Domhnall Cullinan, director of insurance supervision at the Central Bank of Ireland, speaks to Ronan McCaughey about the biggest risks and regulatory challenges facing the sector in 2023
Ireland's insurance market is one of the most important in Europe. As well as a domestic market serving its 5m population, the country hosts an array of international operations from the likes of Allianz, MetLife and Scor.
Cross-border business is a major source of activity and recent years have been good for Ireland, partly thanks to Brexit, company growth and consolidation trends. Between 2016 and 2021, insurer assets grew by 55% and liabilities by 46%. Some 15 re/insurers were authorised and 52 portfolio transfers were overseen during 2020-21.
Watching over this diverse industry is Domhnall Cullinan, a Dubliner and football fan, who began his career as an underwriter before joining the Central Bank of Ireland (CBI) in 2003 and rising up the ranks to lead its insurance division.
He talks to InsuranceERM about Solvency II and Brexit, climate change, diversity and inclusion, and the biggest risks and regulatory changes facing insurers in 2023.
How concerned are you that the UK's Solvency II reforms could lead to divergence with the EU?
The issue is not necessarily about divergence, but the degree of divergence. There has already been divergence between the Solvency II regimes in the EU and the UK since Brexit. For example, the prudential treatment of sustainability risks has been changed in Solvency II in Europe, which would not be reflected in Solvency II in the UK.
There has been a review of Solvency II in Brussels and London, and inevitably after those two reviews there will be even further divergence. It is impossible to say where that will end up.
The question is when does the degree of divergence lead to a situation that it is material, and there may be some question over equivalence, and whether the two regimes still recognise each other?
We have had 20 years at least of a genuine attempt at international level to have a convergence of standards and a level of playing field around the world, such as Solvency II and the IAIS [International Association of Insurance Supervisors].
"When does the degree of divergence lead to a situation that it is material?"
For me, any divergence from that context means if you part of an international group, which many entities in Ireland are, it means you could have one standard for Europe, one standard for the UK, the US, and whatever else.
That leads to greater expense that is not good for insurers, and ultimately that cost is passed on to the consumers. More importantly, it could lead to a race to the bottom and what that might do to policyholder protection.
How do you view the EU's Solvency II review?
We broadly support of the EU's Solvency II reform and we think it will further improve convergence across Europe. There is a real desire to have a European framework that is convergent. The European Parliament is still scrutinising the proposed reforms and we don't know its final position at this stage. And after Parliament reaches a position further trilogues will be required in 2023, aimed at achieving a compromise between Council and Parliament.
What are the CBI's insurance supervision priorities during 2023?
These are in no particular order. One of the big things coming down the track in Ireland is the individual accountability framework. The Central Bank Individual Accountability Framework bill is currently before Ireland's parliament, and we anticipate the bill will come into force sometime early this year. We will then go to consultation in relation to various standards and guidance.
"Now the Bank can pursue individuals within firms"
The ruling will have serious implications for insurers. It will make it easier for the Bank to pursue individuals and make them more accountable.
The intention is not that it will lead to any huge uptick in enforcement, but it may change the nature of it. In the past, our emphasis was pursuing firms because the Bank had to sanction the firm first before you could pursue the individual. But now the Bank can pursue individuals within firms.
Another priority for the CBI is climate change. In 2022, we developed a heat map for climate risk within insurers and we will be using that to focus our efforts on the firms in 2023 that we view as having the highest climate exposure.
A second big pillar of our climate related work in 2023 in relation to this is we have a natural catastrophe project that is going to focus on whether the natcat modelling is adequate overall, whether it is properly modelled for Irish specific risks, and whether natcat modelling takes climate risk into account.
From a consumer interest standpoint, we did a lot of work on value for money in unit-linked products last year and we will build on that this year to see if there are any outliers in terms of charging. We will also be doing a thematic review on the Eiopa supervisory warning on credit protection insurance. Auto enrolment [into workplace pensions schemes] will be introduced in Ireland and that represents a significant change for the domestic life industry.
Operational resilience is a topical area, and we will certainly be monitoring that. It is one of the areas I am concerned about in 2023. The Bank has issued cross-industry guidance on operational resilience which will come into force fully by the end of this year. And then the [EU's] Digital Operational Resilience Act should come into effect around the end of 2024.
How well are Irish insurers are progressing in managing climate risk and sustainability?
We looked at about 40 ORSAs [own risk and solvency assessments] on this specifically last year across life, non-life and reinsurers. Compared with previous years, we saw some had a material improvement in their assessment of climate change risk and that some had carried out quantitative analysis for the first time.
"The majority of firms could be more ambitious in their consideration of climate change risk"
But there are definitely different stages of maturity in firms in relation to their development of climate change.
We still think the majority of firms could be more ambitious in their consideration of climate change risk. A lot has been done and there is much more to do.
What role should capital play in managing climate risk and sustainability?
It is one of the things Eiopa is looking at, at the moment. As I see it, there are two choices. You can increase the capital requirements, or you can look at what we have currently, put a sustainability slant on it and make the current capital requirements more responsive to sustainability risk.
I don't think we have had enough of a conversation on which approach is the right one to take.
What would you say are the top risks facing insurers in 2023?
One thing that struck me when I was at the InsuranceERM conference in December was there was such a degree of uncertainty. Nobody knows where anything is going at the moment, and I have a lot of sympathy for the insurance industry.
I have seen commentary in the media that inflation has peaked but even if this turns out to be the case, it certainly has not gone away, and we still say to insurers you have to be mindful of the impact of inflation on costs, claims, operating expenses and allowances made for reserving in existing business.
"You would have to question the market's ability to absorb further surprises in an already high-risk environment"
Market volatility is still quite a big issue. We saw what happened with the UK gilts crisis and with Covid-19, Russian invading Ukraine and Brexit; you would have to question the market's ability to absorb further surprises in an already high-risk environment.
I do wonder about cyber risk and the one thing I would be concerned about, from an Irish perspective, is that the Irish insurance industry doesn't find itself as large provider of capacity in the international market, but without appropriate pricing and adequate reserving and the right expertise to underwrite the risk.
Will people risk and diversity, equity and inclusion continue to be a big focus for the CBI?
It's an ongoing piece that we look at. There has been a tendency to perhaps get elder states people out of the industry too quickly in the past and not keep that knowledge and experience on board in some capacity.
For example, how many of us have worked in an inflationary environment? Very few, but there are people who have the market knowledge and could explain what it actually means. I think ageism goes both ways.
How can insurers attract more young people and diversity into the industry?
The Insurance Institute of Ireland, which is the educational body, has done major work on its apprenticeship programme. That has been aimed at people who have gone to college and dropped out, and women who were returning to the workforce after raising a young family.
Industry needs to get out there and talk more generally about what a good industry insurance is, the value it provides to the economy, and it's a real way to contribute to society.
How did you get into the insurance industry?
I was only 19 when I started in the industry and 30 years later I am still here
Once it became clear to me that being a professional footballer or rock star was out of the question, it was the only thing I wanted to do. I wanted to work in the financial services sector so I could be financially independent and start earning money.
I was only 19 when I started in the industry and 30 years later I am still here.
What occupies you outside of work?
A lot of my time is family centred. I also have a long-standing interest in the beautiful game of football, and GAA [Gaelic football] as well. A lot of my time is bringing myself and other people to matches and I've seen the Republic of Ireland national team play more than 160 times. I also support Liverpool, Celtic and Shamrock Rovers.