07.03.2017
Interview with the GDV Chief Economist

“Excessive regulation suppresses growth momentum”

Klaus Wiener, Chief Economist of the GDV, on the balancing act between appropriate and excessive regulation, the consequences of a hard Brexit and Donald Trump’s economic policy.

Dr Wiener, the new US President Donald Trump is thinking about easing US financial market regulation, which would also directly and indirectly impact the insurance sector. Excessive regulation is something of a bête noire for insurers. Do you welcome the President’s position?
Klaus Wiener: The global financial markets are not the place to compete for the most permissive regulatory conditions. A level playing field is what we need. Small, large, domestic, foreign, established companies and start-ups such as insurtechs: they should all have to play by the same rules.

And if the rules were to be simplified across the board?
Wiener: The economic fallout from the financial crisis was massive. There were bound to be consequences: many lessons were learned from the crisis and one outcome was a major tightening of the regulatory regime. However, it’s important to keep monitoring the extent of regulation, as there are major costs involved in introducing and operating the regulatory system. Efficiency and facilitating growth are key, in keeping with the maxim: as much as necessary, as little as possible.

Can you give some examples of regulatory standards that disproportionately suppress growth?
Wiener: In Europe? Take the European supervisory regime’s Solvency II capital adequacy requirements: we believe as insurers that some of the requirements are too high given the level of risk involved, such as investments in infrastructure, real estate or venture capital. Or if you look at Germany, the formula for calculating the additional statutory reserve requirement in life insurance has long since lost any connection to reality and, as a result, is placing too much strain on life insurers. Another example would be the plans to reform the occupational pension system, which include a ban on insurers offering products with guarantees. Shouldn’t the negotiating partners be able to decide for themselves which risks their members can bear and which ones to protect them against?

A transatlantic free trade agreement for insurance has just been concluded between the US and Europe. Do the current signals from the US not contradict this deal?
Wiener: I would love to see a successful conclusion to the years of preparation that went into this agreement – for the precise reason that it offers equivalent competitive conditions. Almost 20 years of work have gone into this agreement and the direct negotiations lasted more than a year. Now it’s up to the EU Parliament and US Congress to ratify the deal.

Where do you see the benefits for insurers?
Wiener: The abolition of collateral requirements, which reinsurers have hitherto had to provide in the host state when operating on the other side of the Atlantic. Another plus is that no legally independent subsidiaries will be required in the other country. The main supervision for a global insurance group will be in the country where the group is based, thus freeing up capital for more productive investments. The authorities in the US and EU also want to cooperate more closely.

How important is the US market as an investment objective for German insurers?
Wiener: The US market is extremely significant to investment in Europe. When interest rates rise in the US, as they are doing right now, there will be a knock-on effect for the euro zone equity and bond markets. German insurers also invest directly in American government bonds and equities. New life insurance products allow a higher-risk – and therefore potentially more profitable – investment strategy within and outside Germany.

If the US does relax its financial market regulation, could Europe deal with that in a globalised world?
Wiener: That would increase competitive pressures which would in turn increase the pressure on the European supervisory authorities. But as I said before, you can’t just have regulation for regulation’s sake, you need to keep checking that there is a purpose behind it. US economic policy is an important consideration in this regard, although it isn’t the key factor. Consumer protection comes first. The priority is to determine and discuss whether and, if so, to what extent consumer protection is guaranteed.

Could we see the United Kingdom going the same way as the US with the advent of Brexit? It is after all Europe’s biggest financial centre and it won’t be governed by EU rules any more.
Wiener: It’s basically the same situation as with the US, with the caveat that the UK is still in the EU, which entails certain obligations. Even if there is a hard Brexit those obligations will initially remain intact. We need to make sure these obligations don’t just fall by the wayside during the exit negotiations. Even more than with the US, we need to maintain a level playing field with the UK.

Which specific problems could Brexit pose for the European Solvency II supervisory framework?
Wiener: Solvency II has been in place for over a year now and it’s fair to say that it has got off to a good start. In spite of interest rates falling to levels we would once have never thought possible, the coverage ratios show that German life insurers are adequately capitalised. Even according to the recently conducted EIOPA stress test, which is based on some stringent assumptions, more than 99% of insurers in Europe meet the minimum solvency requirements. Representatives of the UK were also involved in the 15 years of preparation that went into making the new supervisory regime one of the best and most modern in the world. The UK’s exit from the EU will not change that, at least not initially. Nonetheless, any regulatory framework has to be updated to keep pace with changes in operating conditions and resolve any teething problems. The review for 2018 or 2020 is already under way. It will be interesting to see whether Brexit shifts the goalposts.

Do you consider the degree of regulation in Europe as optimal?
Wiener: I’m sure you can imagine what I think as an insurance industry representative: regulation is never too hands-off in Europe. I would also like to point out that excessive regulation can suppress growth momentum. I don’t mean that in a freewheeling, gambling sense. On the contrary, if we make it easier to invest in private equity, shares, corporate bonds or infrastructure, the entire economy will benefit including our customers and savers. As we are in a low interest rate environment, we need to revise our investment strategy, especially as higher-risk and therefore more promising investments are quite thin on the ground with European savers.

Current sentiment isn’t necessarily in favour of standard global competitive conditions…
Wiener: That’s right. Following decades of widespread free trade, we are currently seeing a global renaissance of protectionism. Many states are imposing new tariffs or introducing other import restrictions. They subsidise domestic players or take steps to restrict or even prevent access to their markets through standards and directives. Insurers are directly affected by that, for example premium income in transportation insurance has been stagnant for some time. If this rampant protectionism endures, we may even see income decline.

What can insurers do to reduce the uncertainty in global trade?
Wiener: Insurers contribute to German export strength – even during uncertain times. German exporters can rely on our expertise: we have export credit insurance covering about 15% of German exports and we assume credit risks in the triple-digit billions every year. Moreover, credit insurers make a significant contribution to prevention for their clients: their data provides them with an excellent overview of country or sector risks and they may even know about the trading partner’s economic situation.

More:
>> Read the german version: „Überbordende Regulierung unterdrückt Wachstumsimpulse“
>> The Challenges of regulation: The limits of public regulation for the insurance market