European insurers – regulatory and strategic challenges

Bemoaning the regulatory burden is a staple feature of industry get togethers. However, there has been a dramatic step change in the volume of regulatory initiatives in the EU, leading to consequential concerns about European insurers' international competitiveness.

Andreas Brandstetter, President of Insurance Europe and CEO of UNIQA Insurance Group, set the tone of the conference in his opening remarks — 'regulation is soaking up all the oxygen' — and noted that the capital levels are around 20-30% lower in the US. Regulators must also be feeling the strain of the regulatory change agenda, and Petra Hielkema, Chairperson of EIOPA, remarked on the high speed of production of legislation and the impact this can have on consultation windows.

On top of the insurance-specific files making their way through the European legislative pipeline, there has been a significant increase in cross-cutting regulation. This is a logical response to evolving risks such as the use of data (GDPR), digital operational resilience (DORA), sustainability disclosure (CSDR), and Artificial Intelligence (AI) and Machine Learning (ML) (AI Act). However, cross-cutting frameworks are not tailored to the specificities of the insurance sector and also raise the prospect of duplicative or overlapping requirements as insurers are already subject to extensive rules that often seek similar outcomes. This is a challenge EIOPA recognises, and Hielkema noted EIOPA has advocated for insurance to not be designated as 'high risk' in the AI regulations.

As Petra Hielkema remarked, after a lengthy period of Solvency II development and implementation the focus is now on product governance and oversight. Insurers agree that providing products that deliver positive consumer outcomes is fundamental, but there is a gulf between how firms, regulators and consumer groups prefer to pursue this. The Retail Investment Strategy (read KPMG in the UK colleagues’ analysis here) is one example of this, with the European trade associations presenting an uncommonly united front (PDF 210KB) in raising concerns.

Central to this is the role of EU insurers in providing financial advice. Regulation to date has aimed to close the information asymmetry gap by imposing various disclosure requirements. From consumer groups' perspective, this has not gone far enough and there are ongoing concerns around bias and potentially inappropriate use of inducements. However, David Knibbe, the CEO of NN Group, observed there is transparency but no impact. Regulation has led to a proliferation of disclosure documents aimed at policyholders that have become `something to click through' and are not effective in supporting decision-making and have limited impact on the outcome being experienced by consumers.

Meanwhile, an interesting area to watch is how European regulators will seek to address the supervisory challenges of being able to adequately oversee products provided across the EU on a 'freedom of service' basis via digital platforms. Instances of poor cross-border industry practice may tempt some member states to implement local solutions rather than work within the constructs of the single market for EU-wide fixes.

As noted above, regulators may be relieved to have finally put the bulk of the prudential policymaking behind them, the pending Solvency II review outcome notwithstanding. However, prudent capital and risk management remains at the core of what makes insurance work. In his keynote speech, Thomas Buberl, the CEO of AXA, highlighted some of the recent challenges — climate, inflation, recessions, pandemic — and noted that these types of shocks are not about to leave us.

The sharp transition away from the 'low for long' interest rate environment is a particular issue for life insurers' past and future investment portfolios. Higher rates elsewhere are impacting the value proposition of life products — locked in yields which can now be lower than that of government bonds, while firms still have to manage risk exposure that could materialise over the long duration of the product.

One driver of the increase in regulatory initiatives has been the pace of technological change. Firms and regulators alike are grappling with the opportunities and challenges of AI and ML. Some view them as a force for good that will provide insight into customer behaviour, drive product innovation by helping to assess risk, and eventually do the groundwork in preparing policies. Others, such as Monique Goyens, the Director General of consumer organisation BEUC, worry about the impact on consumers, especially those that are most vulnerable and the critical role that data ethics will need to play. Petra Hielkema talked about how insurers should respond by putting society and inclusiveness at the core of their business models. She argued that customers would be willing to pay higher premiums if they know they — or their neighbour — would be covered even if they have a higher risk profile.

Over the medium to long term, it will also be interesting to monitor how regulators use AI in their own operations and supervisory activity.

Another running theme at the Insurance Europe conference was how insurance can remain relevant in the face of the changing world. Climate change and technological change bring opportunities to support customers with innovative products and effective risk management solutions. But they also challenge existing business models, and underwriting discipline needs to be balanced with the considered use of exclusion clauses. In the words of Thomas Buberl, insurers must be careful not to become an industry in 'quasi run off' as a result of not finding a way to help customers deal with the risks of tomorrow.

Regulators, industry and consumer representatives agree that the growing protection gap — across natural catastrophe, cyber, health and retirement provisions — is a concern. EIOPA and ECB have earlier this year called for an increased uptake of catastrophe insurance. The IAIS also considers (PDF 105KB) closing protection gaps part of the supervisors' remit and is hoping to drive conversation on natural catastrophe risk at the G7 this year. Finally, the Global Federation of Insurance Associations (GFIA) has published the first global protection study, looking at pensions, cyber, natural catastrophes and health gaps, as noted by Susan Neely, the President of the organisation. Proposed solutions range from how to increase take up of private insurance, to solidarity funds and private/public partnerships.

Insurers and governments are thus under pressure to absorb increasing losses. While there is more risk, Thomas Buberl argued there is also less societal tolerance for risk and less ability to absorb risk. He highlighted that we have had a soft landing from COVID-19 and energy crises as governments stepped in to cover (some of the) losses, but there is now less appetite for high government debt and the cost of government financing is rising. This again points to insurers having to find new solutions to cover new risks.

This was a thought provoking discussion, ranging from the latest on the regulatory agenda to how firms should be thinking strategically about embracing new risks and opportunities. While the UK is no longer part of the EU, and the detail of regulation is set to gradually diverge over time, it is clear that the fundamental challenges for insurers are shared on both sides of the Channel and we can learn from continuing dialogue and experience-sharing with each other.