We talk to Petra Hielkema, Chair of the European Insurance and Occupational Pensions Authority (EIOPA), about the challenges facing the European insurance market and supervision. What is the role of European supervision in making society more resilient to risks such as pandemic, climate risk, cyber risk or war?

Agnieszka Durska, PIU: EIOPA ten years ago, EIOPA now and in the next ten years… What are the biggest challenges ahead? What is at supervisory radars? And what are the most urgent legislative problems to be solved?

Petra Hielkema: EIOPA has come a long way since its establishment in 2011. With Solvency II, we developed a modern, risk-based framework that has become a global reference point in insurance regulation. EIOPA’s work over the past decade helped to create a system that has delivered financial stability in our sectors and contributed to better consumer protection. That the European insurance sector continued to serve consumers throughout the pandemic and is emerging largely unscathed from this unprecedented crisis is a testimony to the robustness of this framework. Going forward, our objective is to keep Solvency II fit for purpose, including by addressing the various challenges connected to digitalisation and climate change, where we place a great amount of emphasis on sustainable finance. In general, on the supervisory side, we will be working towards greater convergence across member states and enhanced collaboration between supervisors on cross-border business. The question of exclusions, price optimisation practices and certain value for money risks, particularly with unit-linked products, require our attention so that consumers continue to have access to simple and fair financial products. The near-term legislative agenda includes work on the recovery and resolution of insurers put forward during the Solvency II review, the digital operational resilience act, which also foresees material improvements in the management on cyber incidents, and the use of artificial intelligence in the financial sector.

A.D.: How do you see the role of European supervision in making society more resilient to threats such as pandemic, climate risk or cyber risk?

P.H.: As risk managers and major long-term investors, insurers are in a unique position to mitigate the challenges posed by climate change and to help businesses hedge against the perils of malevolent cyber activities. Both of these threats show an upward trend and risk causing sizeable disruptions if left unaddressed. Sustainable finance is one of our strategic priorities and we recently disclosed seven key areas we will focus on in the near future. Among others, we pledged to integrate ESG risks in prudential frameworks, to strengthen the assessment of these risks on both micro and macro levels and to promote sustainability disclosures. We also launched a pilot exercise to map out adaptation measures with volunteering insurers and started a behavioural analysis to find out what is keeping consumers from purchasing climate risk mitigating products already available.

Another momentous change we are witnessing is the shift towards digital solutions. Our societies are becoming more digital by the day, making us, the services we use and the industries we depend on more vulnerable to cyberattacks. On top of increased vulnerability, cyber capabilities are being deployed in more aggressive and organised ways, including in the realm of geopolitics. Cyber risks have been on our radar since as far back as 2016 when we first included it in our Financial Stability Report. Our vigilance has only grown since and we are glad that cyber considerations are being introduced into regulation. The DORA act will ensure that firms carry out proper testing, address digital operational risks effectively and report incidents in a consistent way. This legislative environment shall help us promote sound cyber underwriting practices so that insurers can play their part in making our societies more resilient.

Regarding pandemics, the risks here are such that they cannot be insured by the private sector alone and any future solutions are likely to require some burden-sharing between private and public actors. We see value in shared resilience solutions where these two sectors co-operate to shoulder the risks together. Here, insurers should be the ones to move first. I believe that instead of considering government involvement as a safety net to fall back on, insurers should embark on a constructive dialogue and propose avenues of collaboration based on an analysis of how existing insurance products match demand. That way, not only do they show their value to society but also provide clarity on where the limits lie for a private solution. As supervisors, our aim first of all is to identify and analyse the risks. Based on the findings, we can engage with member states and the industry to find potential policy solutions.

A.D.:  Speaking about resilience… Europe is dealing with a situation on its Eastern borders that only a few could have foreseen. How does Russia’s war of aggression in Ukraine impact insurers?

P.H.: It’s important to underline that the ones affected the most by this dreadful and regrettable invasion are the people of Ukraine. Whatever the economic and financial consequences, these are dwarfed by the suffering of those who were driven from their homes and separated from their loved ones. I’m glad that Ukrainians fleeing the war were welcomed in Europe with solidarity and that solutions were found quickly by governments and insurers so that they can have access to health care and other forms of insurance, such as liability cover for their cars – often free of charge. The people of Poland have been at the forefront of European solidarity, offering shelter and unwavering support to millions of Ukrainians. We greatly appreciate their kind-heartedness and leadership in this crisis.

As for the effects on the insurance sector, EEA insurers have very limited direct exposure to Russia at less than 0.1% of the undertakings’ total holdings. This means that even a complete loss on all those assets would only have a marginal impact on insurers’ SCR ratios. That said, second-round effects from the macro side and spill-overs from other parts of the financial sector could become a potential source of risk. We are therefore monitoring the situation while making sure that the industry implements the sanctions that have been imposed.

A.D.: How would you rate the European insurance industry’s track record in sustainability? What has been successful, what has not? Which ESG risks should supervision tackle first? Has the pandemic changed priorities?

P.H.: The financial industry is not new to the topic of sustainability, but the global awakening to climate-change risks has made action on this front more urgent, and rightly so. Without a doubt, the financial industry can be a driving force in the transition to a sustainable economy and make our economies and societies more resilient. We see that an increasing number of insurers are taking ESG risks to heart for example by joining the Net-Zero Insurance Alliance, whose members have pledged to green their underwriting portfolios by 2050. This is the step in the right direction, but it still leaves us with many areas where improvement is necessary.

