Interview with Petra Hielkema, Chairperson of EIOPA, conducted by Antonija Knežević for Lider

You were in Zagreb recently. What are the most important conclusions from the panel discussion on which you participated?

For me it was really important that representatives from the entire market, ministries, supervisors from insurance and pension funds, all came together to discuss. Although everyone had their own way of looking at the issue, we all agreed there is an issue. Everyone came with ideas what others can do but also what they themselves could do. That was the most important finding because that is the way to actually find solutions together, and some were already addressed. It takes many people to solve it, and all of them need to be willing to look at themselves and discuss with others. Stakeholders in some other countries are sometimes less willing to discuss issues publicly.

On of the major challenges for pension systems is the extension of human lifespan and ratio of retirees to workers which is falling in every EU country. What is the solution for that problem?

It is a major challenge for pension systems in Europe to provide citizens with adequate retirements in the future. The average state pension in EU as a percentage of the earnings at retirement will fall from 46 percent in 2019 to 37 percent in 2070. In Croatia, the situation is more severe with state pensions as a percentage of last earnings set to decline from 32% in 2019 to around 22% in 2070. 

In many countries at this moment there is discussion what is going on with pensions. So, let's be frank - you need more people to work to be able to cover pensions. However, if you want to resolve this, you also must find an answer on other very important question - who is going to take care of children and elderly in the future. If the question of care is not resolved properly who would take care of children and older people? Most likely women, which means that they would again step out of jobs and working positions. So, this question is also very important for diversity. And again, if we don't discuss the pension gap, which was the highlight of conference, it will be even bigger issue in the future.

What is extremely important is to get a complete overview on pensions in EU countries, including all pillars. This is why, over the next years, EIOPA further discuss with the Commission and other stakeholders to find a way to put all the data in one place, create a comprehensive overview, identify gaps and address them accordingly.

We have several-year long discussions on the pension system reform, with proposals ranging from abolishing the second pillar to its strengthening. Recently, a lot of people are relocating funds in pay out phase from second pillar back to first one, because on this way they are getting bigger pensions. What is your opinion about Croatian pension system?

People who transferred their funds to the first pillar when they retired made a rational choice, but it is interesting to see a movement back to pillar one at a moment where you would like to see all three pillars develop. The question is what that would bring in the future. It is possible that this option was more profitable for those retiring now because they were saving only for 10 years in pillar two. Anyhow, this is a question that is best addressed to politicians rather than to me.

But generally, I can say that it is necessary to understand that every time when you do something in pillar 1 you impact pillars 2 and 3. Also, if you change taxation, you impact all three pillars. That's why it is a system which needs broad discussion. And the solution can be found only if all interested parties talk to each other about the problem. Even then it will take a lot of time to resolve it. It never goes fast but if you have just a few people who are trying to resolve it and if they are pushing hard, results will come.

Regarding second and third pillar, Croatia relies very much on quantitative investment limits. Again, that is for the national and political level to decide on. However, in general, I can see the benefit of a more risk-based approach.

During the years life insurance in Croatia is decreasing. What, in your opinion, is the reason for that? What is the insurance market structure like in other countries?

When you look at central and eastern European countries (CEE region) it's easy to see the same pattern - only mandatory insurance is increasing and others not. Of course, the big reason for that is GDP and standard of living, especially now that we are experiencing a cost of living crisis. The second issue that it's not specific to any region; it’s something every country has: people simply don't think about risks that much.

For example, most people don’t see climate change as a huge risk. Many people are concluding that insurance is just too expensive for them even without checking prices. A recent survey of EIOPA showed that most of the people think that insurance is more expensive than it is in reality. Third reason is that in CEE region many people still think that Government will step in if push comes to shove. 

The example from Spain and France shows how to meet these expectations with quality. In case of droughts government explicitly says that a certain percentage of damages from drought need to be covered by themselves and the rest will be covered by the government. So, in those cases it is much easier to insure properties because it is predetermined who will cover certain percentage of the damage. In the Netherlands, the government also sends a signal indicating that it will step in only in the part for which it was not possible to obtain insurance. These are very good examples where consumers know in advance where and how much they can rely on the government. Whether the same regime can be set up in Croatia is not up to me, but I encourage a dialogue on this, while being conscious of the need to consider the possibilities in the context of GDP.

