Eiopa hints again at lighter treatment for captives under SII review

Petra Hielkema, chair of the European insurance and Occupational Pensions Authority (Eiopa), gave further evidence that captives and other smaller insurers will benefit from lighter treatment after the Solvency II review in her recent speech at the Global Insurance Supervision conference in Frankfurt.

She also publicly reaffirmed that Eiopa believes that fresh public-private partnerships are needed at both national and European level to rise to the multi-headed challenge of climate change that the commercial insurance sector is clearly not able to meet alone.

Solvency II is currently undergoing a review. Eiopa has provided its technical advice to the European Commission. Earlier this summer, the European Parliament reached a position on the review of the directive, which will allow the legislative process to move forward.

“One improvement to Solvency II we can expect to see is that smaller and lower-risk insurers will benefit from reduced requirements for reporting,” said Hielkema in Frankfurt.

“Simplified processes and a lower administrative burden, in accordance with the principle of proportionality, is very much in line with this risk-based approach and a change Eiopa welcomes,” she added. Her words will encourage captive owners and managers who have long complained of the administrative burden imposed by the capital adequacy and reporting standard since it was introduced.

“We can also expect to see the easing of capital requirements. This means that insurers and reinsurers will be required to hold less in capital than before, with the objective of freeing it up for more long-term investments,” continued Hielkema.

The Eiopa chair said, however, that the appropriate course of action is to err on the side of caution at a time of ongoing uncertainties.

“Even though some easing in the context of long-term investments would be appropriate, as also stated in our opinion on the Solvency II review, further capital relief for not truly long-term investments would increase risks for consumers and financial stability in times of uncertainty,” she said.

All European businesses have complained of over-regulation from Brussels in recent times as they struggle to compete on the global stage.

Hielkema said that she understands these concerns but stressed that external factors, not least rapid digital transformation, brings risks that need to be dealt with sooner rather than later.

“It’s true that in terms of regulation, over the last four years, the Commission has been busy. In part this has been driven by the need for the financial sector to play its part in the transition to a greener economy, and in part by the increasing number of cross-sectoral or horizontal regulation,” she said.

“But also in part because of the pace of technological developments. Such is the speed of transformation that while it might be appealing to pause on regulation, the external factors won’t be taking a break. And I would say there is no harm in being early in addressing risk,” continued the Eiopa chief.

Hielkema said the discussion should be less about overregulation and more about good regulation. “By this I mean regulation that is relevant and fit for purpose. Because good regulation benefits competitiveness. To speak of a trade-off between the extent of regulation and competitiveness is too simplistic,” she pointed out.

Hielkema said that Solvency II is an example of regulation that works well. “It is detailed, it is complex, and when it was introduced there were concerns that it was over-burdensome. But it is a regulation that we have seen to work and it is a regulation that is admired and copied by many countries outside of Europe,” she said.

Hielkema pointed out that policyholder protection, as provided by Solvency II, is paramount these days, as is the notion that protection gaps are growing worldwide and fresh solutions are needed on a collaborative basis.

“Climate change is probably the most pressing risk of our time. In Europe, this summer we have seen fires, mudslides and floods. In fact, Europe is the fastest-warming continent in the world, warming twice as fast as the global average for the last four decades. But of course, climate change affects every continent,” she said.

“The impact of these events on individuals is dramatic, the impact on societies large. And so we all have a role to play in preparing for and managing the effects of climate change, also the insurance industry. In fact, the insurance sector is very well positioned to make an important contribution to this collective goal,” continued Hielkema.

The supervisor pointed out that catastrophe insurance is a key tool to mitigate macroeconomic losses following extreme climate-related events. It provides prompt funding for people and businesses to recover and rebuild from devastating events.

“Yet at the moment, a huge 75% of climate-related catastrophe losses in Europe are not insured. This situation is deeply concerning as it leaves households and businesses exposed to unnecessary risks and condemns those affected by natural hazards to a slow and arduous recovery process. To address this issue, we must ensure that insurance coverage against natural catastrophes remains accessible and affordable for all,” said Hielkema.

This, however, will not just happen automatically. This was underlined by the cautious approach recently taken by the reinsurance sector currently gathered in Monaco for the annual Rendez-Vous.

“In fact, we currently see actions that move the other way, with insurance excluding more cat risk, while consumers trust more and more in public authorities to pick up the bill. One could say that the current way the market is organising how to finance the losses as a result of climate change is not functioning well,” said Hielkema.

The Eiopa chair said that the whole market needs to rethink how the entire eco system works, including consumers, public authorities, insurers and reinsurers.

“Instead of each of these groups currently working on shifting risks and costs to others in the system, we need a dialogue in which each of the groups takes its own responsibility and is able to do so. For the question is not how to avoid the events – these will come. The question is how we as a society can stand together to deal with the events in the most efficient way, thereby lowering cost and impact, ensuring quick recovery and in the end quickly supporting the individuals that were impacted this time,” she said.

To facilitate this critical dialogue, Eiopa has worked together with the European Central Bank to develop a set of policy options to increase climate resilience in Europe.

Eiopa and the ECB called for a comprehensive solution to expand coverage based upon:

• Policies designed with adaptation and mitigation measures enhancing the capacity of the insurance market, by involving the entire financial system.
• Public-private partnerships at national and EU levels to cover losses that may be difficult to insure with purely market-based solutions.

“We will continue working on these policy options and share them, while encouraging further dialogue at all levels to bring this topic further. And let me stress that insurance will have a key role to play in bringing this further,” promised Hielkema, another commitment that Europe’s risk and insurance management community will welcome as they struggle to secure adequate property catastrophe coverage.

Hielkema added that Eiopa recently carried out behavioural analysis of why consumers are reluctant to consider insurance options and why 75% of nat cat risk in the EU is currently not insured. It found that the insurance sector has not covered itself in glory.

“We found several causes… past negative experiences, misperceptions about the risks of natural catastrophe events, a lack of transparency in terms and conditions, high reliance on state intervention and demanding purchasing processes were some of the barriers that held people from embracing products offering nat cat protection,” said Hielkema.

Two of the core findings of Commercial Risk’s annual Risk Frontiers Europe survey are that risk managers want to see a more attractive environment for captives, and there is a real demand for public-private partnerships to help rise to the challenge of systemic risks, not least those caused by climate change.

This speech by the head of Eiopa is therefore very encouraging as she is clearly very aware of the needs of European business as well as individual consumers. Let’s just hope that the core messages are clearly transmitted to the politicians at both national and European level.