It is up to the EU institutions to ensure an appropriate regulatory framework is in place that enables innovation and allows consumers, established companies and new market entrants, such as InsurTechs, to benefit from the opportunities that digitalisation can offer.


Michaela KOLLER: Beyond being first and foremost a human tragedy with severe economic consequences, the COVID-19 pandemic has indeed been an extremely challenging period for both insurers and their customers.
Having said this, the European insurance sector's response to the crisis has been very strong and has focussed on:

• Maintaining service levels to ensure that insurers keep their promises to customers, while also keeping those customers and insurance company employees safe.
• Managing risks to ensure the sector remains financially strong.
• Ensuring that the industry fulfils its responsibilities towards society through goodwill initiatives to help alleviate challenges brought on by the crisis.

Operationally, since the outset of the pandemic, all over Europe, the sector has managed to maintain business continuity. When confinement measures were introduced in March, the sector managed to quickly and - overall successfully - adjust to the new reality, and insurers continued to provide their services without major problems. A key component of insurers' response to the pandemic has been that companies moved their workforce to work from home. Across markets, the majority of insurers and associations had already put in place the necessary digital infrastructures and have been able to continue to effectively provide services and process claims remotely. Beyond this, in many cases, insurance companies have adapted their cover to enable their customers to continue to operate in a new environment while being protected.

Obviously, there were some delays in the very beginning, but these were generally minor and mostly seen in markets that have strict requirements in terms of the provision of paper documentation and for those markets in which customers prefer to pay their premiums in cash.

From a prudential perspective, COVID-19 was the first real test of the EU's Solvency II framework. While Europe's insurers support Solvency II - and, in general, the framework works well - the recent COVID-19 induced market volatility confirmed our concerns that Solvency II can exaggerate the impact of short-term price movements in the financial markets on insurers' balance sheets and solvency positions.

When it comes to the impact on business lines, it is difficult to give a clear picture. First of all, insurance products and business lines are very different across countries. If anything, COVID-19 has clearly demonstrated how much insurance products are tailored to national circumstances and specific market dynamics.

Furthermore, each country is affected by the pandemic differently. There are also significant differences in the types of restrictive measures imposed by governments to try to stop the coronavirus from spreading. This means that there are also differences per country in how the sector is affected.
What is worth mentioning in this context, however, is that insurers across Europe have launched a very broad range of goodwill initiatives to support citizens, businesses and societies as a whole, during the pandemic.

These initiatives were very diverse and were tailored to local needs. They ranged from giving flexibility to consumers to making donations to schools and hospitals, but also amplifying government physical and mental health messages. For example, our Romanian member UNSAR published a special webpage dedicated to all of the initiatives that were undertaken by the Romanian insurance market.

XPRIMM: Moving to regulatory files, a major focus for the new EC hasbeen its "green agenda", notably Europe's contribution towards the fight against climate change. How are Europe's insurers contributing towards this?

M. K.: Europe's insurers remain as committed as ever to supporting the transition to a more sustainable society and to tackling climate change. The insurance industry believes that these fundamental ambitions must be pursued despite the huge, new challenges created by the current pandemic. Furthermore, the industry can play a key role in the transition towards a zero-carbon economy through providing both insurance coverage and investment in sustainable assets.

As underwriters of natural catastrophe risks, the insurance sector is especially aware of and sensitive to the risks posed by climate change. In particular, the sector is concerned that continuing global increases in temperature could make it increasingly difficult to offer the affordable financial protection that people deserve and modern society requires to function properly.

Insurance Europe is therefore calling on policymakers to take concrete steps to limit climate change. This being said, even if such measures are taken, action must also begin - as a matter of urgency - to adapt to an already changing climate. Here, the main responsibility falls on public authorities at national, regional and local level. For instance, it is the public authorities' responsibility to make sure, through building codes, that no construction takes place in risky areas, and to make sure that such codes are duly respected.

