Insurance Europe: Working together to ensure the voices of Europe’s insurers are heard in EU policymaking
The pandemic has affected everyone greatly – it is an enormous human tragedy. However, our sector has emerged with its shield in hand, although it is still too early to make a full assessment. There are also critical regulatory challenges ahead. Solvency II, the IDD, but also changes in PRIIPs or facilitating digitalization. These tasks make the role of European cooperation essential. We represent a vast and vital sector that can significantly contribute to the sustainable, green development of Europe. Here we talk to Michaela Koller, director general of Insurance Europe.
Michaela Koller, director general of Insurance Europe
Insurance Europe: European cooperation is key to the passing of good legislation
Agnieszka Durska: What is the role of Insurance Europe?
Michaela Koller: Our role is to represent our members – the national insurance associations, such as the Polska Izba Ubezpieczeń, to policymakers and regulators in Europe and internationally. Through our members, we represent 95% of total European insurance premium income. Therefore, we are indeed the voice of the European insurance industry, including all types of insurers.
Insurers are impacted by a wide range of rules at both a European and international level. This kind of cooperation is therefore very important to ensure that any rules properly take into account our business model and deliver real benefits for consumers buying insurance products.
European cooperation and the pandemic – how did the European insurance industry perform?
A.D.: How has the European insurance industry performed during the pandemic?
M.K.: The pandemic is, first and foremost, a tragedy with severe economic and social consequences. It is also a considerable challenge for both insurers and their customers.
The European insurance sector responded vigorously to the crisis, focusing on:
- Maintaining service levels and keeping promises to customers. Many companies have tailored insurance coverage to allow customers to continue doing business in a new environment: for example, such as covering people who work remotely.
- Managing risks to ensure the sector remains financially strong.
- Ensuring that the industry fulfills its responsibilities towards society through goodwill initiatives to help alleviate challenges brought on by the crisis. These initiatives, launched by insurance companies and/or insurance associations shortly after the pandemic began, have been very diverse and tailored to local needs. They ranged from giving consumers flexibility, to donating to schools and hospitals and amplifying government physical and mental health communiques. Here are some outstanding examples from the Polish market.
However, it is too early to conclude the impact of COVID-19 on our sector, especially in terms of claims reporting and future premiums. This is because some of these impacts will only become apparent over time and will also depend on how the pandemic unfolds and its impact on the economy.
A.D.: And what can be said already?
M.K.: For now, it is worth pointing out that the EU insurance sector has weathered the crisis well, with insurers generally maintaining their solvency position. According to EIOPA, insurers’ capital buffers remained stable at the end of 2019 – with a median SCR ratio of 213%.
It is more difficult to determine the impact of COVID-19 on individual business lines. One thing that can be said with certainty here is that the pandemic has highlighted how much insurance products conform to national conditions. Even more so as governments apply very different restrictions during the pandemic. There is no common denominator. This has become very apparent in motor insurance, for example.
A.D.: The pandemic has already taught us quite a lot. Among other things, it has taught us that we can’t use the same yardstick for many things, that with such a significant threat, an individual approach can be more effective, and that quickly identifying local needs is of great importance because it’s all about reaching people in the best way possible. So how should we approach future pandemics?
M.K.: A key question for the future is whether events like this can be covered by insurance policies in business lines where pandemic risk is currently typically excluded, such as business interruption insurance, as such events have been considered largely uninsurable. There are several reasons for that.
In particular, insurers cannot insure against decisions made by governments, and therefore a pandemic that comes with widespread lockdowns imposed by governments is simply not insurable on the basis of private insurance solutions alone.
Another issue is that global events such as the current pandemic result in claims from a very wide range of business sectors and individuals at the same time. The normal insurance model of pooling the claims of the few to be shared by the many simply does not work in such a situation.
These are just two examples of why any future solution would require the strong involvement of the public sector. However, the insurance industry is committed to playing its part in the search for a workable solution to help societies and economies to better prepare for future pandemics.
