EU Regulation

Backstopping insurers

Under pressure from low interest rates, life insurers are getting ready to ax policyholders. Source: Reuters

Regulation of insurance in the European Union remains dangerously fragmented, the bloc’s top insurance supervisor warned as he called for implementation of minimum standards in providing guarantees for policyholders and safety nets for insurers.

The proliferation of national schemes to rescue insurers and protect policyholders only exacerbates this fragmentation, said Gabriel Bernadino, head of the EU’s Frankfurt-based insurance regulator. “There is no harmonized recovery and resolution approach for insurers in the European Union,” Mr. Bernadino said at the regulator’s annual conference, “and the emergence of national specific solutions will increase fragmentation in the internal market and create additional difficulties when dealing with cross-border cases.”

Moreover, this fragmentation extends into guarantees for consumers. “In the European Union this area is still significantly fragmented,” Mr. Bernadino said, “with the existing schemes differing quite substantially in terms of financing, functions, mandate and coverage.”

Undoubtedly one of the most obscure EU agencies, the European Insurance and Occupational Pensions Authority (EIOPA), proposed guidelines earlier this year for common resolution plans and will produce a discussion paper early next year on harmonizing guarantee schemes, Mr. Bernadino said.

Insurance historically has defied attempts to unify supervision or support.

His concerns came as insurers, particularly in life insurance, are under pressure from low interest rates that make it difficult to earn enough on their investments to cover their payouts. This has prompted many insurers to modify their policies to no longer include guarantee minimum returns but rather to tie returns to specific investments. The danger here, Mr. Bernadino warned, is that it transfers the interest-rate risk from the company to the consumer.

Insurance historically has defied attempts to unify supervision or support. In the United States, insurance is the only financial service that does not have a national regulator. Supervision is exclusively in the hands of state regulators, creating a patchwork of rules and requirements that are a significant barrier to creating a national insurance market. State officials, however, argue that the critical importance of insurance products for consumers requires close supervision at the local level rather than by a distant federal agency.

However, even in the US, the National Association of Insurance Commissioners sets standards to harmonize practices across state lines. This is similar to the challenge now faced by EIOPA, which was established seven years ago as the successor to the Committee of Insurance and Occupational Pensions Supervisors.

A recent study by Policen Direkt, the leader in Germany’s secondary market for life insurance policies, found that only 30 of 84 life insurers in Germany were able to cover their guarantee liabilities with investment earnings in 2016. In the previous year, it was only 20.

This is unsustainable in the long term and has prompted many insurers such as Ergo and Axa to consider selling off their older policies. The German Association of the Insured warned in September that offloading millions of policies would be an “earthquake” in the industry. Buyers of the policies, so-called runoff firms, manage the policies until expiration but offer little in terms of customer service or follow-up. In any case, the consumer group said, the situation creates uncertainty and could permanently damage the reputation of the industry.

EIOPA is part of the European System of Financial Supervision put into place in the wake of the financial crisis. The European Banking Authority (EBA) currently based in London will be relocated to Paris when Britain exits the EU, officials decided this week. Paris is also the home to the third supervisor, the European Securities and Markets Authority.

Carsten Herz covers the insurance and asset management industries for Handelsblatt. Darrell Delamaide, an editor for Handelsblatt Global in Washington, DC, contributed to this report and adapted it into English. To contact the authors: and  

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