Insurers can also contribute to this effort and are willing to do so. For instance, the insurance industry can contribute to a more holistic understanding of risk through its modelling capabilities. Insurers can also assist policymakers in guiding society with tools such as risk zoning and mapping, as well as land-use planning.

At EU level, the insurance sector will also continue to support the Commission's work in this area. For example, Insurance Europe recently responded to a consultation by the European Commission on the EU's strategy for adaptation to climate change, where it called for more prominence to be given to adaptation.

As Europe's largest institutional investor with more than EUR10bn of assets under management, the insurance industry can also help to finance the transition towards carbon neutral, resource efficient and more sustainable economies. It has already developed a number of sustainability approaches and has made sustainable investment commitments.

However, we also need the economy as a whole to shift towards a sustainable approach. In this respect, new policy and legislative initiatives must deliver the right outcomes: e.g. we need appropriate details for the EU Taxonomy and rules on sustainability disclosures, legislation to ensure that companies are providing the sustainability data that insurers need as investors, and a meaningful review of Solvency II. Insurers also need more suitable sustainable assets in which to invest, because there are simply not enough available. Ambitious policymaker action is therefore needed to incentivise economic sectors across the board to adjust towards sustainability.

XPRIMM: Another focus for the new EC is its work on the Capital Markets Union (CMU). The EC recently published its action plan for the CMU. What impression do you have of the initiative?

M. K.: Given the impact that COVID-19 has had on the economies of European member states, an effective strategy to boost economic activity and growth in the EU is needed now more than ever.

As Europe's largest institutional investors, the CMU offers a significant opportunity for EU insurers to play an even bigger role in providing much needed long-term investment to underpin recovery and growth in Europe - that is, if issues with our regulatory framework, Solvency II, are fixed. Europe's insurers therefore very much welcome the Commission's point in its new action plan on the CMU to assess, as part of the Solvency II review, how the framework could be amended to further enable long-term investment by insurance companies.

The review of Solvency II must include targeted but ambitious improvements in how it treats insurers' long-term business that in turn generates long-term investments. Improvements are required to address measurement flaws on liabilities and capital charges for assets, as both determine insurers' investment capacity and behaviour. On the liabilities side, the risk margin and the volatility adjustment must be fixed to avoid exaggerating the valuation of long-term liabilities and artificial volatility in solvency ratios. On the assets side, improvements are required to the risk-based capital treatment of both equity and debt assets to correctly recognise the real risks faced by insurers: ie long-term under-performance rather than short-term market movements. The right improvements will enable insurers to not only maintain, but significantly enhance their role as Europe's largest institutional long-term investors, and to play a central role in delivering of the benefits of the CMU.

Beyond that, we also welcome the Commission's recognition of the role that supplementary private pensions can play in meeting the challenges posed by ageing populations. Similarly, the industry welcomes the recognition in the Action Plan of the importance of financial literacy and skills, and the proposed measures to further encourage member states to support financial education.

XPRIMM: The CMU also coversother areas, including disclosures and distribution, for example. How do you view the CMU from these perspectives?

M. K.: On disclosures, our industry welcomes the Commission's intention to examine ways to improve consumer engagement, digital delivery and interaction. It is, however, vital that the Commission takes a holistic approach to reviewing existing disclosure requirements to address the current overloading of consumers with information.

With respect to distribution, it is important that policymakers recognise the benefits of tailored conduct of business rules. It is therefore unfortunate that the work of the high-level forum and now the action plan overlooks this issue. Consumer participation in the CMU will only be enhanced through regulation that accommodates the specific features of insurance products and existing insurance distribution systems. For example, rules on advice and commissions must be workable for smaller, local distributors who provide access to the CMU to retail customers who may otherwise be excluded.

There appears to be a strong push for harmonising legislation across sectors through the CMU, but it is not clear what real-world problem this harmonisation is intended to solve. If we are not mindful of how the market operates on the ground, we could end up with changes that inhibit access to capital markets, rather than improving it.

