Insurance Insights September 2024

AI is transforming the insurance industry by automating claims, assessing risk, personalising products, and fighting cybercrime. The KPMG report (authored by Frank Pfaffenzeller, Global Head of Insurance and Simona Scattaglia, Global Insurance Technology Lead) highlights that while insurance organisations are investing in AI, projects are slow to reach production. Balancing innovation with risk management is crucial. There is a need for a solid digital foundation, clean data, and upskilling employees to bridge the gap between AI and data. Successful organisations will be data-driven and people-led, leveraging AI to achieve their ambitions over the next three years.

The KPMG 2024 CEO Outlook report provides insights from over 1,300 global CEOs on key issues such as economic confidence, technology, talent, Environmental, Social, and Governance (“ESG”), and geopolitical concerns. Despite economic volatility, Chief Executive Officers (“CEOs”) remain optimistic and plan to increase their workforce, focusing on Artificial Intelligence (”AI”) and upskilling. Attracting and retaining talent is a top priority, with hybrid working patterns under discussion. ESG compliance and geopolitical risks are also significant concerns. Irish CEOs are particularly ambitious about leveraging AI and remain confident in economic growth.

CEOs in Northern Ireland are optimistic about the future, with 93% confident in the three-year economic outlook and 90% planning to increase headcount. The KPMG 2024 CEO Outlook report highlights that Northern Irish CEOs are particularly ambitious about leveraging AI and related technologies. However, they face challenges in attracting the right talent and capabilities. The report also notes ongoing debates about hybrid working, with many leaders expecting a return to pre-pandemic working patterns within three years. Additionally, there are significant concerns about meeting ESG commitments and ensuring compliance with new reporting standards.

CEOs are prioritising generative AI to drive growth and innovation, despite not being digital natives. The KPMG 2024 CEO Outlook report highlights that 67% of CEOs in the Republic of Ireland (“ROI”) and 63% in Northern Ireland (“NI”) see AI as a top priority, surpassing economic and geopolitical concerns. Ethical issues and lack of regulation are significant challenges, with 87% of ROI and 77% of NI CEOs expressing concerns about AI ethics. The European Union AI Act is seen as a tool to address these challenges, underscoring the importance of robust data and technology foundations.

Meeting the demands of AI data centres is a significant challenge for the industry. Intense competition, energy constraints, and the need for advanced cooling systems weigh heavily on data centre operators. KPMG (led by Christopher Brown (Partner, Head of Strategy)) emphasises the importance of innovative solutions, such as extending server lifespans, pursuing renewable energy, and managing supply chain bottlenecks. The report underscores the critical role of robust infrastructure in supporting the exponential growth of AI applications.

Ensuring the most effective board composition is a significant challenge for ambitious organisations. Intense competition, volatility, reputation, and the risk of unforeseen events weigh heavily on the minds of board chairs and decision makers. KPMG (led by Ryan McCarthy (Audit Partner and Board Leadership Centre Lead) emphasises the importance of having a board with diverse skills and perspectives to avoid groupthink. He highlights the need for board members to focus on adding value to the current organisation and stresses the importance of curiosity and the ability to ask insightful questions to drive valuable discussions and decisions.

Internal Audit (“IA”) functions serve as the last line of defense to ensure organisational elements meet rising expectations. High-quality audits are crucial for maintaining the IA function's relevance to business needs. The Institute of Internal Auditors (IIA) International Standards outline quality assurance requirements for IA functions. Establishing a quality assurance function to continually assess IA effectiveness has become standard practice for large audit teams across all sectors. KPMG (led by Patrick Farrell (Risk Consulting Partner) and the Internal Audit team) delve into this topic further.

The European Insurance and Occupational Pensions Authority (“EIOPA”) has published a report following up on its December 2020 peer review of its Decision on the collaboration of insurance supervisory authorities. The follow-up report describes the extent to which National Competent Authorities (“NCAs”) have implemented the recommended actions addressed to them from the previous report 2020 report. 

