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European Insurance and Occupational Pensions Authority
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Interview with Petra Hielkema conducted by Martina Sobková and Tomáš Houdek for Bankovnictví


Publication date
17 October 2022


One of the biggest worldwide problems in insurance is the question of lacking coverage. How is the situation in the EU and what is EIOPA doing to close protection gaps?

Indeed, protection gaps can be observed in multiple segments of the insurance world, such as in cyber, pandemic, or natural catastrophe and pensions – and their extent in some areas is greater than in others. It’s important to understand that insurers may not be in a position to always fully close all gaps as some risks may not be insurable, or at least not in an affordable manner. Moreover, in some instances even when products are offered, consumers may consciously decide not to buy coverage.

Still, our focus should be on trying to narrow gaps as much as possible whilst ensuring that consumers receiving value for money.

As for how to do that, first and foremost, we must understand the reasons for insufficient coverage by identifying the drivers of these gaps. Here, on the supply side, EIOPA is analysing the types of products already available on the market as well as issues related to the exclusion of risks and the lack of clarity in terms and conditions. On the demand side, we are carrying out behavioural research to understand whether consumers believe they have sufficient coverage and to find out what is keeping consumers from purchasing existing products. A further important aspect is promoting transparency and awareness around coverage gaps by collecting and sharing high-quality data and building risk-based dashboards.

Regarding climate change, our pilot dashboard on natural catastrophe protection gaps already gives valuable insight into the level of protection member states across Europe have against natural hazards like earthquakes, windstorms, wildfires and floods. In that regard, EIOPA considers climate-related risk prevention as a key tool to maintain a well-functioning non-life insurance market in the future, which provides insurance coverage at affordable prices to society. On impact underwriting, EIOPA is currently conducting a pilot exercise with non-life undertakings to better understand how climate change adaptation in terms of risk prevention is implemented by the undertakings in their pricing and underwriting practices.

We’re also bringing more clarity to pension gaps. We recently advised the European Commission on the creation of two pension tools. The development of a pension dashboard would help national and EU policymakers make more informed decisions about their pension systems while a pension tracking system would give citizens an overview of their expected retirement income so that they can adjust their savings habits if necessary.


How important is ESG for insurers? How big is the impact environmental issues have on the profitability of insurance companies?

Sustainable finance is a key strategic area for EIOPA, and will remain so in coming years. The role of the insurance sector in addressing climate change is more important than ever. EIOPA expects the industry to manage and mitigate sustainability risks and adopt a sustainable approach to their investments based on principles of stewardship. This will not only support the insurance sector, but also contribute to making sure the insurance sector plays a positive role in mitigating climate change by channeling funds to more sustainable and impactful investments.

Looking at the asset side of insurers, EIOPA has mapped individual holdings of corporate bonds and equity, including through investment funds, to issuers operating in either fossil fuel extraction industries (e.g. coal mining), carbon-intensive industries (e.g. steel and cement production), vehicle production or the power sector, and identified asset holdings worth several hundred billions in these sectors. While these amounts in most cases are manageable compared to the overall holdings because insurers hold relatively well-diversified portfolios, it is still clear that these investments may expose the insurance sector to so called “transition risks” and it is essential that the insurance sector manages those risks. EIOPA is also working on identifying, monitoring and mitigating greenwashing risks. We seek to ensure that providers comply with relevant disclosure, product design and advice requirements, that consumers’ sustainability preferences are taken into account and that no unsubstantiated sustainability-related claims are made.

Regarding physical risks, EIOPA has recently published a report focusing on property, content and business interruption insurance against windstorm, wildfire, river flood and coastal flood risks. These risks have been identified as the most relevant and potentially most disruptive for the European property insurance business in light of climate change.

The report found that European groups and solo undertakings included in the sample have been historically well placed to handle claims stemming from major European natural catastrophes. However, it is important to note that the insurance sector’s ability to continue to offer financial protection against the consequences of such events relies on their ability to measure the likely impact of climate change and adapt their business strategies. Participants surveyed for the paper said they expect all property-related lines of business to be impacted by physical climate change risks and there was an emerging consensus among them that premiums are likely to increase and that adaptation and mitigation measures will play a crucial role in reducing risk levels in the future.

Rising premiums and changes in insurance conditions (e.g. higher deductibles, lower limits and exclusions in risky areas) may lead to detrimental consequences for policyholders and even the insurance sector itself, especially at a time when the overall cost of living is increasing due to inflation. This could have a substantial negative impact in terms of insurability and affordability from a societal point of view as well as reputational impact from the perspective of insurers. EIOPA therefore considers climate-related risk prevention as a key tool to maintain well-functioning insurance markets in the future. With its work on impact underwriting, we aim to promote and raise awareness about climate-related adaptation measures.


