Eiopa tells national supervisors to focus on exclusions in effort to find systemic risk solutions

Insurance supervisors across the EU have been told to keep a close eye on how insurers react to the rise in systemic risks, and in particular how exclusions are applied in difficult areas.

The European Insurance and Occupational Pensions Authority (Eiopa) recently published supervisory statements on exclusions related to systemic events such as pandemic, natural catastrophes or non-affirmative cyber exposures.

The responses to the consultation leading up the statements, which were published in late September, made for interesting reading. They showed a clear divide between customers and carriers that suggests state-backed and even pan-European solutions to these systemic risks will ultimately be needed.

Policyholder representative bodies such as Ferma and the European broking association federation Bipar were clearly looking for more clarity, certainty and better communication from insurers in the wake of failures over business interruption (BI) coverage to respond to Covid-19-related claims, the original spark for Eiopa’s investigation.

Eiopa’s response to comments made during the consultation strongly suggest it sympathises with the policyholder community – whether they be individual consumers, SMEs or corporates. Carriers must brace themselves for closer scrutiny from supervisors over how they approach ongoing and future crises.

There is no suggestion that Eiopa or national supervisors will force insurers to stop excluding systemic risks that they find difficult to measure, price and carry on their balance sheets. But insurers will, it seems, come under increased pressure at EU and national level to clarify and communicate their appetite more clearly so that customers have a much better idea of where they stand.

The first of Eiopa’s supervisory statements giving guidance to national supervisors was on exclusions for risks stemming from 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 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,” stated Eiopa.

Its supervisory statement aims to promote supervisory convergence on how national competent authorities assess the treatment of exclusions as part of the product design and terms and conditions drafting process. The statement also seeks to ensure that the “interests of existing and prospective policy-holders are duly taken into account when products are developed or revised or when events casting doubt on the scope of the coverage materialise”, as with the BI dispute during the lockdowns caused by Covid-19. 

Eiopa recommends that national competent authorities monitor whether insurance “manufacturers” appropriately assess the terms and conditions, and the scope of coverage, when risk arising from systemic events becomes uninsurable, or there is lack of clarity over whether the risk is covered or not.

Eiopa recommends that national supervisors ensure carriers assess their target market’s needs, objectives and characteristics when setting exclusions for systemic events, “including when determining whether risks stemming from systemic events are covered or not”.

“While there may be a limit to insurability, Eiopa is of the view that consumers and small businesses can assess the risks involved better – including those stemming from systemic events – when coverage is clear and aligned to the target market’s needs. The supervisory statement therefore advocates greater clarity and specific tailoring to the target market,” stressed Eiopa.

Its second supervisory statement was on the management of non-affirmative cyber exposures, a hot potato before the arrival of Covid-19.

Eiopa said that given insurers’ exposure to this “burgeoning” risk category, national insurance supervisors should pay “closer attention” to insurers’ assessment of terms and conditions in their existing insurance products covering cyber risks.

“Eiopa’s supervisory statement aims to promote supervisory convergence in how national competent authorities address the market regarding cyber risks. The statement addresses the need for a top-down strategy and a risk appetite definition for (re)insurance undertakings underwriting, or wishing to underwrite, cyber risk. It also reflects on the potential need for a review of the terms and conditions of the contracts regarding their cyber coverage and the need to have in place a strategy on how to communicate such a review to policyholders clearly and in a timely manner,” stated Eiopa.

These are words that will be welcomed by Europe’s risk managers, who have struggled to meet fast-rising demand for adequate cyber cover from bosses, at a time when the insurance market has pulled capacity often in a dramatic fashion.

Interestingly, the recent move by the insurance market to limit its exposure to cyber-related war risks, following Russia’s invasion of Ukraine, is also a focus for Eiopa.

“Undertakings should devote particular attention to traditional war and terrorism exclusions that may not take into account the digital aspects of modern warfare and thus lead to uncertainty and ambiguity regarding coverages. The outcome of this exercise should result in terms and conditions that are clear, simple and aligned with the undertaking’s overall strategy and cyber risk appetite, while at the same time providing value for money to the policyholder in line with the target market,” it stated.

Eiopa also said its statement highlights the need for insurers to identify and measure their exposure to cyber risk, to help implement sound cyber underwriting practices. 

“The management of non-affirmative cyber exposures is of particular importance, including a regular evaluation and use of available reinsurance capacity to mitigate accumulation risk related to cyber risk,” it said. 

Eiopa’s reaction to comments made by various bodies make clear which side of the fence the supervisory body sits on, and will come as welcome news to Europe’s risk managers. 

There are a couple of clear examples of this contained within Eiopa’s summary of comments.

For example, Eiopa said: “When systemic events materialise, insurers are often required to review their terms and conditions to limit disputes, promote certainty and avoid losses due to ambiguous contractual terms. Such reviews may often not to be carried out in accordance with product oversight and governance processes, which would ensure that the target market’s interests and needs are balanced vis-à-vis other business needs and considerations. This creates an expectation gap, which can be significantly detrimental to existing and potential customers, and indirectly to the sector at large in view of reputational impacts and political exposure.”

Insurance Europe, the representative body of the European insurance community, responded by stating that it agrees that clear communication is important. “A lot of work has been carried out by the industry over recent years on ensuring clarity of contracts. Supervisors should focus on clarity and consumer understanding, rather than expecting exhaustive lists covering all possible eventualities,” it said.

But Eiopa’s response strongly suggests it feels this argument is simply not good enough.

“While Eiopa acknowledges the efforts by the industry to improve clarity in insurance contracts, the pandemic and other work carried out by Eiopa in relation to exclusions unveiled persistent issues, ambiguous contractual terms and lack of clarity in the cover provided,” it said. 

The whole topic of exclusions, the value of insurance and rising cyber threat is clearly top of the agenda currently. It is good news that Eiopa has carried out this initiative because, if nothing else, it will raise the level of awareness about an escalating problem among the wider business and political community.

But it is hard to see how Eiopa, or national insurance supervisors, could force any significant change in approach among the insurance community. 

The really significant move would be for Eiopa to push hard at European level to create state and/or EU-backed systemic risk schemes that would force better risk management and loss prevention, while using the insurance industry’s risk assessment and claims handling expertise backed up with national and EU-level reinsurance capacity. Simple!