Cooperation and investment: The keys to a stable, equitable and prosperous future

Ladies and gentlemen

Thank you very much for today’s invitation. It is a pleasure to have the opportunity to address you today.

Central clearing parties play an extremely important role in preserving the stability of financial markets and helping to reduce risks to the wider economy.

In providing a transparent and regulated environment for the buying and selling of financial instruments, exchanges and central counterparty clearing houses also play a vital role in deepening capital markets.

These two points mean a great deal for insurers that already clear interest rate derivatives through CCPs; and pension funds that started in mid 2023.

For insurers the current reporting already provides us with adequate view on the notional – and we are talking about EUR 2.9 trillion in Q4 2021, while for pensions we do not yet have a concrete estimate in terms of volumes. But what we do know is close to half of the IORPs covering 90% of the EEA market are using derivatives.

When it comes to supervision, it is true that you are mostly interacting with our sister authorities – the EBA and especially ESMA. Yet, your market and its regulatory framework – EMIR – is still very relevant to us.

You will know that last December, together with EBA and ESMA, we published an RTS under EMIR that proposes to extend the EMIR equity option exemption.

Moreover, the RTS was accompanied by a no-action Opinion, encouraging supervisors not to prioritise supervisory or enforcement actions relating to equity options until a long-term solution has been provided. With this action the ESA’s are providing for stability in the regulatory environment up to the point when the Commission has taken a decision on the RTS or the EMIR review is finalised.

Solid regulatory frameworks are a fundamental basis for the smooth working of the financial system. It is in everyone’s interests that the frameworks are relevant and trusted and here, EIOPA will continue to work with the EBA and ESMA to ensure that EMIR is fit for purpose.

Still, the focus of the work of EIOPA is on Europe’s insurance and occupational pensions sectors. They play an essential role in helping the economy and financial markets to function and can contribute to the overall financial stability.

Just like the sectors that we supervise, EIOPA is also concerned with the long-term outlook. And the role that the insurance and pensions sector can play in securing a stable, equitable and prosperous future for our citizens. I hope you allow me to say a bit more on “my” part of the financial industry today, while indicating the relevance for the broader financial sector and sometimes industry.

But before we get to the long-term, let me set the scene with some numbers.

Insurers hold over EUR 9 trillion assets in euro. Asset portfolios are also characterised by durations higher than 8 years.

For the occupational pensions sector, the total value of assets managed is more than EUR 2.5 trillion.

In sharing these figures, I want to give you a sense of the size and scale of the sectors that we supervise.

And emphasize just how much insurers and pension funds are long-term investors with considerable funds at their disposal.

This puts them in a powerful position to drive the transformations that our society needs if we are to meet the challenges that we are facing.

Earlier this month, the World Economic Forum published its global risk report.

In the short term, it is not surprising that – given the number of important elections taking place this year – misinformation and disinformation takes the number one spot. Extreme weather events come in second.

Taking a 10-year view, however, environmental risks take five out of the top 10 spots. In fact, they make up the first four, with extreme weather events at number one.

EIOPA is well aware of not just the human costs of climate change – we have all seen news coverage of devastating weather-related catastrophes – but also of the economic costs.

And we know that only one-quarter of EU climate-related catastrophe losses is currently insured. As the climate-related catastrophes grow in both frequency and intensity. Without any action taken, we can expect this protection gap to widen.

For EIOPA, aside from asking how we can close protection gaps, we also have to ask how we transform to more resilience in this context. To get this right is essential in order to continue to preserve financial stability while encouraging growth. How can we do that?

The short answer is cooperation and investment.

[Cooperation]

Let me start with cooperation.

Climate risk cannot be successfully tackled by any one entity alone.

It cannot even be successfully tackled by many entities – especially if they are acting independently.

The only way forward is through cooperation, commitment and communication.

This is often easier said than done.

Commitments made can easily unravel, especially in the face of economic uncertainty, high inflation and a cost of living crisis.

But cooperation is always possible. EIOPA values the constructive relationship that we have with our Board members and national supervisors, as well as with other institutional partners – from our sister supervisory authorities and institutions in Brussels, to wider global associations – such as the International Association of Insurance Supervisors, the Network for Greening the Financial System and the Sustainable Insurance Forum.

One area of cooperation that I would like to mention in more detail relates to EIOPA’s work with the European Central Bank, our neighbour here in Frankfurt.

I mentioned just now that only one-quarter of losses are insured.

This protection gap poses wider risks to the economy and financial stability.

When losses are not insured, it takes longer for families and businesses to get back to normal. For businesses specifically, lengthy supply chain disruptions can impact other businesses, possibly affecting the ability to pay back loans. In the absence of a solution in the market, people will look at the government for help. However, this help often takes longer and government finances may be weakened if they need to step.

Adequate insurance cover would go some way to mitigate these risks, yet uptake for this type of insurance is not what it should be.

EIOPA and the ECB have worked together on possible actions to increase the uptake and efficiency of catastrophe insurance while creating incentives to adapt to and reduce climate risks.

In the first instance, the recommendation is that insurers should design their policies to encourage households and firms to reduce risk, for example by granting discounts for implementing effective mitigation or adaptation measures.

There is also a role for reinsurance as a first line of defence to cover losses from climate related natural disasters. The use of financial markets to transfer risks via catastrophe – or cat – bonds may also support the reinsurance of such risks.

Indeed, capital market instruments, such as cat bonds, can complement insurance schemes to provide fast relief for reconstruction after disasters.

They can also help to pass on part of the tail risk assumed by private (re)insurers and/or public-private partnerships to capital markets.