Climate-change risks are the first of the ESG risks to be tackled by supervision in the context of Solvency II. Insurers need to manage climate change risks, which affect their assets and liabilities, and consider the impact on their investments, technical provisions, underwriting and reinsurance strategy. They should also orient their decisions on sustainability factors towards mitigating and adapting to the impact of sustainability risks.

There is certainly room for development concerning protection gaps for natural catastrophes seeing that only 35% of climate-related losses are covered today in Europe. Contractual issues or even outright exclusions for non-damage business interruption risks are another concern that the COVID-19 pandemic shone a light on. The industry could also do much more on prevention by offering insurance solutions that are better aligned with consumers’ needs and incentivise climate adaption. To analyse the extent to which mismatches between coverage and expectation exist, we are carrying out a consumer study assessing consumers’ experience in regions recently affected by natural catastrophe events. On whether and how the pandemic reshuffled ESG priorities, one thing is certain: the experience of the past two years helped social and governance risks get out of the shadow of environmental ones and claim their rightful place on the agenda. Climate change mitigation and adaptation will remain a top priority, but social and governance risks will be receiving more and more attention.

A.D.: What are the top three topics in conduct supervision? Better and more suitable products for clients – is it area for better regulation or rather for stronger conduct supervision? How European supervision should support consumers?

P.H.: If I had to name the top three consumer protection issues, I would certainly start out with risks related to the unit-linked market, which emerged as the most concerning area in our latest Consumer Trends Report. Unit-linked products are complex products. This complexity means that the bar is set very high for consumers to understand how these investment vehicles function and behave, which in turn means that policyholders often have little overview of the risks and benefits these products offer. The Polish authority, KNF, itself intervened in this market following significant investor protection concerns. We have identified high costs, transparency problems in the sales process – including inducements – product design issues as some of the areas where supervisory attention and work is needed so that unit-linked products can offer better value for money. Another supervisory priority I want to highlight relates to sustainable products, where we must not underestimate the risk of greenwashing. Insurers need to make sure that products bearing a sustainability label measure up to regulatory requirements even under scrutiny so that consumers get the sustainability preferences they sign up for. If there is discrepancy between the claimed and actual sustainability of such green products, we have a risk on our hand that affects not only direct consumers but also our societies as a whole. Finally, the question of exclusions and the growth of uninsurable risks, both of which further widen already existing protection gaps, are unsettling. The pandemic and climate change risks brought to light concerns such as exclusions through lack of clarity in terms and conditions or unilateral changes to terms and conditions that need to be addressed. Insufficient insurance coverage can weaken the financial health of consumers, which in turn negatively impacts the economy’s resilience as a whole.

On the interplay between regulation and conduct supervision, we believe that both are necessary to deliver better and more suitable products. From our side, we’re working to ensure more convergence in the way product oversight and governance requirements are implemented during the product design stage and throughout the lifecycle of a product so that customers’ interests take center stage, not only at the point of sale but in all the steps before. On the regulatory side, the European Commission is seeking advice on how to promote simpler products. We believe that overly prescriptive regulation may not lead to the desired outcome and instead what we need is an approach in regulation, supervision and implementation by manufacturers that puts consumers in the focus.

A.D.: In Europe we have a conglomerate of different insurance markets, which are at the different level of development. How does EIOPA make sure that the EIOPA guidelines are fit for everyone? How to reconcile the different adaptability of markets in Western Europe and CEE?

P.H.: It is important that supervision across the EU constantly moves towards consistent practices and provides a high level of policyholder protection. This applies as much to the CEE region as to Western Europe. Therefore, while EIOPA fully respects the diversity of insurance markets across jurisdictions in Europe, supervisory convergence is one of our objectives and guidelines are a key tool for achieving this. We also use a range of other tools to strengthen consistency in supervisory assessments and outcomes. Supervisory opinions, good practice guidance and peer reviews all contribute to this goal. It’s worth noting, however, that guidelines are on a “comply or explain” basis so if there are valid national reasons why a member state cannot comply with a guideline it can provide an explanation. There’s a certain flexibility embedded in the system.

A.D.: Do we need more rules or more principles and dialogue between the supervisors & the insurance industry? Is the insurance sector overregulated?

P.H.: Regulation of course is essential as it lays the foundation for how business is conducted, but more rules do not always lead to better results. Naturally, regulators should be alert and ready to draw up appropriate legislation to handle new, emerging risks. The European Commission’s upcoming act on artificial intelligence is a case in point. It’s an agile act that uses a risk-based approach and incorporates principles of proportionality, which ensures that implementation does not become overly burdensome. Besides a solid regulatory backdrop, an equally important element is supervisory culture where we are keen to promote and move towards more convergence and enhanced collaboration. Unlike legislation, supervisory cultures cannot be amended by the stroke of a pen and it takes more time to align behaviours than to rewrite procedures. This means that changes in this respect come in increments. Supervisors are united in wanting to build an effective system of supervision in Europe and as long as our objectives are shared, progress is guaranteed. Now, supervisors do not exist in isolation of the markets they oversee – exchanges with market participants are key. Our dialogue with the insurance industry already takes place via multiple channels such as surveys, consultations, events and meetings with stakeholder groups. Feedback gathered in these forums enrich our views as they help us consider and reflect upon issues from various angles. Our proactive approach in seeking input will not wane.