Irish insurers financial strength remains strong but challenges lie ahead

At the close of 2022, Irish-based insurers collectively held net assets over liabilities exceeding €50 billion, a slight reduction from €53 billion in 2021 but a significant increase from €38 billion five years prior.

“Prudential regulation of Irish insurers has come along way since the dramatic rise and fall of Quinn Insurance in the 2000s” says Mazars actuarial director, Gary Stakem.

“The increased powers afforded to the Central Bank of Ireland following dissolution of the old Financial Services Regulatory Authority in 2010, followed by the 2016 introduction of the EU ‘Solvency II’ regulatory regime, has been transformative.”

Most insurers remain extremely well capitalised and more capable of absorbing unexpected shocks compared to 10-15 years ago

Solvency II enforces strict rules on how insurers manage their balance sheets and calculate their Solvency Capital Requirements. “The capital requirements have greatly influenced how insurers govern their risks and set long term strategy,” Stakem explains.

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At the end of 2022, combined Solvency Capital Requirements for all Irish insurers totaled €27.8 billion. Central Bank figures reveal however that most insurers hold capital levels well in excess of the regulatory requirement. Eligible capital amounted to €51.8 billion, meaning on average, Irish insurers had capital coverage ratios of 186 per cent or 1.86 times the prescribed amount.

“Most insurers remain extremely well capitalised and more capable of absorbing unexpected shocks compared to 10-15 years ago,” Stakem added.

“Ireland has developed a strong reputation as a global financial services hub, partially due to credibility of the regulatory regime. As an English-speaking nation within the EU, with a well-educated work force, Ireland has proved an attractive location for many global insurers to establish their European headquarters. Ireland is amongst the top four insurance markets in the EU,” Stakem comments.

“We are punching well above our weight for a country of our size.” Irish based insurers and reinsurers service 25 million policyholders across more than 100 countries globally according to statistics published by Insurance Ireland.

Over €102 billion in premium was written by Irish based insurers in 2022, up 3 per cent from the prior year and 40 per cent over the past five years

The insurance sector has seen considerable premium growth in recent years. Premiums exceeding €102 billion were written by Irish based insurers in 2022, up three per cent from the prior year and 40 per cent over the past five years. Stakem highlights, “Interestingly, only about one seventh of the premium volumes concern domestic policyholders. The level of cross-border business is substantial with the UK, Germany, Italy, France and the US being key markets.” According to the Central Bank’s data, premium growth has been particularly prominent on non-life business, which covers everything from home, motor, pet and travel; to commercial, legal, marine and aviation. Non-life now accounts for over half of all premium. Property damage and general liability premium volumes have more than doubled over the last five years, largely helped by an influx of cross-border reinsurance activity.

Life insurance, savings, and investment products account for just under half of all premium.

“With larger balance sheets, insurers must consider where to hold their excess assets,” Stakem explains. “The level of investment assets had surged from €77 billion in 2017 to over €100 billion in 2021 but suffered a dip to €93 billion at end 2022 following changing market conditions. Corporate and government bonds remain the most popular asset choice accounting for over 66 per cent of investments while equities, collective investment undertakings, and more complex derivatives, are often seen as less favourable investment allocations for insurers. “For many insurers, their investment portfolio has as much of a bearing on their bottom line as their core insurance activities. However, the recent return of higher inflation and interest rates have prompted questions from shareholders if excess regulatory asset levels are diluting returns on capital,” says Stakem.

“Overall, the significant increase in rigor of regulation in the past decade has greatly improved confidence in Ireland’s financial system. Nevertheless, insurers will face new demands with climate change, artificial intelligence and a transition to a more digitalised service offering. These emerging issues have created further challenges in recruiting and retaining skilled staff – a struggle that is being exacerbated by the country’s accommodation shortages. As a consequence, insurers’ expense budgets have been forced to sharply increase to keep pace and this is evident in the latest Central Bank statistics.”

Stakem concludes, “There is no denying that the Irish insurance industry has done incredibly well to attract international investment in recent years but there is plenty of competition now looking to eat into that market share. Ireland will face challenges from other jurisdictions that may adopt lighter interpretations of the regulations to minimise cost and capital burdens. Furthermore, we have already seen the UK begin to diverge from the EU capital regime post Brexit.”

“Ireland is highly regarded as a prudent, financially sound insurance hub, but challenges lie ahead in continuing to enhance our regulatory standards in a cost-efficient and competitive manner.”