- Publication date
- 25 September 2023
You started a position as Chairperson of the European Insurance and Occupational Pensions Authority (EIOPA) two years ago. What has been your focus during this time?
My primary focus, naturally, is how to bridge the insurance protection and pension gap. This is essential. There is a slow drama happening in Europe because we are an aging continent. Even before inflation has begun to take its toll, the numbers showed that one in five citizens will not have sufficient funds to live comfortably on their pensions. Now, with inflation, I think that number is growing and that is becoming a huge problem. Not only for individuals, but also for society, and ultimately for economies as well.
There are still continuous crises happening. When I started this position, we were coming out of the corona crisis, then aggressive war in Ukraine began. Afterwards we had a crisis in the UK and with the US banks, so we are almost going from one crisis to another. And this requires close monitoring of the markets.
I have also put digitalisation in focus because I believe it has significant importance. I do not think we will handle digitalisation just by hiring a few new people who know a lot about the topic. We need to do that by ourselves, all of us. We need to know how to make sure that business works in a digital environment. Nowadays, data is essential and EIOPA has a central role to play when it comes to insurance and pensions data.
Finally, my focus upon arrival was centred around diversity. While diversity is crucial across all sectors, it was particularly lacking in the insurance and pensions sectors, where the industry predominantly consists of males of a certain age. We need more talented individuals with diverse backgrounds, varying ages, and different genders. That is why I’m very happy that first steps are being made and to see that in Solvency II proposal there is an article requiring the board of insurers companies to consider gender diversity in their governance.
The review of the IORP II Directive provides a similar opportunity. Diversity of management bodies is important for several reasons. First, to ensure adequate representation in the management body of the population as a whole; second to facilitate independent opinions and critical thinking, thus helping to address the phenomenon of 'groupthink'; and third to monitor management more effectively and contribute to improved risk oversight and resilience of institutions.
The Russian invasion of Ukraine brought new challenges for the financial industry after the pandemic years, with the growth of inflation, energy costs, and the necessary transition to ecologically sustainable energy sources. In your opinion, what are the challenges for society in general and for the financial institutions in the next period?
If you do any business, including insurance, and particularly cross-border activity, the macro environment has a big impact on you.
First, it is important to make sure that the industry stays robust, and I think the insurance industry has managed this during these challenging times. We have very good solvency numbers, but still, we need to continue to check that people can still afford insurance due to the cost of living crisis. Insurers also need to monitor whether sales are decreasing or if there are fewer insurance policies, and determine the reasons for this.
For example, we must look if there are other products on the market that give higher returns and therefore people move to these other products. However, we do not see this happening a lot at the moment. If you cancel your life insurance and decide on another financial product, you might lose a tax benefit or you might need to pay a penalty in most member states. But we see a drop in new premiums, and I think it’s the impact of the ongoing crises.
Finally, we need to make sure that we look at the impact of climate change and how we deal with it. Climate change damages are extremely high, look at the storms now, look at the flooding. Every time I talk about insurance against natural catastrophes these days, I can name an example of a natural catastrophe caused by climate change on a weekly basis. There are lots of questions that we need to answer. For example, we see that people don’t really insure themselves against these damages. What are the reasons? EIOPA published the report that studies this is the case: consumers tend to perceive insurance as too expensive, they might not understand the product, or they have had previously a negative experience with insurance claims and so on.
We experienced an earthquake in Croatia three years ago, and during that time, earthquake insurance saw rapid growth, but only for a short period. Now, it is back to the way it was before. Every summer we face problems with floods, but we do not insure ourselves against them. Our government provides financial support for extreme damages like these. Is it a good idea to rely solely on the government when extreme natural events occur?
This is not typical only for Croatia. If you look at any other country - we had very seriously flooding in Germany two years ago, where many people died, but only 37% of percent in the region of Rheinland-Pfalz had insurance coverage. If you look at the whole Europe, 75 percent of all the climate-related risks are not covered right now by insurance. This is a huge protection gap. Why is that? There are several answers, but one reason is that people don’t really see the risk. I think this is finally changing because these events are happening more and more often, so people start to see and realise that the risk is there. Many people assume that if an extreme event happens, the state will step in. And to be frank the state often does step in.
Your question was whether we need to change that and, if so, how? One of the reasons why would we want to change this is because we want to go to a model where everyone in the system is involved in trying to cover these losses.
Losses can be reduced by adaptation, mitigation and taking measures. However, even then there will still be a lot of damages.
EIOPA and the ECB recently published a joint discussion paper on how to better insure households and businesses in the European Union against climate-related natural catastrophes such as floods or wildfires.
