Global Insurers Are Expected to Face Increased Regulatory Costs

Global insurers will face increasing regulatory costs due to structural shifts in the life sector, climate change, and artificial intelligence (AI) as insurance industry regulators intensify their response to growing risks, according to Fitch Ratings. 

While climate change and AI are long-term regulatory themes for the industry, a push for regulatory consistency in the life sector could have a more significant near-term impact for insurers, Fitch said. The rating agency noted that the National Association of Insurance Commissioners and the Bermuda Monetary Authority are monitoring insurers' increasing allocations to alternative assets and the increasing adoption of cross-border asset-intensive reinsurance. 

Those regulators are looking to identify liquidity and credit risks that aren't addressed adequately in regulatory capital requirements, Fitch said, and are seeking to detect potential regulatory arbitrage and financial stability risks. 

Fitch also noted that the International Association of Insurance Supervisors (IAIS) adopted the Insurance Capital Standard in 2024 as a global solvency standard for internationally active insurance groups and identified climate risk as a priority. The IAIS will focus on insurance sector resilience and how insurers can help reduce climate risk, the rating agency said. 

Meanwhile, the European Insurance and Occupational Pensions Authority (EIOPA) is calling for higher charges for natural catastrophe risks in insurers' Solvency II standard formula calibrations, Fitch said. Several other local regulators are also focusing on climate risks, the rating agency said. 

On the subject of artificial intelligence, Fitch said that regulatory scrutiny of AI and the costs related to that scrutiny will increase, partially offsetting gains in efficiency that AI might provide. "Regulators have started to develop guidance on how insurers should use AI appropriately," a Fitch statement said. "The IAIS is reviewing responses to its draft application paper on AI supervision, which aims to help supervisors address concerns around societal biases and discrimination, data privacy, and accountability of decisions made with the help of AI."

Meanwhile, EIOPA is conducting its own examination of AI governance and risk management that will help inform guidance to insurance supervisors on how to implement provisions related to the use of AI systems in insurance, Fitch said.