XPRIMM: The new EC has also been focussed on its digital agenda, and recently published its Digital Finance Strategy for the EU. How is the industry responding to the increasing digitalisation of our societies?

M. K.: As consumers embrace new and innovative digital solutions, the insurance industry continues to strive to meet their expectations and use new technologies to better serve its customers. The COVID-19 pandemic has further emphasised the need for strong and innovative digital capacities in the financial sector. However, it is up to the EU institutions to ensure an appropriate regulatory framework is in place that enables innovation and allows consumers, established companies and new market entrants, such as insurtechs, to benefit from the opportunities that digitalisation can offer. This means removing any regulatory barriers that hold back innovation, facilitating a data-driven financial sector and supporting a greater uptake of new technologies.

The Commission's Digital Finance Strategy for the EU represents an important step in this direction, seeking to support digital transformation and innovation and to enable European consumers and businesses to enjoy the benefits and opportunities of digital financial services.

For this to be achieved, insurance consumers must enjoy the same level of protection regardless of who their provider may be. The insurance industry therefore welcomes the Commission's recognition of the need to ensure that the EU legal framework must continue to safeguard financial stability and protect customers via the same activity, same risk, same rules principle.

This will help to preserve a level playing field between existing financial institutions and new market participants - such as technology companies offering financial services.

The insurance industry also welcomes the recognition of the need to ensure that the EU legal framework is future proof and technology neutral, to ensure that insurers' innovation for the benefit of their customers is maximised and not unnecessarily hindered.

Promoting a data-driven financial sector will also be key to promote innovation and competition. Greater availability of data could help insurers to improve risk monitoring and assessment, offer a better customer experience and increase fraud detection. The insurance industry is supportive of efforts to facilitate appropriate data sharing, in which the treatment of different players is based on a true level playing field. At the same time, customers should have full control over the sharing of their data and feel confident that it is being stored securely.

However, much will depend on the specific approach chosen for any data-sharing framework. The industry therefore looks forward to further dialogue with the Commission in the months ahead to help realise these objectives and deliver an appropriate framework.

M. K.: Progress on the review of the MID has been held back by the COVID-19 pandemic. Trialogues are on hold and discussions in the Council of the EU have only just resumed.

There has been one Council Working Group meeting under the German Presidency, which is understood to have focused on possible areas for a compromise with the European Parliament. A further Council Working Group meeting is due to take place on 23 October. The German Presidency has not identified this as a priority file but will continue to seek possibilities for compromises.

At least one trialogue is expected in November, likely focusing on scope (ie scope of the compulsory MTPL insurance requirement under the MID, covering the Vnuk ruling as well as light electric vehicles), but this remains to be confirmed.

From the perspective of the European Parliament, the situation is similar. However, the IMCO Committee will need to select a new chair since Petra de Sutter has been nominated as Deputy Prime Minister of the new Belgian government. Ms de Sutter was also one of the shadow rapporteurs on this file.

Regarding where we stand, the position we published two years ago remains our compass. Some other proposals were added by the Parliament (eg a price comparison tool) but none really seem to be gaining traction at the moment.

XPRIMM: What are the differences between more mature insurance markets and those that joined the EU at a later stage?

M. K.: One of the major differences is that mature markets tend to have a wider range of insurance products on offer. In less mature markets, the main product tends to be motor insurance, and this is particularly the case in Central and Eastern European markets.

There are of course other products available, such as life, nat cat or general liability cover, but penetration for these products tends to be much lower than in mature markets. This does however mean that non-mature markets offer insurers significant opportunities for growth.

XPRIMM: Protection gaps and underinsurance have emerged asmajor topics in recent years. What actions can be taken to tackle it?

M. K.: Protection gaps are present in all member states. While they exist in different forms in different places, three common examples are:

• Lack of pension provision.
• Lack of cover for natural catastrophes.
• Lack of cover for cyber risk.

