While risks loom in the latter end of this year and into 2022, Ireland is approaching them from a slightly stronger position as compared to the rest of Europe due to its special mix of advantages.
“The Irish economy managed to grow more than 3 percent during 2020 and is expected to grow 5 percent this year, said Nadia Bagijn, Head of Financial Institutions for Travelers Europe. “It’s amazing, considering how the economies of other European countries went into recession. While Ireland has been impacted financially during the pandemic, its industries have made it more resilient than other countries.”
Ireland has traditionally held favourable corporate taxation tariffs comparative to its peers within the European Union, giving rise to a plethora of different industries attracted to conduct business there. More significantly, industry sectors such as pharmaceutical, technology and financial services companies have enabled the overall economy to demonstrate the resilience required during times of stress. Furthermore, the rise in renewable infrastructure projects within Ireland have also supported growth and created new jobs within the country, with the government pledging that 70% of its energy will come from renewables by 2030.
The attractiveness of conducting business within Ireland has only increased over the past 24-36 months, with many UK based firms keen to maintain their passporting capabilities and connections to European clients.
Managing risk to maintain momentum
Still, Ireland could face some hurdles as the year progresses – particularly when it comes to unemployment, inflation, house prices and insolvencies.
The strains of unemployment, in particular, trickle down through all other aspects of the economy. While Ireland’s GDP grew in 2020, its unemployment rate, oddly enough, climbed 22 percent. The biggest decline in unemployment was seen inmore labour-intensive sectors like hospitality, retail and the the aviation sector where employment fell by 43.6% year on year.. Furthermore, other services activities, including ‘arts, sports, entertainment and cultural activities’ fell by 30%, with administrative and support services falling by almost the same amount.
Ireland expects to see inflation in the months ahead as the country manages high demand and low supply for a wide range of goods. The worst-case scenario, Bagijn says, is 3.3 percent inflation at the end of this year and 5 percent in early 2022. Ireland’s ability to reopen more parts of its economy will play a role, and much like the rest of Europe, its vaccination programme has been delayed, so it may not reopen as quickly as the UK.
House prices went up in Ireland during the past year, due to a lack of supply versus the strong demand from consumer seeking larger homes away from the city centre. but the health of the housing market will likely be challenged by a potential rise in interest rates. “While the current average mortgage fixed interest rate in Ireland is just under 3 percent, it’s not uncommon right now for lenders to stress-test every borrower up to 6-7 percent interest to ensure affordability going forward,” Bagijn said. There are concerns around negative equity as well. Consumers have made low deposits on houses, so if and when house prices drop, banks’ capital reserves and solvency will be impacted.
Finally, insolvencies will play a role in the coming months. While insolvencies in Ireland fell 30 percent in the first quarter of this year as compared to the same period last year, this is likely due to the wide range of measures the government introduced to support companies struggling to operate during the pandemic. Soon, many businesses that were shielded from closure will reach a point where they must pay debts or close permanently. Companies in some sectors have been slower to reopen and may also be either unable to rehire people or find themselves short-staffed if reliant upon British employees who returned to the UK due to Brexit. Legal actions may increase against directors who were operating while insolvent, which has the potential to generate more Directors & Officers claims for insurers. Finally, loan defaults and declining profits for financial institutions, and portfolio impacts for asset managers as businesses close their doors, are other areas to watch.
What does this mean for brokers and their clients?
In the current market, brokers can expect insurers to have restrictions in their appetite, early renewal submissions, and tighter wordings, with specific emphasis on sublimits, mitigation cover and investigation cover. Amid insurers’ increased selectivity, brokers can help their clients find ideal cover by expecting to have to answer more questions up front and also scrutinising an insurer’s financial strength and claim handling capabilities.
Several types of cover can help financial institutions navigate the risks of the current environment:
Directors & Officers (D&O) insurance is designed to protect the directors of a business against any ‘wrongful acts’ committed whilst acting in their working capacity. A representative claim might involve a whistleblower who accuses a fund manager of non-compliance and improper recordkeeping, for example. D&O cover can help financial institutions navigate the complex regulatory environment, protect against potential insolvency claims, and mitigate risks related to merger and acquisition activity and Environmental, Social and Governance practices. It can also provide some protection against cyber exposure, though more insurers are moving away from this to encourage standalone cyber cover.
Professional Indemnity (PI) insurance is designed to protect the company and employees from claims related to professional services provided to third parties. A representative claim might involve a fund manager who is tasked with buying and selling in different currencies and makes in error in executing a trade, for example. For financial institutions, having PI insurance is sometimes a contractual requirement. But more importantly, it provides balance sheet protection, cover against mis-selling claims, and can help mitigate the outcome of complex claims.
Crime insurance is designed to protect the company from crime losses perpetrated by employees, third parties or both. A representative claim could involve a large payment made from their bank to a third party in response to a fraudulent request, for example. Crime insurance helps companies contain the potential impacts of crime, which can be significant: Theft by employees is often undetected for a significant period of time, which means once the loss is discovered, it can be substantial. Small companies often lack proper internal procedures, and a large loss to a small client can lead to financial difficulties or insolvency. Computer fraud/social engineering has become increasingly common and any client can be exposed.
“There have been some real success stories in Ireland throughout the pandemic and protecting against the challenges we’re likely to see later this year can help sustain them,” said Bagijn. “Brokers can expect insurers to be more selective in the current environment but open to insuring the right risks. Supportive partnerships and good communication among insurers, brokers and insureds will continue to be important.”
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