With this paper we are starting the public discussion on how we are going to deal with all of this. We advocated for a comprehensive solution to expand coverage with four pillars such as enhancing adaptation and mitigation measures, bolstering capacity within the insurance sector, fostering national-level public-private partnerships, and establishing EU-level schemes to address losses that might pose challenges for purely market-driven insurance solutions.
We have to find an organized methodology and way to deal with these problems. The more structured approach will help with quicker pay out and reduce the burden for the tax payers. But this is the discussion that needs to happen on national level, and even European level because everyone needs to be involved. But in the end, we would all like to have this discussion and have a more mature model to deal with these damages. And it’s easy to say ‘the state will pay’ but when we say: the state pays, it‘s not really the truth, because in the end tax payers pay for all that.
I see models developing in Europe where, for example, there is a very clear statement when it comes to the support by national government: we will step in to support your losses but only the last 50 percent, the first you need to cover by yourself. Or you can get insurance and then it is on insurer to cover the losses. That is the incentive to get the insurance and then insurer says: No problem, I will insure you, but you need to take measures. This is what I mean when I said that we need a system. We’re not there yet but this is something that is definitely starting in Europe.
Do you think that the insurance policies will become more expensive because these events are happening more and more often?
The cost of the insurance in the end is the cost of the probability that an event will happen and the cost of that event. Because of the inflation, the cost of events are increasing and if you look how severe damages are now - we used to have storms and then two or three trees would fall down and now we have storms where roofs are flying off houses - that is a significantly higher cost. So, costs are going up because of more damages, inflation and the frequency of these events. Overall, the number of damages is much higher and insurers will price for that, so this is one of the reasons we have to talk about the cooperation with the public through public-private partnerships because we will get to the point that something will be too expensive or even uninsurable.
But some insures, like those in Florida, already don’t want to insure properties against climate risk because the risks are too high?
Yes, this is happening. In relation to exclusions, we issued a statement related to systemic events. As the frequency of systemic events increases, there is a risk that insurance products covering them become unaffordable or unavailable. At the same time, products covering such events or products that are silent about the coverage may explicitly exclude them in the future. These developments have the potential to further widen existing protection gaps, which can have a detrimental effect on consumers and make our economies and societies less resilient.
The primary goal of the statement was to guarantee that the interests of both current and potential policyholders are always considered during product development, revisions, and when unforeseen events challenge the extent of coverage. If someone has property insurance and storms are included but the cost are growing and the insurer decides to exclude it, then the insurer has to be very clear about it. We see that insurers start to exclude certain climate change risks, like storms, but also some cyber risks. And we need to pay attention to that.
At the same time, I appreciate that insurers now realize that these events are happening but if they are not going to insure them, then why would costumer have insurance. That is why I like the examples where it is clear that you will get the insurance up to a certain amount and the state will only support you after a certain amount. So, if you have 40.000 euros damages, the first 20.000 you need to cover by yourself and second will be covered by the state; or you can get insurance. These are difficult discussions, so we need to talk about some pools that would finance these events, at national or European level, just to help communities and member states to deal with these risks.
EIOPA published the results of its climate stress test of European Institutions for Occupational Retirement Provisions. Can you tell us what are the main goals of that test and what insights you gained?
We focused on transitional risk on the portfolio of IORPs on the assets side – we were testing if IORPs have assets that will reduce in value because of climate change. And we could see that the impact would be a drop of 13 percent of all assets (255 billion euros). These are serious numbers but at the same time it is manageable for the industry. The goal was to get a feel of where we are when it comes to risks and the results are a starting point for supervisory dialogue.
In these unstable times (pandemic, war, damaged international relations, pronounced climate changes), how should risk monitoring be approached?
What is always important is that you have a good starting point and I truly believe that in Europe with Solvency II we have that. In the Solvency II review the tendency is on reducing capital requirements for mid-term and short-term investments and we think that this is appropriate only for long-term investments. At the moment there is so much happening on the market and if you have a robust starting point this is certainly healthy.
The second important thing are scenarios – we have those already in the own risk solvency assessment – ORSA. Insurers need to see what is happening in the market, what are the developments and what does this mean for the business model. And finally, what is really helpful is stress testing, in particular climate stress testing which helps to answer the question about how much liquidity is there. And if there is more stress on the market, we can see if we can still deal with it.
Liquidity risk is still the main concern for the insurance supervisors and insurers. It has to do very much with clearing in case of certain events on the market and low liability. So, do insurers have enough liquidity? So far, the answer was always yes. What’s important is that we know the answer, so I am very much supportive of first getting the data on liquidity which we are monitoring right now at European level on a quarterly basis and we’re also doing stress tests. I think it is very important to see if there are any issues, and so far there are none. There were issues with the yield prices in the UK, but what we see in Europe is that it’s a completely different market.
