Address by Director of Policy and Risk, Gerry Cross, at DIMA AGM on 29 June 2015

29 June 2015 Speech

Ladies and gentlemen,

First of all: let me offer my congratulations. It is a significant milestone to reach the 25th anniversary of a trade association. I have been reviewing DIMA’s 25th Anniversary Dublin Insurance Report including the Milestones chart it contains. There is no doubt that it has been an action-filled and very successful 25 years. Since the first reinsurance licence was issued 25 years ago, the growth in the international insurance, reinsurance and captive sector in Ireland has gone from strength to strength and DIMA has been at the heart of this development.

All that and the planting of 25 oak trees in the Phoenix Park earlier this year!

I would like to thank Sarah Goddard CEO of DIMA for inviting me to speak at today’s event. Particularly so, as I have very recently joined the Central Bank as Director for Policy and Risk. So DIMA’s 25th Anniversary provides me with the opportunity to meet with you and speak to you for the 1st time.

Solvency 2

With just over six months to go to Solvency II implementation, the remainder of 2015 will of course be a demanding phase for the insurance / reinsurance industry in Ireland. The final piece of the puzzle, the second set of Implementing Technical Standards and Guidelines will be issued shortly and with this the complete Solvency II legislative framework will be in place. We on our side will certainly be maintaining a strong momentum right up to and on through the 1st January 2016 implementation date. Deputy Governor Cyril Roux has recently discussed some of the benefits and challenges of Solvency II when he spoke at the Central Bank Solvency II Forum (20 April). And the Central Bank's Director of Insurance Supervision, Sylvia Cronin, has also spoken importantly on Solvency II implementation, including to the DIMA Conference of 14 May. I don’t intend to cover the same ground. What I would like to do is pick up on a number of themes looking forward including aspects closely related to Solvency 2, but also covering some broader ground.

While not of course perfect in its design, Solvency II is a significant positive step forward in ensuring the appropriate protection of policyholders. It will help in achieving a level playing field and promoting more harmonised cross border provision of insurance services across Europe which I know will be particularly important to many of you here today.

Despite already applying many of the requirements of Solvency II such as Fitness & Probity and Corporate Governance in parallel with your preparations for Solvency II, we in the Central Bank have also been preparing for the changes that Solvency II will bring. We are addressing a range of policy issues that will inform how we supervise and what we expect from firms. For example, the recent consultation on the Actuarial Function was, of course, Solvency II focussed and there are numerous one-off issues, (many raised by DIMA) that require decision or clarification. So there is much going on behind the scenes to enable the Central Bank to be also ready for the new regime.

So will this result in a change in our supervisory approach? As you are aware Solvency II introduces risk based supervision. Of course that is not new to insurance undertakings in Ireland who have been subject to risk based supervision since 2011 under the PRISM framework. The Solvency II Supervisory Review Process is closely aligned with the PRISM framework of forward looking, risk-based and judgement-led supervision. The PRISM framework will be adapted to reflect the special features of Solvency II (including a revised engagement model) but, in general, undertakings can expect that there will be good continuity in the Central Bank’s approach to supervision. At the same time across the financial sector, the approach to supervision continues to evolve post-crisis and we have not reached the end of this journey.

A clear onus is placed firmly on the firm and the Board concerning the different aspects of Solvency II. This is very much as it should be. There is no substitute for a firm’s seeing regulatory compliance – compliance in the spirit not just the letter - and high behavioural standards, led strongly from the top, as non-negotiable. This should underpin the interaction between firms and supervisors, who will in turn base their approach on a clear understanding of the risks the firm is exposed to. Open and robust dialogue will continue to be key. Based on the Central Bank’s risk-based framework, supervision will be appropriately intensive and challenging including in respect of firms’ risk measurement, management and mitigation. The development of a strong risk culture is paramount and risk awareness should be embedded throughout the firm.

Solvency II at its core promotes good governance of insurance undertakings. In Ireland we already have a strong governance framework in place with the introduction of the Corporate Governance Code and the Fitness and Probity Regime in recent years. Solvency II will complement our current regime in a number of areas and will provide firms with a comprehensive governance framework in which to operate. It should be noted however that the primary responsibility lies with firms to ensure that they have an appropriate governance framework in place both today and under Solvency II.

