premises to continue doing business; or they may not have suffered losses as a result of COVID-19. For example, a proportion of responsive policies are in respect of essential retail businesses, care and health facilities or residential property owners which were not subject to closure.

Where notified claims are valid, firms are fully settling them, or making interim payments while awaiting the High Court’s ruling on quantum, expected later this year. To date, more than €130 million has been paid to 4,371 policyholders through settled claims and interim payments.  This figure includes 3,485 claims which have been fully settled, and 886 who have received interim payments.

Our work is now focused on monitoring compliance by the relevant insurers with our expectation that all valid claims are handled and paid by the firms in accordance with their claims handling processes, in compliance with their legal and regulatory obligations.

There are policyholders who, for the aforementioned reasons, will not submit a claim. There are other policyholders who have made a claim but not yet submitted the relevant information in order for the claim to be assessed.  Again, there may be very good reasons for this. After the hardships of the last 18 months, the priority for some businesses is simply reopening and ensuring they get back on their feet, before dealing with issues such as insurance claims. Equally, other businesses may be awaiting the High Court quantum ruling before progressing their claim.  This is completely understandable.

But we want to see all valid claims submitted and settled, and so we encourage all policyholders to engage with their insurer on all claims. Where policyholders have submitted a claim, it is vitally important they engage with their insurer and provide all necessary information to ensure full and successful settlement of valid claims. As mentioned above, we are watching closely to ensure insurers continue to meet their obligations in full where valid claims are submitted.

Therefore, while our early intervention and system-wide examination of business interruption insurance meant the potential for widespread consumer detriment was avoided, our work is not finished. We will continue our work over the coming months to ensure that claims are managed, processed and paid efficiently and as quickly as possible, based on all required information being provided by the policyholders. We will continue to monitor the process throughout to ensure it is managed in line with our expectations.

More broadly, the issues which arose in respect of business interruption insurance highlighted the impact that unclear or ambiguous policy wording can have on both policyholders and insurers. Future events may have the potential to cause similar issues if not properly considered by insurers. A strong Product Oversight & Governance framework is important in identifying the events that could materially affect the main features, the risk coverage or the guarantees of their existing products and in establishing processes to review policy wording so that it is clear, unambiguous and understandable to the consumer.

As I noted earlier, firms are expected to have robust governance frameworks in place, which are applied when approving any new insurance product or adapting an existing product. This is not simply good practice, but a legal requirement under the Insurance Distribution Directive. Boards and senior management in Ireland bear ultimate responsibility for the products they design (including in respect of cost efficiency and value), the market they target and the means of distribution. The best interest of consumers must be at the heart of this.

Looking ahead

While the focus today has been on our current priorities, as a regulator it is important that we also look to the future. We regularly assess and benchmark our supervisory approach to ensure that consumer protections are appropriate and relevant, based on our experiences and interactions with firms, best international practice and revised standards.

We are currently developing our proposals to update the Consumer Protection Code to address emerging trends and risks across the rapidly changing financial services landscape and to ensure that it continues to deliver strong protections for consumers and investors into the future.

Our proposals will take account of the impact of technology and digitalisation on financial services, which as we know, is now widely established as a significant part of the delivery of financial products and services. New and emerging digital technologies are transforming the retail financial services market, and improved experiences in other industries have increased expectations amongst consumers regarding their experiences with financial service providers.

While the Irish insurance sector has experienced a relatively lower level of technological disruption, a number of firms are trialling digital initiatives, including the use of telematics in motor insurance and engagement with customers through apps. The adoption of digitalisation in insurance appears likely to grow year on year. Indeed, one impact of the COVID-19 pandemic appears to be an acceleration of the digital agenda of many financial institutions.⁵

Whilst those able to adapt effectively to a new digital environment may gain a competitive advantage, firms must also recognise that some prudential and consumer risks will emerge or be exacerbated by digitalization.

Our Code Review proposals will be framed with such risks in mind. We will also seek to ensure information to consumers and investors is as clear and useful as possible, both in terms of content and delivery. We will also set further requirements on how firms can better address vulnerability among consumers and investors. We will, of course, publicly consult on these proposals, and expect to launch our consultation in H1 2022.

European developments and climate change

As many of the regulatory requirements relating to insurance stem from European legislation, we work with our colleagues in other EU member states in the continued development, review and interpretation of European legislative requirements. Climate change and sustainability is one such area.

The broad range of challenges associated with climate change, environmental degradation and sustainability have significant implications for households, businesses, governments, regulators and financial services firms.

We have engaged with firms to make them aware of our supervisory expectations regarding Environmental, Social and Governance risks. We have emphasised governance, risk management, scenario analysis, strategy and business model risks and disclosures as five key areas of focus for firms. I stress again that boards need to take ownership of the climate change agenda in dealing with these risks. Firms will have to adopt a range of appropriate measures to strengthen and improve their financial and operational resilience, as well as ensuring that customers are treated fairly and that consumer and investor interests are protected.

Individual Accountability Framework

Finally, a brief word on the Individual Accountability Framework. In July, Minister Donohoe published the General Scheme of the Central Bank (Individual Accountability Framework) Bill which includes the introduction of conduct standards for individuals in regulated firms, conduct standards for the firms themselves, and the Senior Executive Accountability Regime (SEAR).

We have worked closely with the Department of Finance on the development of the proposals for an Individual Accountability Framework to incentivise positive behaviours and promote improved culture and governance within firms while strengthening the Central Bank’s enforcement toolkit, particularly with respect to individuals. The various separate aspects of the Framework complement each other to achieve the ultimate goals of better outcomes for consumers and a more sustainable financial system by driving higher standards of behaviour for individuals in financial services firms. Once the legislation has been enacted, we intend to consult on the implementation of the Framework.

The Framework will drive to the heart of culture and governance. Let me be clear in saying that most firms aspire to high standards. We see the Individual Accountability Framework as a positive in this regard – a tool to ensure that all firms and all staff know what is expected of them. A tool to ensure that senior leaders in particular are crystal clear about their responsibilities and can therefore better manage their businesses. A tool that drives an uplift in governance across the board. We therefore believe it will assist us in our mission but also assist you in yours.

Conclusion

In conclusion, we will continue to work with the insurance sector to ensure that it is prepared for the challenges ahead in an increasingly interconnected landscape, where digitalisation and innovation poses both risks and opportunities for businesses and their customers alike, and where climate change effects and costs are already with us. Effective governance and culture will be central to how the sector addresses those challenges. By doing so, the insurance sector will continue to have a vital role to play to serve the needs of policyholders and the wider economy and to contribute to financial stability.

Thank you for your time today.