Throughout the world, governments face a huge challenge in providing funds for retired citizens. This is mainly due to demographic changes, as the proportion of workers to retirees decreases in most countries, which has a huge impact on pay-as-you-go pension systems. In addition, people are simply not saving enough for an adequate retirement income. For example, a survey conducted by Insurance Europe found that almost half of respondents were not saving for their retirements.

On this issue, policymakers must be bold. They need to be transparent about the state of public finances and make it clear that people need to save more for their retirement. Policymakers must then encourage people to do so by providing the right incentives and promoting well-balanced multi-pillar pension systems built on adequate, stable and attractive regulatory frameworks.

At European level, the pension challenge has resulted in an increased focus on pensions and new initiatives. For example, our industry recently welcomed the Commission's recognition in its CMU action plan of the role that supplementary private pensions can play in meeting the challenges posed by ageing populations.

Another key pension focus for the Commission has been its work to develop a pan-European Personal Pension Product (PEPP). However, the success of the PEPP will depend on many key issues that still need to be addressed by the European Insurance and Occupational Pensions Authority (EIOPA) and the Commission in the draft regulatory technical standards for the PEPP.

Moving to natural catastrophes, the scale of under-protection is often shocking. For example, in 2019, natural disasters around the world created economic losses of 150 billion USD, according to some estimates. However, only around one third of those losses were insured.

This problem can be particularly acute for emerging economies. Because insurance penetration is so low, the impact of catastrophic events is felt more intensely, and for longer. However, under-protection is also a huge problem for many mature markets, including many in the EU. While insurers have a role to play, policymakers must take the lead in addressing this issue, partly through better financial education.

Moving to cyber risk, recent attacks have shown how exposed we are to online criminals and insurers are increasingly responding with products to protect their customers. However, providing insurance against cyber risks is complicated. Unlike natural catastrophes, cyber risks have no geographical boundaries. This raises questions of accumulation and aggregation and is one reason why insurers tend to be cautious with cyber risks.

A key factor limiting the development of cyber insurance solutions is the lack of data available for insurers to analyse. This makes cyber risks difficult to understand and price. Therefore, if policymakers wish to shift risk away from society, they must make information on the nature of cyber-attacks available on an aggregate and anonymised basis. This would enable insurers to refine the protection they offer to clients.

For example, the EU's General Data Protection Regulation obliges companies to notify their national authority about data breaches. This creates an opportunity: If national authorities provide this data to insurers - in an anonymised form - it would enable them to better understand cyber risks. Policymakers also need to make society more resilient to the risks we face. This means raising awareness on how to prevent cyber breaches and what to do when an attack takes place.

Finally, recent events have demonstrated how exposed our society and economies are to the risk of pandemics. While the losses associated with pandemics are widely covered in insurance lines such as life, travel and event cancellation, as well as in many liability lines (general, medical, professional, directors' & officers'), in other lines, such as business interruption insurance, pandemic risk is considered to be a catastrophic risk that cannot generally be covered through the existing insurance model in which the claims of the few are shared by the many. Standard insurance policies typically provide protection only against risks that cannot all happen at the same time, as these can be offered at prices that customers can afford.

In practical terms, this means that, although specialist and limited markets do exist for this type of cover, insuring a very large group of individuals and businesses against a pandemic cannot be done relying exclusively on the normal principles of insurance.

For this reason, it was so far only possible to cover pandemic risk in specialised insurance policies covering limited situations and with clear cover limits. In a range of non-life policies, pandemic risk is not covered and therefore has not been included in the premiums, has not been reserved for and has not been taken into account in setting the solvency capital.

Removing existing limits or providing broad, general cover for pandemic risk is therefore not possible for the insurance industry alone. Here is an example to illustrate why: it has been estimated that in one market current business interruption premiums would need to have been collected for over 100 years to cover just two months of COVID-19-related business interruption costs.

Events such as pandemics require the joint involvement of the insurance sector and of the state. The industry has significant expertise here, having already joined forces with governments to develop workable and affordable solutions for other huge and difficult-to-insure risks, such as flooding, terrorism, earthquakes and nuclear energy.