David Worsfold
With political and macro-economic turmoil grabbing more attention every day, it is all too easy to forget that the serious business of regulating Europe’s insurance companies continues at a relentless pace in the background.
Turning Solvency II into a vehicle for effective consumer protection remains the top priority for the European Insurance and Occupational Pensions Authority (EIOPA). Alongside this is the drive towards regulatory convergence: this makes no concessions to Brexit, whether hard or soft.
Gabriel Bernardino, chairman of EIOPA, made this clear recently when he spoke at a conference in Bonn organised by the German Federal Supervisory Authority, BaFin.
“Solvency II implementation is a huge step forward in the protection of policyholders. But in order to ensure the protection of policyholders and beneficiaries, all supervisory authorities in the European Union should be provided with the necessary mandate and means. They need the relevant expertise and capacity to execute this mandate in full independence.
“In a single market, where cross-border business plays an increasing role, it is fundamental to ensure that the supervisory system has no weak links. The European Union supervisory system will only be as strong as its weakest link. Solvency II implementation is therefore the tremendous opportunity for supervisory convergence and all National Competent Authorities need to be part of the collective effort to develop a common European supervisory culture”, said Bernardino.
He stressed this required much closer supervisory convergence if it is to be more than just fine words: “A stronger and more co-ordinated supervision at the European level is needed. This implies a common interpretation of the laws and regulations, a common understanding of supervisory objectives and a common view on the key characteristics of good and effective supervision”.
Behind these aspirations lies a determination on the part of EIOPA to ensure there is no scope for regulatory arbitrage and that all consumers in Europe enjoy similar levels of protection.
EIOPA’s ambitions in this direction reach beyond the European Union. The meeting in Bonn was preceded by one in Frankfurt of the Steering Committee of the EU-US Insurance Project, originally set up in 2012.
This, says Bernadino, has a clear view of where trans-Atlantic co-operation should be going in 2017: “The forum engages the world’s two largest insurance markets in a dialogue with the ultimate goal of achieving efficient, effective and risk-based cross-border supervision. In the light of the challenges of the increased globalization and the need to place consumers in the centre of the business, such co-operation is crucial”.
Back in Bonn, he offered some insights as to the areas that EIOPA will be paying particular attention to as it strives to make regulatory convergence a reality, some of which will quickly find their way into the in-trays of insurance companies.
“EIOPA devotes a special attention to the on-going monitoring of internal models, an area where material differences can have a huge impact in the level playing field and policyholder protection. EIOPA is prioritising the on-going monitoring of internal models, by working on consistency reports on issues like the treatment of sovereign debt and the modelling of the volatility adjustment as well as market and credit risks. We are conscious that potential material differences due to diverse interpretations by National Supervisory Authorities could have a huge impact in the level playing field and policyholder protection”.
A key theme of EIOPA’s work on consumer protection is to create a culture and processes that identify and deal with problems before they impact on consumers, not after. This should put effective risk management at the heart of every insurance company, says Bernadino, with genuine commitment to an effective Own Risk and Solvency Assessments (ORSA).
“Insurance undertakings should make full use of the ORSA to set up a strong risk culture. Insurers should increasingly use robust risk management capabilities to deal with the different challenges posed by the economic slowdown, the low interest rate environment, the financial market volatility and the stress on sovereign debt. The time of “box ticking” is over. Risk management requirements and specifically the ORSA cannot be taken as a compliance exercise. This requires a clear tone from the top. We expect boards of insurance companies to set, to communicate and to enforce a risk culture that consistently influences, directs and aligns with the strategy and objectives of the business and thereby supports the embedding of its risk management framework and processes. Supervisors will need to be very attentive to this issue”.
EIOPA’s determination not to be distracted by Brexit is underlined by the complete absence of any mention of the UK’s decision to leave the EU. In doing so, it reinforces the concerns about how the UK will retain engagement with these key regulatory developments after March 2019.