08.11.2017
Column EU Supervision

When the regulatory framework is more volatile than the financial markets

Insurance regulation in Europe is in flux. The main driver of change is Solvency II, launched almost two years ago. The political agenda to develop the insurance supervisory system needs to include leaner supervision. After all, the competitiveness and innovativeness of our insurers depend on it. The column of Jörg von Fürstenwerth, Chairman of the GDV Management Board.

Our sector welcomes Solvency II, even if its implementation remains highly laborious. Good regulation should be purpose-driven, effective and cost-efficient. However, sometimes I feel like the man who is told to wear a belt with his braces.

When we insurers keep requesting continuity, predictable operating conditions and less red tape in the midst of this volatility, we aren’t motivated by contrariness or parsimony. Rampant bureaucracy is expensive – it ties up financial and human resources. The insurance sector should put these resources to better use – particularly in light of the enduring low interest rate environment and the ongoing challenge of digitization.

I often feel regulatory volatility far outstrips financial market volatility

I often feel regulatory volatility far outstrips financial market volatility. Take the restructuring of EU financial supervision as an example. The EU Commission has now published its proposals. Many of them go in the right direction, especially since they keep the basic division of responsibilities between the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA). It is of primary importance for our sector to retain autonomous insurance expertise in a supervisory capacity, as insurers’ business models are fundamentally different to those of other financial services providers. That’s why we have our own supervisory system, known as Solvency II.

At the same time, however, a significant expansion or – I am tempted to say, proliferation – of EIOPA’s competencies is being planned. As a result, there is a danger of EIOPA’s role overlapping with the national supervisory authority’s remit, potentially entailing a much greater demand for information and new reporting obligations. The end result will be, that in future 60 percent of the EIOPA budget is financed directly by European insurers – and only 40 percent from the EU budget, so insurers effectively pay twice, as they would still contribute to their national supervisory authority.

Can an authority flout a political agreement?

Moreover, the supervisory authority is still too involved in setting the rules instead of focusing on supervision. The sector’s solvency ratios are currently stable, which is good to see. One would hope they will remain stable as opposed to being jeopardised carelessly by regulatory changes. Take the ultimate forward rate (UFR) as an example: Some are calling for a review of this key business metric again, citing the current extremely low interest rates in the eurozone as the reason. That suggests a misconception of what the UFR really is – it represents the interest rate that – in layman’s terms – is expected in 60 years.
EIOPA wants this rate to decrease incrementally from its current level of 4.2 percent from 2018. This will oblige companies to accumulate higher reserves now for liabilities that lie in the very distant future. We oppose a standalone change in the UFR at the current time, simply because there is no reasonable justification for such a measure. Besides, the rate was set following an extensive political discussion and decision-making process. My question therefore is whether an authority can flout a political agreement.

Alarming interim verdict

The interim verdict on Solvency II from German insurers gives cause for alarm: over 97 percent of them believe Solvency II is excessively complex. That is the result of a sector-wide survey conducted by our association. Seventy companies of different sizes, structures and legal forms took part in the survey, accounting for a market share in the region of 85 percent of gross written premiums.

This is our position. Granted, there are other opinions and interests: supervisory authorities, investors and consumers wish to, and indeed must, be able to get a good idea of the economic conditions and risks facing our sector. How much work does that justify, though: what is proportional and what is simply unnecessary?

GDV conference on insurance regulation on 8 November 2017 in Berlin

I have no doubt that the digital revolution will dynamically change the supervision of markets, companies and their stability. Are we at the threshold of an era where supervision almost occurs in real time? An era when investors, clients, competitors and supervisors can access the latest financial information immediately, and not only in the insurance sector. How would that impact our work?
You can debate these topics of the future with experts from politics, supervision and the business community at the GDV’s international Conference on Insurance Regulation on 8 November 2017 in Berlin.

Let’s talk about it.

Sincerely yours
Jörg von Fürstenwerth
 

Jörg von Fürstenwerth