EIOPA has welcomed the new report published by the Climate Resilience Dialogue in July 2024. The Climate Resilience Dialogue is convened by the European Commission and includes 17 organisations to represent a full range of stakeholders from various parts of the economy (e.g. insurers, reinsurers, risk managers, public authorities and regions, and representatives of consumers and the real economy). The report includes insights from the various stakeholders and aligns closely with EIOPA’s own sustainable finance priorities.4. 

EIOPA has published a staff paper on the future of the pan-European personal pension product (“PEPP”). In the paper, EIOPA analyses the reasons why the PEPP has had limited success to date and highlights issues including the inherent expenses in offering PEPPs, the limited targeted market for these products, low participation and awareness by consumers concerning pensions, and the behaviour of some Member States in making it difficult or impossible to sell PEPPs in their jurisdictions. 

EIOPA have published a speech given by the EIOPA Chair Petra Hielkma entitled “The role of reinsurance in promoting healthy markets”. In the speech, Ms Hielkma addresses several key issues: the European Commission (“EC”) is focusing on competitiveness in the reinsurance sector and the EU's reliance on third-country reinsurance; the green agenda remains a priority, with a need for advancing transition plans; the Solvency II Directive provides a solid framework, with increased supervisory focus on conduct and emerging issues; complex reinsurance structures and mass-lapse reinsurance arrangements are under scrutiny to ensure genuine risk transfer and asset-intensive reinsurance contracts, which introduce counterparty risk, are also being closely monitored. EIOPA plans to consult on guidance for national supervisors by the end of 2024.

On 4 September, EIOPA published its monthly technical information for Solvency II relevant risk-free interest rate term structures with reference to the end of August 2024. 

On 4 September, EIOPA published its most recent technical information on the symmetric adjustment of the equity capital charge for Solvency II with reference to the end of August 2024. 

From January 1 2025, EIOPA will stop publishing technical information for 11 non-EEA currencies, including the Brazilian real, Indian rupee, and South African rand, among others. These currencies are not considered material for the EU insurance sector. The updated technical risk-free interest rate documentation will take effect on the same date with the first calculations based on it occurring at the end of January 2025. Until then, the current version of the documentation remains in use. 

The International Association of Insurance Supervisors (IAIS) has extended the deadline for responses to its fourth consultation on climate risk supervisory guidance to 28 October 2024. The IAIS has extended the deadline given the extensive stakeholder interest in the consultation. The consultation is the last of a series of four consultations on proposed changes to guidance relating to various insurance core principles (“ICPs”) and on new supporting material to better incorporate climate-related risk as part of effective supervisory practice. 

On 29 August, the IAIS published their newsletter for July/August. The newsletter covers various in focus and topical areas for the Insurance sector such as AI, Climate Change and Fintech whilst highlighting past and upcoming events within the IAIS.

Insurance Europe (“IE”) published an information document detailing the importance of the Retail Investment Strategy (“RIS”) in the context of insurance-based investment products (“IBIPs”). It highlights how IBIPs provide unique benefits, such as risk coverage and financial guarantees, which are not adequately considered in the current RIS framework. Insurance Europe calls for a more balanced approach that prioritises the qualitative aspects of insurance products, supports product diversity and ensures that distribution channels, including smaller ones, are not disadvantaged. It also emphasises the need to reduce information overload for consumers and to focus on essential information that aids their investment decisions.

On 13 September, IE published its response to the EC targeted consultation on AI in the financial sector. IE highlights the potential benefits of AI, such as improved efficiency and customer service, but also warns of risks like market concentration and dependency on a few AI providers. The response emphasises the need for balanced regulation to foster competition, protect data privacy, and ensure that AI integration does not increase the compliance burden. It also suggests promoting data sharing under strict conditions to enhance AI development while safeguarding sensitive information. 

For more on any of the items above, or any Insurance-related queries, contact Brian Morrissey, Head of Insurance. We'd be delighted to hear from you.