Details
- Publication date
- 26 July 2023
Description
What are the biggest challenges facing the insurance industry at the moment?
First of all there is the current economic situation. High inflation and rising interest rates are posing challenges to European insurers. However, overall the sector is in good financial shape and I believe that it will be able to weather the storm of the current macroeconomic environment.
As a society and as a sector we are also facing the challenges caused by climate change. The insurance sector has always had a valuable role to play in the move to a green economy and now we can see environmental, social and governance approaches from insurers.
The fast pace of digitalization is another trend but also a challenge where we all have to adapt quickly. More and more, we are seeing horizontal – or cross-sectoral – regulation. In these cases, regulation is not targeted specifically to the insurance and pensions sectors, but could be for the broader financial sector. Here, I am referring to the Artificial Intelligence Act, the Digital Operational Resilience Act and the Open Finance Framework. Adapting to new technology and new regulation will require insurers – and indeed supervisors – to develop new skills and new approaches.
Where does work need to be strengthened to ensure that insurance customers are protected and well-informed about their options?
More needs to be done in the design of products, the delivery, and monitoring and review process. When designing a product, insurers need to think about who the product is for. Costs charged to consumers should be justified and they should be proportionate, so that products represent value for money.
When it comes to delivery, distribution channels should suit the needs of the consumer, who should receive fair advice and clear, transparent information. Unfortunately, our recent data shows that over 60% of European consumers see the advice process as biased and over 70% claim it is very difficult to understand terms and conditions. More oversight is needed here, with a particular focus on digital channels.
The last stage is monitoring and review. After a product is sold manufacturers and distributors need check to see if the product has achieved the envisaged outcomes.
Finally, it is important that nobody is excluded. All consumers – regardless of their needs and characteristics - should be protected. We see instances where women have less access to insurance protection. We also see discriminatory practices such as loyal consumers being penalized over price savvy consumers who shop around.
The insurance gap is a reality. What needs more work to be done to reduce it? In that context, is low-price insurance a problem or a solution?
We recently published a joint discussion paper with the European Central Bank to encourage a debate on how to tackle the climate insurance protection gap. We are setting out possible actions which should be considered in reducing catastrophe risks from climate change in the EU by means of insurance coverage and adaptation measures. These efforts should be complementary to mitigation policies to tackle climate change and reduce associated catastrophe risks, and should not be seen as a substitute for such policies.
Efficient policy making is based on good data. Last year we developed a natural catastrophe risk dashboard where we bring together data on economic and insured losses, risk estimations as well as insurance coverage from 30 European countries. We want the dashboard to enable evidence-based decision-making on how we can improve society’s resilience against natural catastrophes. At the same time it should raise awareness of the protection gap and promote a science-based approach to protection gap management and policy making.
We are also looking at the drivers of the protection gap, why are people not buying the insurance and the need for insurers to gradually use prevention and adaption measures to reduce the risk. Regarding the price, I think that low-price insurance is neither a problem nor a solution: the price of insurance acts as a signal of the risk, hence risk-based pricing is essential. As the price of insurance for climate related risks is already rising, appropriate measures need to be developed to mitigate the risk or adapt to reduce the losses.
In Madrid you mentioned that EIOPA is working on policy options to address the protection gap, which are those?
Indeed, this is what we have proposed in the joint discussion paper.
First of all, we emphasize that private (re)insurance should be the first line of defense to cover losses from natural disasters. The use of financial markets to transfer risks via catastrophe bonds may also support the reinsurance of such risks.
However, as natural catastrophes are expected to grow and become more difficult to insure, policymakers need to consider putting in place more sophisticated frameworks to deal with extreme weather events and minimize future costs to taxpayers. These include public-private partnerships, where we already have good examples to drawn on, in particular from France and indeed with Consorcio in Spain. Such mechanisms could also potentially be reinforced by an EU-wide component, naturally together with suitable safeguards and incentives to promote risk mitigation. This is a more structured approach than creating an EU scheme ‘for all purposes’.
In addition to CAT claims, for what other risks could be captured under a potential EU scheme?
Other risks would be different types of ‘systemic risks’ which affect public health or safety, the economy or national security. Examples include pandemics, terrorism or cyber. They all have similar characteristics such as uncertainty and risk of spreading.
Private insurance solutions alone will not be sufficient to protect society against the financial consequences of these increasing systemic risks. Solutions will require both public and private sector involvement. But we also need to look at the specific characteristics of the underlying risks, the exposure and vulnerabilities, and again, as mentioned, there is more to it than creating an EU fund ‘for all purposes’.
In this regard, some insurers and reinsurers have announced that they will stop offering cyber insurance due to the increase in attacks. How is cyber security being addressed? Is underwriting becoming complicated?
