The Central Bank of Ireland published their Regulatory & Supervisory Outlook report on 29th February (Regulatory & Supervisory Outlook Report 2024). The report sets out the Central Bank’s perspective on the key trends and risks facing the Irish financial services sector and the Bank’s regulatory and supervisory priorities for the next two years and is aimed to complement the sector-specific supervisory engagement it undertakes. The Central Bank also published an accompanying letter from the Governor of the Central Bank, Gabrial Makhlouf to the Minister for Finance, Michael McGrath T.D (Letter to the Minister for Finance) setting out his views on the macro-financial environment, the financial services landscape and the Central Bank of Ireland’s financial regulation priorities for 2024 including: Working with the Department of Finance on priority policy areas including continuing implementation of the Retail Banking Review; access to cash; the National Payments Strategy; the completion of the 2030 Funds Review and the National Financial Literacy Strategy. Putting in place a revised and modernised Consumer Protection Code (CPC) to ensure consumers are protected in a more digitalised financial services sector; Continuing to progress work both internationally and domestically to address systemic risks from the non-bank sector and deepening our analysis and understanding of macroprudential risks in this sector; Implementing the Individual Accountability Framework (IAF) and supporting external stakeholders to embed the new standards; The Regulatory and Supervisory Outlook Report itself is structured in four sections which aligns with the Central Bank’s supervision strategy. The first section depicts the current global macro environment, major trends and drivers of risk. The second section outlines the Central Bank’s assessment of the key risks facing the entities it regulates and the consumers and investors whose interests it seeks to protect, considered over a two-year time horizon, the third section explains the supervisory priorities in the context of that risk assessment, with the fourth and final section then providing a sector by sector view. The conclusion of the report shines a spotlight on two topics of particular prominence across all sectors currently in the form of Artificial Intelligence (AI) and Financial Crime. Broad Supervisory Priorities The Central Bank set out six supervisory priorities applicable across all sectors and align to different aspects of the Central Bank’s financial regulation responsibilities, and are also aligned with the priorities of the European System of Financial Supervision. The priorities are focussing on achieving a proactive risk management and consumer-centric approach by the leadership of firms, ensuring firms are resilient in the face of the challenging macro environment and that they are appropriately responding to change in such a fluid environment. The broad supervisory priorities are outlined below;   1.     Proactive risk management and consumer-centric leadership of firms 2.     Firms are resilient to the challenging macro environment. 3.     Firms address operating framework deficiencies. 4.     Firms manage change effectively. 5.     Climate change and Net Zero transition are addressed. 6.     The Central Bank enhances how it regulates and supervises. Sectoral Focus (Re)Insurance The report outlines the changes in the size of each insurance subsector (page 34) measured by number of entities and by total assets. In terms of Life, Non-Life, and Reinsurers over the period from 2016-2023, there has been a 26%, 4% and 10% reduction respectively in the number of entities regulated under the Central Bank’s remit, yet total assets over the same period have grown substantially, 45% for both Life and Non-Life and by 57% for Reinsurance entities. The report also frames the more detailed risks identified for the different sectors. The risks identified and the outlook provided for the (Re)Insurance sector are informed by the Central Bank’s market monitoring and horizon scanning, the risk assessment work undertaken by the European Supervisory Authorities (ESAs) and feedback from their supervisory teams across five topics. Topic Risk Description Risk Drivers and Outlook 24/25 Outlook Financial Risks & Resilience Risks to solvency and liquidity that are driven by factors including underwriting and reserving practices and the uncertain macroeconomic and financial market outlooks.   Topical focuses include: new lines of business and high-growth firms; the inflation and interest rate environment; market and credit risks more generally; and the availability of parental support in times of stress. Pricing discipline and reserving strength.   Macroeconomic conditions and financial market volatility. Stable Climate Change/Environment-Related Risks (Re)insurers have direct exposure to the physical, transition and litigation risks associated with climate change, varying according to the types of risk they cover and their geographical footprint. Firms also have exposure to the indirect impacts of climate change such as business model risk and risk to reinsurance availability. The transition to Net Zero.   The increasing frequency and severity of extreme weather events.   The increasing prevalence of environmental-driven litigation Increasing Consumer Detriment Risks Risks to consumers can arise if their best interests are not central to decision-making throughout the lifecycle of the various life and non-life insurance products, from initial product design to the sales process, to ongoing service and ultimately claims handling /surrenders.   Risk that consumers do not always have access to clear and unbiased information and some firms may seek to exploit information asymmetries or behavioural vulnerabilities in their pricing practices, in the obfuscation of product charges, in claims handling and/or via the misleading marketing of products.   These risks can ultimately lead to poor or unfair outcomes for consumers. Inherent complexity of some non-life insurance products and their contingent nature.     Outcomes from long-term savings products depend on unknown future investment returns with the impact of charges not always being clear.       Operational constraints within firms impacting standards of customer service. Stable Cyber Risks (Re)insurers face elevated cyber risks as potential victims of attacks and as underwriters of the cyber risks of other businesses.   There is significant uncertainty associated with this line of business given the emerging nature of the risk, the lack of historical data and rapidly changing cyber environment Cyber incidents are becoming more sophisticated and their costs difficult to quantify.       (Re)insurers’ own infrastructure vulnerabilities and the effectiveness of their IT risk management frameworks Increasing Operational Risks & Resilience Outsourcing risks across the value chain arising from a significant reliance by some insurers on third-party or group service providers for key activities. Risks are exacerbated where there is a lack of appropriate governance and oversight arrangements in place to monitor third-party activities.   Also, in Group situations, Irish subsidiaries’ requirements can be “crowded out” by a bias towards the needs of home-country entities and larger foreign subsidiaries. Staff attraction and retention challenges in some firms are leading to shortcomings in customer service standards, particularly in relation to claims handling.     Access being sought to specialist services and to reduce fixed costs.   Intra-group outsourcing to achieve operational and financial synergies. Increasing   The key supervisory activities for the Central Bank outlined in the report in respect of (Re)Insurers for 2024/25 are the following: Review of reserving assumptions in light of higher inflation and interest rate scenarios. Review of governance and underwriting in sectors or lines of business which have been subject to significant growth or changes in risk profile. A focus on the integration of climate change and sustainability considerations by (re)insurers and, in particular, firms’ assessment of the materiality of their climate risk exposures, as set out in the climate guidance issued by the Central Bank in 2023. Research the flood insurance protection gap with the aim of assessing the materiality of the gap in Ireland currently and how this might change over the medium to long term with the impact of climate change. Review of the adequacy of governance arrangements where a branch in a third country is used to conduct regulated functions or activities. Review of the oversight of critical outsourcing relationships and maturity of operational resilience frameworks. Examine the impact of reinsurance market contraction on insurance business models Commence a series of targeted reviews focusing on, for example, firms’ consumer protection risk management frameworks, health insurance renewal process, and customer service. Continued involvement in the European Insurance and Occupational Pensions Authority’s work on value for money in unit-linked investment products. Deepen the understanding of innovation and digitalisation in the insurance sector, in line with a broader evolution in the Central Bank’s approach to engagement regarding innovation. Ongoing risk-based supervision to include: a focus on underwriting and reserving practices; operational resilience; sustained improvement in culture; and a holistic approach to risk management.