As Sylvia Cronin noted in her remarks to the recent DIMA conference, one cannot overstate the importance of the ORSA in a Solvency II world. The ORSA must deliver the essential overall alignment between risk and capital in an undertaking. We are all aware that Pillar 1 capital requirements may not capture all the risks to which a firm is exposed or potentially exposed. It is virtually impossible to design a regulatory capital requirement to address all potential risks and this is where the benefit of the ORSA process will be felt for both firms and supervisors alike. The ORSA will require firms to consider longer term risks and other non-quantifiable risks and therefore provide a better understanding of a firms risk exposures and the adequacy of their risk mitigation strategies.

Solvency II also places significant emphasis on group supervision across EEA member states, supplementing solo supervision and providing a comprehensive view of the risks within large multinational groups. The regulatory college is a key device for dialogue between supervisory authorities and the Central Bank participates in a number of supervisory colleges. Overall group supervision under Solvency II will assist in the co-operative approach to group supervision across different supervisory authorities.

You will all be aware of the Delegated Regulations on Equivalence recently issued by the European Commission which provides welcome clarification in this area. The Solvency II equivalence assessments have been instrumental in the development of regulatory co-operation paving the way to more effective supervision. The European Commission plans a second wave of equivalence assessments in the autumn which will be of particular interest to a number of firms based in Ireland given the international nature of the market.

Other than Solvency II implementation what else is on the regulatory horizon?

EIOPA work

The Central Bank engages actively at an EIOPA level and will continue to do so into 2016 and beyond. A key focus at EIOPA in 2016 will be to promote supervisory convergence and EIOPA adopted a multi-annual oversight strategy earlier this year in order to achieve a convergent approach to supervision across the EU. EIOPA is currently developing a supervisory handbook the aim of which is to build on good practices in Solvency II, encouraging supervisory authorities to implement these practices in their processes.

Recovery and Resolution

There have been early-stage discussions about the possible development of an EU Recovery and Resolution Framework. This might be thought a logical next step in the development of insurance legislation post Solvency II. A harmonised EU Recovery and Resolution regime could be beneficial and would seem to complement the enhanced risk management, capital management and governance which will be introduced by Solvency II. We should however be careful, policymakers will need to take close account of the specific risks of insurance undertakings and understand the differences between insurance and banking. We would need to be very clear what does and does not need to be achieved in this area. This would provide the best result for policyholders, industry participants and supervisors.

Another important aspect is the question of policyholder guarantee schemes. Currently in Europe there are number of national regimes. The features and funding of these schemes are not consistent resulting in different treatment of policyholders across Member States. The lack of harmonisation is to the detriment of policyholder protection, where the failure of an insurance undertaking operating cross border results in different levels of policyholder protection in different member states. That being said, while such harmonisation is desirable, there would also be significant challenges in introducing such a scheme and much consideration, co-operation and compromise between Member States would be required.

Infrastructure Investments

Another area currently under consideration is the treatment of infrastructure investments. In February the EC issued a call for advice to EIOPA on the identification and calibration of infrastructure investment risk categories in the Commission Delegated Regulation on Solvency II. It is believed that insurers could be an important source of funds for infrastructure investments as the long-term nature of their liabilities seems to offer a good fit. At the same time from the prudential regulatory point of view it is important that we remain clear about the objectives of different policy instruments. Prudential requirements must remain risk-sensitive and well-calibrated. EIOPA will shortly issue a consultation paper on this issue outlining the asset classes and the proposed treatment under Solvency II.

You will all also be aware of the discussions around the treatment of Simple, Standardised and Transparent Securitisations.


Turning to a different but related matter, I should take the opportunity to mention the recent IMF ROSC report on the observance of Insurance Core Principles in Ireland. The Central Bank worked closely with the IMF on this review of the performance of the regulatory regime in Ireland against the Insurance Core Principles issued by the IAIS. The report noted the concentrated nature of the market and the fact that most (re)insurers established in Ireland are part of large multinational groups. While the report finds an overall high level of observance of the ICPs it also identifies weaknesses and makes a number of recommendations. The report notes for example the importance of addressing the challenges around high turnover of insurance supervisors. It also suggests the need for consideration of the currently reactive approach to PRISM-designated ‘low impact’ insurers. This is an important report and we are looking closely at these and its other findings and how they might be addressed.