How has inflation affected the EU insurance and pension sector? What strategies are being implemented to tackle this inflationary risk?

There is a big distinction between life and non-life insurance. In non-life insurance, costs have increased, for example car repairs. These costs then spill over into higher insurance policy prices. At the very beginning of the price increase, a university in Germany created a questionnaire in which they asked insurers what they would do about the increase in costs. Some insurers answered that they would not increase prices because they had fewer claims paid out during the corona, others answered that they would increase prices slightly, and the rest said that they had already made a decision to increase prices. Still, the positive of corona is fading out, while inflation is still with us. Price growth in this segment is logical because it must follow the level of costs. Not only in non-life insurance, but also in reinsurance, where cost growth is not only a result of inflation but also of natural disasters in Europe.

On the life insurance side, the impact of inflation is somewhat different. When it comes to insurers, even though they were hit on the assets side, they also have lower liabilities due to higher rates. Although the losses on the property side are quite large, from the perspective of solvency they are still not problematic.

We were worried that people might start lapsing because they needed money, but that doesn't happen often. In the market, you either lose the tax benefits if you lapse or you have to pay penalties. That helps keeping people stay in pension and life products which will help them in long term. In markets without tax or other penalties, like in Italy, we can see more lapses.

What measures is EIOPA taking regarding consumer protection?

A big project that we do together with national supervisory authorities is 'value for money'. We want to ensure that insurance-based investment products offer value for money to consumes.

At the conference organized by HANFA today, professor Ivanov gave an example of a life insurance that will be paid out in case of death, but not if the cause of death is a heart attack or stroke. The question here we need to ask ourselves - is that the kind of insurance a person really needs? Also, there are examples in the EU, on the life insurance side, where the insurer sells the products but it’s up to the consumer to choose from hundreds of options. Again, is that really what consumers need? So, what needs to happen is if there is certain niche of consumers, insurer can tailor the product for them and even charge higher prices. I believe that we need some general products that consumers can understand. And that they are offering value for money.

Second, although everybody is talking about the importance of financial literacy, we also must underline very strongly that the industry also needs to act responsibly when selling products. 

Finally, there is a shift going on in supervision. Risks are more going to consumers, there are fewer life products with a guarantee, more cross border services…. These are the reasons why we need more European supervision; we need to provide security for all the consumers who take the same products.

How do you see the impact of new technologies, blockchain and Artificial Intelligence on the insurance industry?

As a supervisory authority we are clearly technologically neutral. That means if you fulfill the same requirements in accordance with regulations we don't care if you do that on paper, on Excel spreadsheets or you let AI to do it for you. That means that you can validate the data which you used, you understand them and technology you used. As long as you can do that following these principles you are free to use any technology you want.

I am totally open to new initiatives and technologies entering the market, but in that case I would like to have one document in the package and that is - an exit plan. And I don't mean about selling it to Google and going to some tropical island to the rest of your life but I mean, if it goes wrong how to roll back these solutions in such a way that consumers are not impacted.

What trends are expected to mark the year 2023? How significant is the impact of growing interest rates on the operation of the insurance and pension sector?

Despite the challenging environment, insurers and pension funds have remained resilient. European (re)insurers entered 2023 with robust solvency positions, even in the face of sizeable natural catastrophe losses, weaker investment returns, higher than expected inflation and continued economic uncertainties. Impacts of rising interest rates can be multiple. Although, rising interest rates are generally positive for insurers, in particular for life insurers, when they grow too quickly, they can pose risks. The example of this was the gilt crisis in the UK which generated liquidity challenges.

What are your main objectives and priorities in the upcoming period?

The first priority is to identify and address various protection gaps: in pensions, climate change, cyber risk, health insurance... Across Europe, as much as 20 percent of the population is at risk of poverty in their older years, in Croatia only nine percent of people are insured against natural disasters. Our focus is to help society deal with these gaps. The second priority is to constantly monitor the market, to step in when necessary, constantly giving the message that in times of instability we need shock absorbers. This is a logical role since we are in a very volatile macroeconomic environment, with an unprovoked war and aggression against Ukraine, a time when we have a lot of elections in Europe and the USA, high inflation and interventions by central banks. The final part is encouraging diversity. We requested that the Solvency II and IORP II directives include a requirement for diversity in management. According to what I saw at the conference in Croatia, I must say that in this part Croatia is doing well, better than some other parts of Europe.