The sector is engaging on this topic with public authorities at both national and European level, and by sharing its expertise and experience from dealing with other huge and difficult to insure risks.
Insurance Europe: regulatory challenges for the upcoming years
A.D.: What legal challenges will the European insurance market face in the coming years?
M.K.: The EC’s “green agenda” is a major focus, notably Europe’s renewed ambition towards the fight against climate change. Europe’s insurers remain as committed as ever to supporting the transition to a more sustainable society and to tackling climate change. The insurance industry believes that these fundamental ambitions must be pursued despite the huge, new challenges created by the current pandemic. Furthermore, the industry can play a key role in the transition towards a zero-carbon economy through providing both insurance coverage and investment in sustainable assets.
As underwriters of natural catastrophe risks, the insurance sector is especially aware of and sensitive to the risks posed by climate change. In particular, the sector is concerned that continuing global increases in temperature could make it increasingly difficult to offer the affordable financial protection that people deserve and modern society requires to function properly.
Insurance Europe is therefore calling on policymakers to take concrete steps to limit climate change. This being said, even if such measures are taken, action must also continue to focus — as a matter of urgency — on adapting to an already changing climate.
A.D.: What should these measures be?
M.K.: For example, it is the responsibility of public authorities to ensure, through building codes, that no construction takes place in high-risk areas and to ensure that such regulations are correctly enforced.
Modeling a green future
A.D.: And from the industry side?
M.K.: We can contribute to a more holistic understanding of risk through our modeling capabilities. Insurers can assist policymakers to guide society towards better adaptation practices through tools such as zoning and risk mapping, as well as spatial planning.
While much of the responsibility lies at a national, regional, and local level, the EU also has a role to play, and Insurance Europe will continue to support the Commission’s work in this area.
As Europe’s largest institutional investors, with over €10 trillion in assets under management, insurers can also help fund the transition to a carbon-neutral, resource-efficient, and more sustainable economy. And, as an industry, we are already making sustainable investment commitments.
A.D.: This is a significant challenge – and one that goes beyond just insurers, correct?
M.K.: Yes, the need to move to a sustainable approach applies to the entire economy. Therefore, new policy and legislative initiatives must deliver the right results. For example, we need appropriate legislation on EU taxonomy and sustainability disclosures, legislation to ensure that investee companies provide the sustainability data that insurers need as investors, and a significant revision of the Solvency II Directive. Insurers also need more appropriate, sustainable assets to invest in because there are not enough of them available. Therefore, ambitious policy action is necessary to encourage all sectors of the economy to adapt to sustainability.
Digitalization – the pandemic has shown that it is a must
A.D.: And the digital agenda? For us insurers, digitalization is still a challenge.
M.K.: The EU Digital Agenda includes many initiatives, including regulatory proposals for artificial intelligence, cybersecurity, cloud computing, blockchain, open finance and data.
As the COVID-19 pandemic has further emphasised the need for strong and innovative digital capacities in the financial sector, it is vital that the EU institutions ensure the regulatory framework enables innovation and allows consumers and companies – including both established firms and new market entrants, such as insurtechs – to benefit from the opportunities that digitalisation can offer. This means removing any regulatory barriers that hold back innovation, facilitating a data-driven financial sector and supporting a greater uptake of new technologies.
The Commission’s Digital Finance Strategy for the EU represents an important step in this direction, as it seeks to support digital transformation and innovation, and to enable European consumers and businesses to enjoy the benefits and opportunities of digital financial services.
For this to be achieved, insurance consumers must enjoy the same level of protection regardless of who their provider may be. The Commission, as it proceeds with its various digital agenda initiatives, will therefore need to ensure that the EU legal framework continues to safeguard financial stability and protects customers via the same activity, same risk, same rules principle. This would help to preserve a level playing field between existing firms and new market entrants.