The cyber protection gap is a problem and it is likely to grow as more digitization can also lead to more cyber attacks. In terms of protection gap, our recent Eurobarometer shows that around 70% of European SMEs are not covered if there is a cyber event.
At EIOPA we are looking into how SMEs are covered for cyber-risks. We want to better understand the experience and perceptions of SMEs regarding cyber insurance. In particular, we want to know whether they have considered purchasing a policy, what influenced their decision, or what stopped them from buying a policy – was it because of cost, product complexity or a lack of understanding about the benefits that a policy would offer.
We have been talking about the problem of demographic change and population ageing in Europe for many years. Are we aware of the real consequences?
Today around 16 million Europeans are at risk of poverty or social exclusion which is worrying. This risk is almost 35% higher for women than for men. Moreover, the gender pension gap amounts to almost 30%. These pensions gaps are set to rise due to population ageing.
Even though there is lot of information out there about the impact of population ageing, in my view, the awareness about pension gaps is low and should be enhanced, both for individuals and for policymakers.
We have advised the European Commission on best practices for setting up national pension tracking systems which provide people with an overview of their pension entitlements. This will help people better understand their future retirement income and help them to make better informed decisions. We have also recommended the development of a pension dashboard with transparent information on the adequacy and sustainability of national pension systems to enhance the monitoring of national pension systems. We believe that both tools will help in closing pension gaps.
Three years after the start of the COVID-19 pandemic, how has it affected the insurance industry? Did insurers explain their contracts properly? Has this been a problem? What measures should be taken to ensure that it does not happen again?
Three years after the pandemic we see the sector has overall reacted well. Insurers have shown forbearance by offering premiums discounts and rebates to balance the reduced risks for certain products, like motor insurance for policyholders who did not drive their vehicles because of lockdown measures. Intermediaries continued offering advice – even remotely – and insurers processed claims in a timely manner.
It wasn’t all good news. Many consumers and at times supervisors had to go to court to interpret terms and conditions, often related to business interruption insurance.
We have also seen instances of poor disclosures and lack of clarity related to the increase in natural catastrophes and the invasion of Ukraine by Russian forces, as well instances where insurers quickly and promptly reviewed coverage to ensure certain risks are excluded.
In light of this, EIOPA reacted with a supervisory statement and clear guidance on how to ensure contract simplicity in such events. We wanted to remind the market that product reviews should take into account consumers’ expectations at the time the product was bought. Better product design and improved transparency can help in preventing this issue.
The European Parliament has just indicated the way forward for Artificial Intelligence (AI) in Europe, what criteria should not be missing from an insurance point of view?
The insurance sector has some specificities that should be taken into account. For example, actuaries play an important role in the oversight role of pricing and underwriting of insurance products which does not exist in other sectors. In addition, certain data (for example relating to a person’s age or disability) not allowed to be used for pricing products in some sectors of the economy are allowed to be used for insurance underwriting purposes.
Given the potential high impact the AI Act can have in the insurance sector in the future, the governance of the AI Act is particularly important; EIOPA would like to see a greater role given to European Agencies such as EIOPA in the new European Artificial Intelligence Board in order to ensure that the specificities of the insurance market are adequately taken into account in the decision-making bodies.
Is there a risk that citizens will be left without insurance if AI is put into underwriting models?
One of the main risks with the AI relates to bias and discrimination; AI systems can inherit or learn biases from the data they are trained on, which can lead to discriminatory outcomes that disadvantage certain groups i.e. certain groups of consumer could need to pay higher premiums for reasons unrelated from their risk profile.
From a different perspective, increasingly accurate and granular risks assessments enabled by AI systems have the potential to promote financial inclusion to some consumers who were originally considered to be high risk. However, they could also make insurance more difficult to access for consumers classified as higher risk in competitive insurance markets or to consumers with more conservative approaches regarding the sharing of their personal data.
In recognition of the possible risks to consumers by the use of AI, EIOPA together with an expert consultative group set out principles for ethical use for an ethical and trustworthy AI in the European insurance sector. They should set the boundaries for the appropriate use of AI in insurance.
How does Eiopa see the role of insurtechs?
We're seeing new actors including InsurTech start-ups and BigTech companies entering the insurance market, both as competitors as well as cooperation partners of incumbent insurers. Incumbent undertakings increasingly revert to third-party service providers to gain quick access to new technologies and business models.
This trend is reinforced by the platformisation of the economy. Insurers often share data via Application Programming Interfaces (APIs) and cooperate in the distribution of insurance products via platforms embedded with other financial and non-financial services.
