From uncertainty to strength: Supervision for an economy in transformation

Keynote speech delivered by Petra Hielkema at EIOPA Annual conference 2022

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Good morning.

Let me offer a very special thanks to Commissioner McGuinness for opening our conference.

On behalf of EIOPA, a very warm welcome to you all today.

We are here on the 28th floor of our building and while I wish that we could be meeting in person, I am pleased that we have been able to reach so many people online.

The theme of our conference is ‘From uncertainty to strength: Supervision for an economy in transformation.’

And let me say, without doubt, we are in a period of uncertainty.

Without doubt we are in a period of transformation.

And without doubt, we will need to build on our strength – our individual strength, our organisational strength and our collective strength – to ensure that we can meet the challenges that we face.

This is what we will be looking at today. How together we manage the uncertainty and the transformation that we are experiencing and leverage our strength to ensure robust insurance and pensions sectors in Europe.

And in my remarks this morning, I want to address some of the issues that we are facing and how we at EIOPA want to address those, where possible with you.

Let me start with uncertainty.

Let’s face it, the unprovoked military aggression of Russia against Ukraine has dampened the optimism we had at the beginning of the year as the coronavirus threat receded.

The Russian invasion has provoked a humanitarian crisis, a political crisis and an economic crisis. One that not only is urgent now, but that will also impact many economic and political decisions in the future. Indeed the impact will be far-reaching, both in time as well as geography.

Since the beginning of the year, we have been observing an abrupt change in the economic and financial situation, with the effects accelerated during the latest period.

Supply chain disruptions, spiking energy and commodity prices triggered by the prolonged pandemic crisis and the geopolitical tensions, are shifting the narrative from one dominated by protracted low yields and low inflation to an economic juncture driven by high inflation and uncertain economic growth.

For insurers, uncertainty in the economic condition and tightening in monetary policy are causing an increase in the risk premia and of the risk free rate with potentially mixed effects on capital positions.

Corrections in the values of assets and of liabilities can materialise and the latter might be counterbalanced by the effect of the inflation on claims. In addition, liquidity positions might be challenged by potential margin calls on the hedging portfolios intensifying short-term liquidity needs.

These new conditions have implications for policyholders as well, depending on the type of policy underwritten. Life coverage, whose benefits and guarantees are usually nominal, are negatively impacted in real terms, yet profit participation based products might benefit from the higher yields.

For consumers, inflation means a cost of living crisis and some hard choices.  And here not everyone will be able to see the long term impact when making choices in order to deal with short term challenges.

Across Europe, people will be asking themselves:

Should I let my insurance policy lapse and hope for the best?

Should I reduce my pension contributions – just for now?

Do I need to put off my retirement plans? Or

Should I take a chance on that investment I saw online as a quick way to make some extra cash?

Now it’s not for us as supervisors to tell policyholders what insurance cover they need or which policy they could drop.

Nor is it our place to advise people on how much they should be saving for retirement.

But it is our responsibility to make sure that people understand what inflation could mean for their financial health – both in the immediate and longer term.

And it is our responsibility to make sure that the products offered to policyholders offer value for money. That people’s needs are put first before profit and that they are sold the products that are right for their individual situation.

And it is also our responsibility to make sure that consumers have access to the right information and the right advice so they can make better informed decisions. This means that we need to make sure that disclosure documents are truly consumer-focused and adapted for the digital age. That advice, including advice given by a person, not a chatbox or website, is available. And for pension products availability of clear annual benefit statements and dashboards will be key.

And finally, it is our responsibility to identify and monitor gaps – whether they be advice gaps, protection gaps, pension gaps or digital gaps – and see how we can address them. We may not always be able to close gaps completely, but we must do what we can to narrow them.

We are also a society – and an economy – in transformation.

I am sure that everyone joining us today will appreciate just how much digital technology is changing our lives.

As a supervisor, we have to approach digitalisation with an open mind. It can offer many benefits, but there are also risks – and we need to be able to manage those risks in order to maintain stability and trust.

And so we rely on both regulation and supervision to make sure that consumers remain protected.

Today, in one of our panels, you will hear about the importance of regulatory frameworks being ready to adapt to new risk.

This is certainly the case with digitalisation, where we have to remain agile to preserve our operational resilience.

On top of this, the digital transformation is also accelerating the interconnectedness of financial services, so that regulation is now becoming more horizontal. The AI Act and DORA – the digital operational resilience act – are just two examples.

Our role at EIOPA is to make sure that the sectors we supervise are well represented in new cross-sectoral and horizontal regulation.

Take the AI Act, for example.

We welcome the act and support the objectives and principles of the European Commission’s legislative proposal to promote an ethical and trustworthy use of AI.

But we also believe that the Act needs some further reflection to make sure that the specifics of the insurance sector are taken into account.

To give two examples.

First, we don’t believe that all insurance use cases should be included in the Act’s list of high-risk use cases. Not all AI systems pose the same opportunities or risks. In the case of insurance, the use of AI in pricing and underwriting will arguably have a higher impact on consumers and insurance firms than the use of AI in back-office operations. So we need to think carefully about what we label as high risk.

Second, we need to recognize that the insurance industry is already regulated and that national supervisors are already acting on the use of AI as we speak. Indeed these national supervisors know best how their sectors operate and are well-placed to supervise the use of AI in insurance and pensions.

For this reason, we believe that EIOPA together with national competent authorities should remain responsible for the development and implementation of further regulation and supervision of the use of AI in the insurance and pensions sector, while closely working together with the AI Board, preventing gaps, but also overlap and confusion.