Capital Markets Union

Now let me say something about the Capital Markets Union (CMU) initiative which will be the centre piece of new financial services regulatory activity for the next 5 years and which has the potential to impact significantly on the insurance sector. The European Commission’s green paper aims at

  • improving access to financing for all businesses across Europe (especially SMEs) and infrastructure investment
  • increasing and diversifying the sources of funding
  • making markets work more effectively and efficiently especially cross border.

CMU has the potential to deliver significant benefits to the European economy. In general, of course, the insurance sector would benefit from any increased level of economic activity, increased financial stability, greater levels of funding and the increased efficiency of cross border markets to which CMU aspires. And of course, there are elements in the CMU programme which will be directly relevant to insurers.

The Commission is now reviewing the some 700 responses to the consultation process it launched in February and is on track to produce an action plan in September.

Although not all the responses have been published it is clear that there is very widespread support for CMU coming not only from the Financial Services industry, but also from national governments and regulators and from key European institutions including the Parliament and the ECB.

There is also strong support for the Commission’s initial priority actions proposal – development of simple standard and transparent securitisation and of a simplified Prospectus Directive and the Commission plans to submit the relevant legislation also in September.

It is expected that the Action Plan will indicate a clear prioritisation of deliverables and a timetable with specific milestones. Quick wins on short term priorities are viewed as important to gain momentum. What will be interesting to see will be the degree of ambition to tackle some of the more deep-seated or far-reaching challenges to fully integrated capital markets in Europe – for example in the areas of insolvency law or securities law.

The Green Paper accepts that legislation might not always be the appropriate policy response. Non legislative steps and the effective enforcement of competition and single market rules can offer the best way forward. Legislative solutions can fall short of full harmonisation such as developing an EU ‘29th regime’ to complement national frameworks.

In the Central Bank’s response to the Commission consultation we emphasised the need for a coherent data strategy. In many market segments covered by CMU there is limited data on activity and limited regular reporting on a mandatory basis. Our focus is on the need for better data for regulatory, supervisory and financial stability purposes. In its response the ECB went further. It called for compulsory standard universal identifiers (covering legal entities, products, instruments and transactions) a robust data infrastructure for granular information and access to relevant information by all stakeholders.

The role of good regulation

Finally, maybe it is opportune to say just a few words about the role of regulation and regulators at this moment. This moment being not only the occasion of the 25th anniversary of DIMA but also something of an evolution-point in phases. In particular there is a sense that we are shifting from what we might call the first post-crisis phase with its focus on fixing the many things that went wrong. And here, to be clear, I do not have the insurance industry per se in mind but rather financial services and their regulation more generally. And we are moving into what might be called the restoration phase, with a renewed emphasis on restoring growth and the economic wellbeing of citizens. The capital markets union project, for example is part of this new phase.

But what does this mean for regulation and supervision. Well let me be rather clear on how I see this. To my mind, the best, and only real, contribution that regulation and supervision can make is to be high quality, rigorous, and effective. What we have seen since 2008 is the very high price that is paid when the pricing of risk becomes undermined and confidence in the system fails. To avoid this it is essential that regulators and supervisors at all times keep their attention fixed firmly on their objectives: the appropriate soundness and stability of firms and of the system, the protection of consumers, and the effective functioning of financial markets.

Now that is not to say that there cannot be vigorous debate about how these outcomes are appropriately or best achieved. There can be and there should be. It is also legitimate to demand that regulators are appropriately resourced and that they use their resources effectively and efficiently.

But there should be no expectation that regulators will shift their attention away from these to other objectives. No one should think that other - perhaps more apparently tangible or shorter term objectives - might be allowed to weigh in the balance against them. We have been down that road; and we know where it leads.


So, in conclusion, good regulation is in everyone’s interest and we must not forget the key aim of Solvency II, soundness, stability, and the protection of policyholders. Work on Solvency II does not end on 1 January 2016 and, despite all the efforts placed on the preparatory period, there will still be significant work required in order to embed the new regime. I look forward to working with you both pre and post Solvency II implementation with the aim of having a robust regulatory framework for insurance that will benefit us all.

Thank you for your attention