Promoting a data-driven financial sector will also be key to promote innovation and competition. Greater availability of data could help insurers to improve risk monitoring and assessment, offer a better customer experience and increase fraud detection. The insurance industry is supportive of efforts to facilitate appropriate data sharing, in which the treatment of different players is based on a true level playing field. At the same time, customers should have full control over the sharing of their data and feel confident that it is being stored securely. However, much will depend on the specific approach chosen for any data-sharing framework. The industry therefore looks forward to further dialogue with the Commission and other relevant stakeholders, such as EIOPA, in the months ahead to help realise these objectives and deliver an appropriate framework.
The PRIIPSes need to be amended
A.D.: These two main challenges are not all that need addressing.… There is a long list.
M.K.: Yes, another one relates to disclosure requirements, such as the Commission’s work to address the shortcomings of the regulation on packaged retail and insurance investment products, or PRIIPs.
The PRIIPs Key Information Document (KID) is intended to enable retail investors to make informed financial decisions. It applies the same disclosure standard to different products, although in practice, it is mainly applied to insurance products.
The European Commission wants European regulators to propose technical solutions by the end of January to adapt the KID PRIIP to collective investments in transferable securities (UCITS), as the exemption for these funds from the PRIIP rules expires in December 2021.
This is very frustrating because PRIIPs are treated as if they only apply to asset managers when 75% of PRIIPs are actually insurance-based investment products. For example, all of the technical proposals presented to date to amend the KID PRIIPs have been designed for clients purchasing mutual funds, not for insurance consumers. This approach is flawed. Consumers purchasing insurance investment products should not be treated as second-class consumers.
Therefore, the Board of Supervisors of the European Insurance and Occupational Pensions Authority has rightly rejected the previous proposals. The proposed changes to the PRIIPs KID have not been sufficiently tested and would make the KID worse than it is now. It would have meant even more confusion for insurance consumers and further diminished their understanding of insurance-based investment products.
Since it went into effect in 2018, the PRIIPs Regulation has already undergone a series of eight revisions, including guidelines, Q&As, and supervisory position statements. This has not solved the problems.
So, we don’t need another “quick fix” that will create even more confusion for insurance consumers. Besides, how can the ESAs and the European Commission develop thoroughly tested technical solutions in such a short time that are implementable for our products and benefit insurance consumers? Instead, the Commission’s recently launched study on distribution and disclosure would provide a factual, solid basis for rethinking the approach to PRIIPs.
Therefore, we hope that the Commission and the ESAs will start working on solutions that will benefit consumers.
Major Directive revisions – SOLVENCY II, IDD
A.D.: There are two major sectoral reviews ahead: Solvency II and the Insurance Distribution Directive (IDD). What position will Insurance Europe take in representing the needs of its members in these reviews?
M.K.: The pandemic was indeed the first real test of the functioning of the Solvency II Directive. It is fair to say that it is generally working well, but the market volatility caused by COVID-19 confirmed our concerns that Solvency II may be overstating the impact of short-term price movements in the financial markets on insurers’ balance sheets and solvency position. This is one aspect of the existing legal framework that needs to be examined, among other things, during the ongoing review of the Solvency II Directive.
The Solvency II Directive is overly conservative, contains errors in risk assessment that mainly affect long-term business, and imposes unnecessary operational burdens on European insurers.
These measurement errors unnecessarily limit the opportunities for insurers to play a critical role as providers of long-term savings and retirement products, including products with guarantees that are valued by customers and that could contribute to solving serious social problems such as population aging. Not only that, but they also restrict insurers from making long-term investments. And these are essential for economic recovery and sustainable growth in Europe. Let’s remember that insurers are the largest institutional investor in Europe, managing more than ten trillion euros in assets, equivalent to about 60% of the EU’s GDP.
Moreover, these drawbacks also undermine the ability of European insurers to compete internationally at a time when the EU is seeking to increase its global competitiveness.
We therefore very much welcomed the European Commission’s objective outlined in the Capital Markets Union (CMU) Action Plan, which, in relation to the review of the Solvency II Directive, says how the regulatory framework can be changed to allow insurers to invest in the long term.