Sustainability is the other great transformation that we are facing.

It is a necessary one.

Climate change related events are more frequent and more intense than ever before.

I am sure that you are all familiar with the extent of our work in this area.

We are incorporating sustainability principles into Solvency II, IORP II and the IDD, as well as the technical standards for the SFDR.

We have two new mandates on sustainability as part of the Solvency II review. One related to the analysis of a dedicated prudential treatment of exposures related to assets or activities associated substantially with environmental and/or social objectives and one to the reassessment of natural catastrophe underwriting risk capital charges.

And we are conducting our first climate stress test this year, as we look at the effects of environmental risks on the resilience of the occupational pension sector.

This is a lot, at the same time, all urgent. And so there will continue to be tough choices and difficult conversation for insurers, pension fund managers and supervisors as we take on the mammoth task of greening our economy.

But it is also a chance, for here insurers, in particular, play a valuable role in keeping cover affordable for policyholders. Indeed, with data, innovation and incentives, insurers are helping businesses and people prepare for the future managing societies risk to the extent possible, sometimes also indicating where these possibilities become limited. All this is relevant and needs to be discussed.

My message to industry, to policy makers and to supervisors is that at EIOPA we are here to listen, certainly, but also to foster cooperation and to facilitate knowledge and data sharing in order to take on this challenge as an industry, not only with Europe but also at international level.

I also emphasize that sustainability is not limited to environmental factors, like climate change and indeed nature risk. Indeed, we must also consider social and governance factors. The ‘S’ and the ‘G’ of the ESG that we talk about so often. It is true that there are fewer scientific indicators for these areas but that does not mean we should ignore them and we will continue to support the work of the European Commission and the Sustainable Finance Platform to develop these areas.

Transformation should be all about opportunity. And most of the time it is.

But there is always the risk that some people will be left behind.

And here I would like to say something about gender and diversity. For too long people have faced – and still face – discrimination because of gender, ethnicity or sexual preference.

We have seen how important it is for gender and other aspects of diversity to be on the agenda of all insurers and for this reason we have recently written to the European Commission, Parliament and Council calling for diversity of management bodies in insurers and pension funds. This too is a badly needed transformation that will have a positive impact across both sectors.

Ladies and gentlemen

Uncertainty can make us feel powerless.

Transformation can cause confusion.

But on the other hand strength can be empowering.

So we have to build on our strengths.

At EIOPA, our strength is dialogue, cooperation and supervision.

And the foundation for our supervision is good regulation.

And so we take it seriously when we are asked to provide advice on potential future legislation. I gave the example of the AI Act earlier.

But there are other important areas where we need the voice of insurance and pensions to be heard.

Like the retail investment strategy. When we create frameworks to protect retail investors, we have to recognise how many investment products are insurance-based and the special role that distributors and intermediaries play.

If we want people to be able to take full advantage of the opportunities that the Capital Markets Union offers, then we must make sure that the specificities of insurance sector – including distribution methods and products with guarantees – are fully understood.

We also take seriously our responsibility when reviewing existing frameworks. Just as we have done with Solvency II, and will do now for the IRRD, the IORP II and soon for the IDD.

And as we approach the final leg of Solvency II negotiations, it’s important to remember that policyholder protection is always our priority.

With robust frameworks in place, we can concentrate on monitoring emerging trends and threats.

Because the single market offers so many possibilities. And we cannot afford to put it at risk.

This means we have to confront home-host issues.

The digital transformation means that more services are being provided cross-border, reaching more people. In fact, cross-border premiums have been steadily increasing over the past five years compared to domestic premiums.

In most cases, these services are to the benefit of the European consumer.

But it can also mean that consumers are buying policies without knowing from which country they are buying their policy, without knowing who is ultimately responsible if things go wrong, and without realising the impact that this could have on them in cases where the insurer fails.

Now in the full spirit of our internal market, this should not be a problem, however, unfortunately we are seeing more cases – with policyholders in one Member State receiving less protection and in case of failure less compensation than policyholders in another Member State. That, in my opinion is unacceptable. It is therefore that EIOPA stresses that minimum harmonization of insurance guarantee schemes is very much needed.

Supervision is our strength. But we are only as strong as our powers permit. Too often it is taking us too long to resolve these cases. And, as an EU body mandated to safeguard financial stability and protect consumers, this puts us in an uneasy position.

So we will need to make some decisions. If there is no appetite for a single insurance supervisor in Europe, we still must see how we can address this shortfall. The problem will not go away.

And no matter how resilient the sector, how robust the regulation, we will – sometimes – have to deal with failure and we need to prepare for that. And this is also why EIOPA is paying close attention to the development of the Commission’s proposal for a minimum harmonized Insurance Recovery and Resolution Directive.

This makes sense for financial stability and it makes sense for policyholders.

And when we, at EIOPA, say that ‘consumer protection is at the heart of our work’, I want that to be a statement that we can live by.

Let me conclude.

The speed of transformation will set the pace for supervision and in many cases will outpace regulation.

And to make the best of the transformation – to create opportunities and to mitigate risk, we must build on our strength.

The financial crisis of 2008 showed us the importance of robust regulatory frameworks

More recently, COVID, climate change and cyber have shown why working together is often the only way to address challenges.

And today, the Russian invasion of Ukraine, is showing us that our European values are our strength, that our diversity is our strength, and that our belief in cooperation and acting together is our strength.

Ladies and gentlemen, we really are stronger together and it is this joint strength that will carry us through this uncertainty and period of transformation.

Thank you very much and I hope you enjoy the day.