These developments are creating new opportunities for consumers and businesses. Outsourcing to tech companies allows financial institutions to focus on their core services. Digital platforms are available 24/7 and enable financial firms to tap into a broader customer base, including cross-border, and capture efficiencies of scale.
Yet, there are also new risks and regulatory and supervisory challenges. There might be risks to financial stability in case the same small number of companies is being used by many firms across the financial sector. Digital distribution channels, together with sometimes aggressive marketing techniques, can also pose risk to consumers.
Does Eiopa fear the arrival of large companies such as Google, Amazon...?
We don’t fear the arrival but we definitely recognize the need to keep a close eye on these developments. We do so by engaging with new stakeholders, setting up dedicated studies and enhancing our capabilities but also those of national supervisors. Supervisors that have a good and up-to-date oversight on market developments, with good cooperation between themselves and those driving change can support sound progress for the benefit of the European economy, its citizens and businesses.
The arrival of large companies into the financial market is not possible without a licence issued by a relevant supervisory authority. Having such a licence would submit an entering BigTech under the supervisory scheme of financial undertakings. We are looking thus more closely at the subtle way of the arrival of these BigTechs.
Spain
How do you assess the Spanish insurance sector and is it prepared to face difficult environments such as an economic crisis? Do you think that having a solvency margin of 240% is the right one, even if it is below the European average?
The European insurance industry properly navigated through the recent crises thanks to its robust solvency position. The same considerations can be made for the Spanish insurance market. While slightly lower than the European level, the solvency level still represents a comfortable cushion which can be absorbed for unexpected events.
Spain is the only country in the EU using the Matching Adjustment in Solvency II to a large extent and therefore it is worth keeping an eye on how potential adverse developments such as increases in the risk premia or potential downgrades of assets might affect the solvency position of insurers.
How does the work and collaboration with the Spanish supervisor (Dirección General de Seguros y Fondos de Pensiones); are you satisfied with the relationship, are there any points to improve?
The collaboration with the Dirección General de Seguros y Fondos de Pensiones is excellent and the supervisor plays a good role. The most striking point that I see at the moment is the current structure and its dependence on the Ministry which would need to be addressed.
One of the main complaints and claims in Spanish insurance is about some banking practices (bancassurance) in the distribution of some insurances, especially on the side of agents and brokers. You made a warning recently, are you concerned about the issue; have you noticed any changes? What do you expect from this issue in the whole sector and particularly in Spain?
This issue is widespread across the European Union, especially in those Member States, like Spain, where bancassurance business models are more present via exclusive partnerships and group structures, where the bank owns the insurer or vice-versa.
Insurers and banks must clearly go beyond the text of the law and not just apply the law by minimal standards to ensure fair consumer outcomes. Under Spanish law, tying practices are permitted under restrictive conditions and, when not complied with, the contract tied to the credit will be considered as invalid. Moreover, the debtor has the right to offer the bank an insurance coverage from an insurer other than that proposed by the bank with the same features without any penalty from the creditor. Still consumer detriment persists.
Our warning sets expectations for supervisors and for the market. Where consumer protection issues have been identified, insurers and banks should take remedial actions. We also expect national supervisors to prioritise monitoring of this market by assessing compliance with product oversight and governance requirements and ensure that product oversight and governance systems and controls are sufficient to prevent undue influence of the bank in the product design.
At EIOPA we are coordinating follow-up activities with national supervisors, including the looking at how insurers and banks are implementing the warning. We are also assessing the measures taken by national supervisors to address the issues identified. Together with national and other European supervisors we will thoroughly reassess market practices and trends. If insurers and banks continue to fail to comply with existing legal requirements including product oversight and governance requirements, national supervisors will exercise their supervisory powers and may impose sanctions or administrative measures.
Spanish insurance, through Unespa, has been calling for an independent supervisor for years. What is your opinion on this? Do you agree with this proposal? Should the Spanish government introduce it among its priorities? What elements would be essential?
I am aware of the situation and think it would be good for Spain to move towards a fully independent supervisory framework. This would enable the supervisory body to have control over resources and budget. As supervisors, we have a very full agenda, with more and more on our radar, such as consumer behaviour, climate risks, financial stability. We have to be well prepared and a fully independent supervisory framework will make sure that the supervisors in Spain are well-equipped to tackle existing and emerging challenges.
At EIOPA we defined the criteria needed for the independence of supervisory authorities and these include characteristics such as operational independence, sufficient financial resources to fulfil their mandates, independence of members of the supervisory authority’s governing body to fulfil their tasks and conduction tasks in transparent and accountable manner.
I think that independence is something that would require immediate attention as it will bring in particular more resources and autonomy for the Spanish supervisor.
Read the interview in Spanish below.