A.D.: What else is worth fixing in Solvency II?
M.K.: On the liability side, flaws in risk margin and volatility adjustments need to be fixed to avoid overvaluation of long-term liabilities and artificial volatility in solvency ratios. On the asset side, the risk-based capital approach needs to be improved for both equity and debt assets to correctly identify the actual risks to which insurers are exposed: i.e., long-term underperformance rather than short-term market movements.
Furthermore, Solvency II’s excessive operational burden needs to be reduced, reporting requirements need to be streamlined, and proportionality needs to be ensured so that insurers can adapt to Solvency II requirements in line with the scale, nature, and complexity of their business.
A.D.: Is EIOPA’s position in this context in line with these demands?
M.K.: Unfortunately, it is disappointing. In December 2020, EIOPA published an opinion for the European Commission that ignored these issues and which, if implemented, would instead make Solvency II even more conservative, although it did not prove that the overall level of capital is currently too low. EIOPA’s proposals may lead in the long run to a less competitive European insurance sector, which will be able to invest less in the economy and provide fewer long-term savings products and offer lower returns to customers. Such an outcome is completely unnecessary and must be avoided by the co-legislators – the European Commission, the European Parliament and the Council of the EU – who will decide the changes that the review will introduce to the current framework.
Given the urgent need for long-term investment in Europe to drive recovery and growth – and to help fund the transition to a sustainable economy – it is essential that these changes are made now so that insurers can not only maintain but significantly increase their role as Europe’s largest long-term institutional investors.
The IDD – a directive introduced efficiently and successfully
A.D.: And the IDD? How is this directive performing?
M.K.: In the two years since it came into force, insurers have fully embraced the new law, bringing significant benefits to both consumers and themselves. The IDD introduced robust and effective conduct rules for the sale of all insurance products and additional revised requirements for the sale of insurance investment products (IBIPs).
A.D.: What, then, has played into the IDD?
M.K.: Some of the reasons for the IDD’s success include the fact that:
- It provides improvements in consumer protection.
- It respects existing distribution channels.
- It has been tailored to properly reflect the industry it covers.
- It accounts for the diversity of national markets.
This demonstrates how sector-specific legalisation can deliver the best results for consumers when it takes account of the characteristics of the companies and products it covers.
EIOPA is currently preparing a report on the IDD application, and, as I mentioned, the European Commission has also launched an external study of distribution systems. Both processes should be taken into account in the IDD review. Because, for example, the way consumers buy insurance is changing. Digital distribution may become the default type, and in-store sales the exception.
As a result, IDD rules will need to be updated, including removing requirements to provide paper-based information to customers by default. Instead, the conditions should focus on efficient communication with customers through digital means while ensuring robust rules for selling insurance through the range of distribution channels available to customers.
The goal should be to create digitally friendly, technology-neutral, and sufficiently future-oriented rules of conduct and preserve both innovation and competition so that consumers can take full advantage of the benefits of digitalization.
How should Europe create its laws?
A.D.: The insurance industry often talks about how EU regulations are sometimes developed simultaneously by different, unrelated units, leading to duplication and even inconsistency in their content. What could the EU institutions do to remedy this?
M.K.: When preparing EU legislation, the cumulative impact of individual provisions and the coherence of the regulations as a whole are often not taken into account. This leads to inconsistencies, overlaps, and duplication.
For example, the Solvency II Directive, PRIIPs Regulation, the IDD, and the GDPR have led to a 250% increase (from 33 to 115) in the number of individual disclosures made by a broker to a client at the pre-contractual stage when selling an insurance-based investment product. In contrast, the number of disclosures for online sales currently stands at almost 161, a number that will increase further with the entry into force of the new Sustainability Disclosure Regulation.
The EU institutions must ensure all EU legislation’s coherence and consistency by assessing the cumulative impact that proposed and existing legislation would have on consumers to address such problems. They should also ensure that the drafting of new legislation includes thorough consumer research to ensure that it achieves its objectives and brings real benefits to consumers.