What can insurance companies do to mitigate the environmental issues?

Insurers cannot undo the heatwaves or put out the forest fires we experienced over the summer, nor can they guarantee the steady rainfall farmers are wishing for instead of periods of drought followed by heavy rain. However, as risk managers of our society and as major institutional investors with trillions of euros of investment power, they do have an important role to play in tackling climate change. Insurers can deploy their investments in green, sustainable initiatives and technologies that create long-term value for the society and contribute to building up societies’ resilience to climate shocks. They can make a difference by investing in renewable energy-related assets like wind farms or solar panels instead of investing in fossil fuels. Moreover, through active stewardship, insurers can substantially support firms in reducing their greenhouse gas emissions. Channeling money into sustainable projects can also have a signaling effect, potentially encouraging the involvement of other parts of the financial sector.

Insurers can also help the society and economy to better adapt to the consequences of climate change through their underwriting practices. In light of increasing physical risk exposures due to climate change, impact underwriting has the potential to change policyholders’ behavior towards climate-related risk prevention. In that regard, insurers can raise the awareness of their policyholders about climate-related risk exposures and incentivize the policyholders to engage in risk prevention, for instance, to build houses with waterproof walls and doors against flood risk.


How concerned are you about the current situation where European countries are increasingly reopening their coal power plants? Can insurers change their opinion on the coal power plants and start to insure them again?

Europe is heading into the winter months amid unprecedented uncertainties on the energy supply side and it is unclear whether the continent’s supplies will be sufficient to keep people’s homes warm and factories running. Against this background, it is understandable that politicians are reaching back to sources of energy that we thought we were leaving behind for good. My understanding and expectation is that these are temporary measures and I hope and expect that we won’t lose sight of long-term objectives.

Major insurers started exiting fossil fuels over the past few years and forward-looking associations such as Net-Zero Insurance Alliance have been established. These are good developments, but insurers’ growing commitment to sustainability doesn’t mean that coal power plants come up against the wall when looking for coverage already today. We need to accept that moving to a more sustainable economy is a transition that is needed, but also takes time. With today’s knowledge, the reopening of certain coal plants aims to address a temporary problem while countries build up capacity elsewhere. Of course this isn’t ideal. Still, I do not see a need for insurers that already decided on a greener path to renege on their promises and re-enter non-sustainable industries.


Insurers have a lot of capital. Can they have a positive impact on the environment via investments in sustainable infrastructure, energy etc?

Insurers can indeed deploy their capital to support Europe’s transition to a net-zero economy. At EIOPA we have an ambitious but realistic sustainable finance agenda for the sector, the main objective of which is to ensure that undertakings integrate ESG risks in their risk management in a forward-looking and transparent way while also contributing to a sustainable society through their investments, products and services. We recently published our guidance to insurers on how to best reflect climate change in their own risk and solvency assessment and as of the beginning of August, insurance distributors must integrate consumers’ sustainability preferences in the sales process and insurance manufacturers must integrate consumers’ sustainability preferences in their product oversight and governance framework. These are some concrete steps that will positively influence insurers’ underwriting and investment practices from a sustainability perspective.

Through their investment portfolio, insurers have ‘skin in the game’ as well and it is in their interest to finance sustainable projects with promising trajectories rather than piling money into sectors that risk being stranded over the medium term. Thanks to their business models, insurers are uniquely placed to fund the long-term and rather illiquid initiatives that sustainable infrastructure and energy projects tend to be. As such, insurers are also a natural - and willing - partner within the private sector to help fulfil the ambitions of the European Green Deal. EIOPA supports the idea of releasing capital for the continent’s green transition. To this end, we have proposed a more favourable but still prudent treatment of truly long-term investments as part of the review of Solvency II.


Another problem is that the population is getting older and we are still in a low-yield environment. This forces insurance companies to change their concept of life insurance. What is the stance of European insurers toward this topic?

Due to the prolonged low-yield environment, over the past years we have observed an increasing shift from products with guarantees – i.e. traditional insurance with profit participation – to products with limited or no guarantees that pursue higher return expectations. Insurance undertakings have therefore developed more sophisticated products to manage policyholders' exposure to risks, whilst making products more attractive for consumers by seeking a higher return.

European insurers are also monitoring closely the statistics on the ageing of the population and they are frequently updating and adjusting the mortality tables used in the evaluation to make sure they reflect the most updated and real situation in order not to underestimate risks and reserving. In addition to the impact on the modelling side, some insurers are also increasing their offer with products more tailored to “senior” profiles to meet the demand of this increasingly bigger target group.


With life insurance we have to discuss the investment element as well. How popular are unit-linked life insurance contracts in Europe? Are they even useful given that people can now very easily invest via funds and take out insurance separately?