How much investment in new technologies, new solutions can help in times of crisis if it is known that every crisis also creates new opportunities?
If you look at the COVID crisis, at the start when everybody was lost with working remotely, and now - three years later I think we have taken a major step on how we went digital. Those who were more behind at the time, also made step up. That was a benefit. We saw that even in those difficult situations, the insurance industry can work, and that was a plus.
And if you look at the inflation, which is of course very relevant and at the same time means high yields, we can also see an opportunity.
As far as digitization is concerned, digitalization has two components. Insurers have been analysing data for decades, so we can only get better at this with new technologies. AI, for instance, when used properly – transparent and non-discriminatory - puts industry in a good position. It can give a better understanding of data, result in better products and maybe even at lower costs. Second, distribution channels can reach more people more easily. If someone has a call with you on a video or provides you with the information through infographics for instance, these are all opportunities to present products in a different way to costumers.
Could you tell us in what ways the insurance market is stronger thanks to Solvency II?
There are several reasons but let me mention a few of them. The first one is that Solvency II considers a market valuation. That means that we measure the value of assets and assess the liability at the moment when we also need to sell assets. Being a market valuation is helpful because it gives you a realistic picture of where you are.
Second, we have tremendously improved risk management, we improved our ability to see risk, to deal with risk, and to mitigate risks. For these reasons Solvency II is the model that is accepted across the world. Most of the Asian countries are moving to Solvency II as a model, as is South America, South Africa, and countries in the Western Balkans. I think that Solvency II has proved itself as being very robust, also in response to crises. It brings us lot of peace and stability on solvency ratios and allows us to look at the other risks. It gives a very steady basis in the market.
The final reason is group supervision. We are better placed to assess what is happening at the group level, and improve the protection of policyholders within the EU as well as at the international level.
After five years of the Insurance Distribution Directive (IDD) what are the main experiences of its application?
The IDD shows that in every country there will be differences, but generally the IDD has a positive impact on how insurance is distributed to consumers. The fact that we are jointly as a European community looking at how distribution is done has a positive impact on how insurance is distributed. And it also has a positive impact on distributors acting in the best interest of their customers. With Solvency II in place, supervisors also have more time for conduct supervision. They can look if insurers have enough capital to fulfil the promises they gave to their clients and how they manage their relationship with consumers. Having that in place is very positive. We will be sharing the experience on the application of the IDD in more details beginning of next year.
Can you tell us in what way work of EIOPA reflects on countries like Bosnia and Herzegovina, Serbia, Montenegro that are not yet in the EU?
These countries for me are very important partners of EIOPA and I had a pleasure to meet their supervisors several times. At the IAIS last year in Dubrovnik EIOPA had a meeting with them and at the beginning of this year we organized a conference in Frankfurt to exchange our practices and experience. Regulators from Croatia, Slovenia and Austria made a tremendous effort in sharing their experience as well. We help by sharing information, organizing meetings, and we will continue with this at least once a year.
Life insurance and personal pensions in this region are at a low level. Few people recognize the true value of these products. Why do you think that is the case especially when we know that in Western countries they are well-sold products?
You’re asking the golden question: How are we going to make people think more about their pensions? Well, you’re not the only country who is preoccupied with this question.
If I translate that into my supervisory language, this is an example that I always give. We crawl as a baby, we walk as grown-ups but at an old age we need three legs. We need an extra stick. Pensions are also based on three pillars and we need all three of them to live comfortably. Many countries mostly lean on the first pillar, the state pension, and they are doing a bit in a second, like in Croatia. And the third pillar pension system constitutes a voluntary pension insurance and implies individual savings in voluntary pension funds. It is an important source of savings. However, many people think they don't need a third pillar because they, for instance, owe a house.
We’ve produced two sets of advice for the European Commission where we explain how countries can set up a pension dashboard at the macro level to show where the gaps are, but also at a micro level so citizens can go online and see how much pension they can expect. To raise the awareness, it is essential that every individual knows about his savings and to see whether there is a gap. I come from the Netherlands and we have an online tool where I can see my pension and I know where I’m standing. Only seven EU countries have a pension tracking system in place that provides such information – including the Nordic countries, the Netherlands and Slovakia.
Once we show people or companies what the gap is, life insurance product will be more interesting as a way of saving. Life insurance products of course needs to be fair, understandable, and distributed according to the IDD. But, like I said, in order to create the demand, we need first show the gap.