Capital market instruments, which are often used together with traditional reinsurance, provide two key benefits: (i) the diversification in the form of an alternative source of capital and (ii) a lower premium for overall coverage.

Nonetheless the frequency of climate-related catastrophes also has an impact on the price of reinsurance which in turn affects the primary insurer and ultimately the policyholder, leading to a possible situation where insurance is simply unaffordable.

Here national or European public- partnerships can play a role, through pooling capital, enhancing the ability of a member states or even the EU to respond the climate related events in an orderly way. We now see several examples of public private partnerships developing and will continue to monitor this in 2024 at the EU and international level. We will also continue our work with the ECB on this matter with a focus on the role of capital markets and financial products to create more capacity for these events as well as possible forms of risk-pooling that could be considered. We will communicate about this work throughout the year.

Indeed, closely linked to cooperation, is communication. And here I mean both raising awareness and sharing knowledge.

I just spoke about the low uptake of insurance cover against natural catastrophe events. There are different reasons for this – from the ‘I will never be able to afford cover’ to ‘It will never happen to me.’

These statements show just how much work needs to be done to raise awareness about the destruction that climate change can cause and the value that insurance can offer.

Sharing expertise and data, including on catastrophe modelling, is therefore essential to improve risk awareness and incentivise adaptation and mitigation efforts.  And in our capacity as a centre of excellence for catastrophe modelling and data, EIOPA is able to provide both insurers and supervisors with the tools and data so that they can effectively assess, monitor and supervise catastrophe risk.

At the end of last year, EIOPA launched its catastrophe data hub that provides Europe-wide data on insured losses from extreme weather events, like the 2017 wildfires in Portugal. Also at the end of last year we published our updated natcat dashboard. A dashboard that shows per member state what the risk is for five natcat perils and how much of that is insured.

As I said – cooperation, commitment and communication can be easier said that done. But the truth is that however hard, we have to do these things if we are to have success in addressing the effects of climate change. While at the same time taking measures to worsen the situation.

[Investment]

In other words, we need the green transition and this comes with a cost.

The European Union has some ambitious targets in place – to become the first climate-neutral continent by 2025 and to reduce emission by at least 55% by 2030.

And the cost: The current estimate is that the EU will need some EUR 350 billion in additional investment every year over this decade to meet its 2030 emission reduction target in energy alone.

This level of investment will not be achieved by public spending. Private investment into sustainable economic activities is the only way.

And this is where insurers again, but now with pension funds can play a pivotal role by investing in the green economy.

But the reality is that only a small proportion of insurers investments can be considered environmentally sustainable today.

Last year, EIOPA analysed a snapshot of insurers’ direct investments in corporate bonds and equities – which in total account for around 29% of the investments – and found that only 2.6% of investments are aligned with the taxonomy, which a further 15.5% are eligible.

This shows that there is work to be done and as a member of the EU sustainability platform, EIOPA will continue to contribute to improving the usability of the sustainability framework and on monitoring capital flows into green investments. While at the same time ensure that what is called green, indeed is green. Avoiding greenwashing is essential to keep the trust of consumers not only in green products, but also in the financial sector.

Now how will we get to more investments. There are some options.

Revisions to the framework Solvency II regulation will very likely lead to the easing of capital requirements for insurers. The rationale behind this is that these funds will be used to fuel the green transition. But there is no guarantee that this will happen and so as a supervisor, we will monitor this, monitor how capital is used to support the green transition within the EU.

Now beyond institutional investors, there is also great appetite for sustainable products from retail investors.

Just yesterday EIOPA published its latest consumer trends report. We are seeing an increase in the number of consumers that have heard about sustainable or ‘green’ products, just as national supervisors have noted a rise in the availability of products with sustainable features. Moreover, there is an interest among consumers in more green products. Overall, this is a positive development.  For the interest in green, may trigger an interest in retail investment, in stepping into new products.

The possibility to have more consumers in the EU not only saving in bank deposits, but also becoming retail investors, will support the need for capital for the transition, and provide for an opportunity to save for retirement. The latter point is something very relevant for an ageing continent, where 1 in 5 is at risk of poverty at old age.

Looking ahead to the incoming Commission, the pensions gap is one of the reasons that EIOPA will very much continue to support further work on the Capital Markets Union while at the same time calling for the development of a pension dashboard. Like the nat cat dashboard, a pension dashboard will raise awareness about the need to act today for a good retirement later and hopefully trigger action.

[Conclusion]

Now, I started out with some big numbers –the trillions of euro that insurance and pension funds have to invest. And I am ending talking about the retail investor – the person on the street – who has much smaller sums at their disposal, but still nonetheless is committed to creating a more sustainable society and needs to safe for later.

Without doubt, both are equally important to the green transition and to ensuring the stable, equitable and prosperous future that I talked about at the beginning of my remarks.

But I want to end with you and the role markets, exchanges and CCPs can play in this endeavour. A big role I would say.

First of all, you can support the trust that citizens and businesses have by providing fair, transparent, reliable services; and second you can provide capacity to the markets and in particular the insurers, reinsurers and public-private partnerships that need capacity to manage risk.

Finally, you can support the mindset of not only focussing on returns today, but on the long term need for a stable and sustainable economy. You may not be as close to individual consumers as other players in the industry. But in the end, your activity has impact at that level.

Above all, central counterparties are part of the critical infrastructure that foster a thriving Capital Markets Union and it is in all our interests that work together to build deep, liquid, integrated capital markets in Europe.

Thank you very much.