Unit-linked products and hybrid products, mixing a traditional guaranteed component with a unit-linked component, play an increasingly important role. In fact, while traditional profit participation products tended to offer stable guaranteed returns, given the low-yield market situation of the past years and the rising inflation, consumers might perceive them as offering limited chance of returns in the future.

The hybrid and unit-linked product category are very heterogeneous both from the point of view of the underlying financial risk-return profile and in terms of the number and type of funds on which it is possible to allocate the unit-linked component. Moreover, these products also include a range of protection components – not offered as separate riders – which are not limited to basic coverage in the event of death, but can include coverage of disability, critical illness, etc. which if properly designed can offer value to consumers. In practice, while unit-linked and hybrid products are more similar than traditional with profit participation products to pure investment products, there are important protection aspects from which retail savers can benefit.

Insurance distribution is one of the most important ways that allows small savers and investors to participate in the capital markets. Agents, brokers and bank distribution channels are able to reach consumers directly at the local level. Insurance-based investment products are often the first, if not the sole, retail investment product which consumers buy. Life insurance, because of its societal benefits, leads many investors to opt for insurance over other retail investment products available in the market. Insurance distribution networks are also more present in rural and remote areas than other distributors; hence, insurance distribution is often the key point of contact which consumers have with the financial sector. In a recent EU-wide Eurobarometer, consumers indicated that they believe that traditional life insurance and insurance-based investment products are the second most important insurance product – after accident and health insurance – in order to have a financially healthy life. 

EIOPA is of the view that in order to unlock the potential for insurers to drive a more efficient and effective Capital Markets Union, and to fulfil their possible role bridging the institutional and wholesale markets and the needs of individual consumers, unit-linked and hybrid insurance-based investment products are key. In fact, unit-linked and hybrid insurance-based investment products that put consumer outcomes at the heart of product design, distribution and monitoring processes offer significant value to consumers. However, certain value for money concerns with such products remain. We recently developed a framework addressing these issues (such as on pricing, product complexity and proper testing) and are working with national competent authorities to make sure that insurers keep to it.


A lot of pension companies invest in bonds, but when rates and yields go up bonds funds will suffer. How problematic can this be for pension funds?

In EEA Member States IORPs allocate 45.3% of their investments towards bonds split into 27.6% in government bonds and 17.7% in corporate bonds. The allocation is heterogeneous across countries, with 14 member states allocating more than 50% of their investments towards bonds, and 7 members allocating less than 50% of their investments.

For fixed income assets, the other side of the coin of an increase in yields is the reduction of their market price with a negative impact on the asset side of the IORPs. However, when assessing the impact of an increase of yields on the balance sheet position of an IORP, we should not neglect the liability side, which might be affected as well. The estimation of the impact on the liabilities is not trivial and depends on two main elements: i) the nature of the increase of the yields (e.g. repricing of the risk premia or increase in the risk free rate component; and ii) the characteristics of the liability portfolios (e.g. defined benefits vs. defined contributions).

Assuming an increase of yields not purely triggered by a repricing of risk premia, given that IORPs are characterised by a negative duration gap (e.g. liabilities have longer duration than assets), a reduction in assets due to yield increases is accompanied (and in some cases overcompensated) by a reduction in liabilities. Evidence shows that in some cases the combined impact on assets and liabilities leads to stronger financial positions.

Looking at the characteristics of the liability portfolios, for IORPs with defined contribution schemes the financial position won’t be affected by market movements as the market risk is fully transferred to the members as ultimate risk bearers.


What about people in retirement with extreme inflation that we have now?

Annuitants, in particular those purchasing the annuity during the low yield environment, are facing a double hit. First, the annuity payments as such have been low at the point of purchase. Second, the higher than expected inflation further erodes these payments.

High inflation may have major implications for the purchasing power of the elderly/retired, as rising inflation erodes pension benefits. This is the case in capital-based defined benefit systems, where indexation is not standard but depends on country specificities. It is a structural problem if nominal rates stay low in the face of continuous high inflation. Benefits in first-pillar pay-as-you-go systems tend to be linked to price inflation, but in an inflationary environment, the financing of these systems may become even more challenging than they already are.

Coming out of the pandemic, the general view was that rising prices would be a temporary phenomenon. Since then, some factors including supply chain disruptions have proven to be more stubborn than previously foreseen and Russia’s invasion of Ukraine delivered another massive shock. This resulted in rapidly rising prices in fossil fuels, energy and imported commodities while also suppressing growth prospects.

Inflation affects everyone, but its effect is especially painful to bear for low-income groups as they usually spend a larger share of their monthly income on everyday necessities. A cost of living crisis may result in consumers no longer saving enough for retirement. Moreover, high inflation also erodes the real value of people’s past savings. It is therefore all the more important in the current inflationary environment for insurance-based investment products to offer consumers fair value for money. We are working with national supervisors to ensure that manufacturers’ and distributors’ product oversight and governance processes are carefully monitored so that consumers receive fair value from the products they purchase.


When we are discussing pensions, we have to talk about PEPP. How popular is this product in the EU? In Czech Republic, for instance, no company is offering it.

The Pan-European Personal Pension Product Regulation entered into force at the end of March this year. It was designed to be an affordable, transparent investment option with low costs and fees and one that allows troublefree cross-border mobility within the EU. While there are no registered providers of PEPP yet, it’s worth pointing out that we did not expect immediate applications. The long-term nature of PEPPs means that providers do require some time and preparation before they can launch them. We conducted a survey at the beginning of the year which showed that there is interest in the industry for PEPP and we believe that this is still the case.

Some national supervisory authorities are already in talks with interested companies and one NCA has now received an application, which is currently being assessed*. We hope this to be the first of many as PEPP alongside other products already available can be an important saving mechanism.

*Note that the interview was conducted in September before first PEPP has been authorised and registered.


One of EIOPA’s key roles is to coordinate and steer regulation. What will have the biggest impact on the insurance sector in upcoming years?

After Solvency II was introduced in 2016 legislators are currently discussing adjustments to the framework. EIOPA provided advice on possible changes in 2020. Solvency II is overall working well and has been copied all over the world. The main purpose of the EIOPA recommendations is therefore to ensure that the Solvency II regime remains fit for purpose. Its elements are a balanced update of the regulatory framework, the recognition of the economic situation and a completion of the regulatory toolbox. Given the success of Solvency II, the changes included in the proposals are more evolutionary than revolutionary, but there are important elements such as the recovery and resolution framework, enhancements to the proportionality principle and the extra mandates on sustainable finance would improve the framework.

Solvency II is the regulatory bedrock for the insurance sector and our aim is for it to remain robust and fit for purpose. Policymakers and regulators are also alert to new challenges, such as digitalisation and sustainability, which are going to be central issues in the years to come.

Several pieces of legislation are in the pipeline on digitalisation. The EU’s Digital Finance Strategy seeks to ramp up the digitalisation of financial services on the continent by stimulating responsible innovation and competition among financial service providers. The Digital Operational Resilience Act will require all participants of the financial system to steel their defences against cyber attacks, the Artificial Intelligence Act will bring about trustworthy AI solutions that facilitate financial inclusion, and the drafting of the first Open Finance proposal is underway. There’s a lot happening there.

Undoubtedly, sustainability is another salient topic on the agenda and a key strategic priority for EIOPA. By defining within the Taxonomy Regulation what sustainable activity is and by requiring the industry to comply with disclosure rules, the EU has established basic tools to ensure that investments are directed towards sustainable projects and activities. Our focus at EIOPA is on incorporating environmental, social and governance risks in the prudential framework for insurers and pension funds, consolidating risk assessments at the micro and macro levels, and promoting a sustainable conduct of business while rooting out greenwashing. Just in the past couple of weeks we advised insurers on how to best reflect climate change-related risks in their Own Risk Solvency Assessment and how to integrate consumers’ sustainability preferences when advising them on products. There is more to follow.


One of the big trends today is using data. With data, insurance companies can be much more precise. What is the current status with Open Finance and Open Insurance regulation?

Insurers have always relied heavily on data for their risk management. With the general shift towards increasingly more digital solutions, it is becoming easier to harvest data from sources like traffic cameras, phones, watches or home security systems. All such devices generate data points that could potentially be used by insurers to assess risks more accurately and develop increasingly tailored products. We see that insurers are already combining new data sources with traditional ones and increased business applications across the entire economy are to be expected.

The amended Payment Services Directive, or PSD2, opened up payment data to third-party solutions enabling the first forays into Open Banking, but there’s no blanket regulation yet for the financial industry that would facilitate the flow of data across sectors and providers to bring about Open Finance. The European Commission announced that it would put forward a proposal for Open Finance, noting that the current environment of low data interoperability hinders business innovation and prevents consumers from reaping the full benefits of digitalisation. On our end, we have already analysed the opportunities and risks of Open Insurance in a report published early 2022 and stand ready to support the Commission with further insights. This might include further work on more concrete open insurance use cases. If done right, Open Insurance can bring wide-ranging benefits, but we must ensure that innovation in the field strictly complies with the rules of digital ethics and does not undermine the protection of consumers. Hence, leveraging on the AI governance principles recently developed by EIOPA’s consultative expert group on digital ethics, we aim to develop further work on specific AI use cases in insurance as well as assess the topic of financial inclusion.


Read the interview in Czech here.


26 MAY 2023
Interview with Petra Hielkema for Bankovnictví
(141.58 KB - PDF)