Executive Vice-President

Valdis Dombrovskis keynote at the conference “2020 Solvency II Review: challenges and opportunities”

Brussels, 29 January 2020

Ladies and gentlemen – good afternoon.

We have come a long way with insurance law in Europe.

The first steps towards creating a free market in insurance were taken in 1973 with the first non-life insurance directive.

Almost half a century later – and many amendments and directives later – this is where we are now: Solvency II.

We can be proud of our world-leading regime for insurance and reinsurance. It implements the freedom to provide services in the insurance sector and protect consumers, across all countries of the European Union.

Today, the EU has become one of the world’s three major regions for insurance business.

Europe’s strong and vibrant insurance businesses are one of the largest investors in our economy.

They help us to manage the risks that we face in today’s uncertain economic climate.

As you know, Solvency II came into effect in 2016 but was developed much before that. Those were very different times – especially when you remember the financial and economic crisis, its impact and aftermath.

The conclusion is that Solvency II must be fit for purpose in all economic environments. That is the reason for its review.

The legal regime must be regularly evaluated and updated - especially given the many other challenges that we are facing.

These include climate change and sustainability;

The need to complete the Capital Markets Union;

And of course, digitalisation, new technologies and cybersecurity.

All these issues have shaped the priorities of the new European Commission.

They also affect and involve the insurance sector, thanks to its dual role of protector and investor.

This is a delicate balance.

On one hand, we want to make sure that consumers and policyholders are properly protected.

On the other, given the challenges, we want insurance companies to use their financial clout to invest in sustainable projects and the real economy.

Europe’s insurance sector is a mainstay of our financial industry.

More than 11 trillion euros in managed assets that are mostly held by life insurers on behalf of policyholders.

This is close to three-quarters of the EU’s GDP.

Thanks to the long-term nature of their liabilities, insurers are especially well placed to provide long-term financing.

Let me elaborate a little. I will begin with climate change.

I’m sure you will have heard of our ambition for Europe to become the first climate-neutral continent. No net emissions of greenhouse gases by 2050, under the Green Deal that the Commission presented last month.

That calls for a great deal of long-term funding, especially from the private sector. Just to meet our 2030 climate and energy targets requires extra investments of €260 billion a year.

These investment needs will be even greater as we move towards more ambitious targets.

It means raising finance from a variety of private investors.

That includes the insurance sector, of course.

It is uniquely placed among financial institutions to contribute to sustainability and tackle climate change.

Insurance can also help to address the impact of climate change, by providing risk sharing opportunities and policies that support mitigation and adaptation.

This month, we launched a detailed plan to fund the Green Deal, and mobilise at least one trillion euros in of public and private investment over the next decade.

But this is not only about raising investments.

We need to set the right policy environment to guide investors towards sustainable projects.

That directly affects insurance businesses.

We will consult widely and present a renewed sustainable financing strategy later this year.

On the reporting side, we will propose measures in the EU’s Non-Financial Reporting Directive, and ask companies to give sufficient and reliable information on their sustainability risks and opportunities.

But not every detail can - or should - be fixed in law.

I believe that we will also need some accompanying standards for companies to apply.

So I will ask the European Financial Reporting Advisory Group to start work on these standards as quickly as possible.

We will also assess how insurers integrate climate and environmental risks, and how best to reflect that in EU rules.

We will continue to look at how insurers can strengthen resilience to risks and natural disasters caused by climate change.

Take 2019, for example.

This was a year of record extreme weather events.

Tropical cyclones in Asia, widespread flooding in India and China, severe storms in the United States.

Massive bushfires in Australia.

According to Munich Re, global economic losses from natural disasters in 2019 amounted to $150 billion. Of that, insured losses were estimated at $52 billion.

These are not small numbers for the insurance industry.

They show that climate change is also a financial stability issue.

Ladies and gentlemen: let me turn now to the Capital Markets Union.

We have come a long way with this project over the last five years. But I think we should now reflect and consult further on the long-term trends that affect where we go next.

This is why the Commission has gathered experts from industry, civil society and academia to discuss these issues in a High-Level Forum on Capital Markets.

In May, it should present recommendations for the Commission in its work on the next strategy for the CMU, due later this year.

Among other areas, I would expect the Forum to look at how we can promote more institutional investor participation in financing of the real economy, including by insurance companies.

We have already made several CMU-related amendments to the Solvency II rules to remove barriers to investment in infrastructure, high-quality securitisations, and long-term equities.

In the Solvency II review, we will continue to explore ways for removing barriers to insurers wanting to invest in companies that create jobs and growth.

In addition, when I mention long-term investment, many of you will probably be thinking of Long Term Guarantee measures.

These were introduced to ensure an appropriate treatment of insurance products which have long-term guarantees.

The questions I would ask now are these:
Could they work better to remove disincentives to long-term investment?

Can they still work well in an extended environment of low interest rates?

Then, Europe faces another transformation that is well underway: digital.

This has a major impact on financial services, where we already see more use of distributed ledger and artificial intelligence technologies.

Financial innovation and the digitalisation of financial services are a priority, given the huge potential that new technologies bring to the financial sector.

The financial sector, including insurers of course, is the world’s largest user of ICT infrastructure and accounts for about a fifth of all IT expenditure.

As new technologies emerge, especially digital, that dependence will increase.

Later this year, we will present a new strategy for Europe to get the best out of FinTech and compete globally, as we remove regulatory barriers between countries.

Unfortunately, finance is the sector most at risk of cyber-attack – three times more than any other. That is despite outspending other sectors to protect itself against ICT risks.

The security and resilience of our financial institutions and systems is paramount.

It is time to update and streamline EU rules so that financial-sector ICT systems can withstand security threats and so that we monitor third-party ICT providers.

That’s why the European Commission has opened a public consultation on digital operation resilience for financial services.

It closes on March 19.

I encourage everyone here to make their views known.

Returning to the review of Solvency II, at its core is the issue of proportionality.

In reporting, for example, we know that supervisors are keen to have extensive data available to them.

But do they really use it all?

Could reporting burdens be lightened?

Are the Directive’s application thresholds appropriate?

We will look at all these issues.

Lastly, there is one aspect of the review that may involve an addition to Solvency II. It concerns a gap in EU insurance law.

There is no EU-wide resolution regime for the insurance sector in the event of distress, and no minimum EU rules on insurance guarantee schemes.

If every EU country had insurance guarantee schemes, it would benefit policyholders, taxpayers and the insurance sector as a whole.

We are already testing the water with a proposal for dealing with insolvency in the motor insurance sector.

EU institutions are now discussing this at the trilogue stage.

The Commission has also requested EIOPA’s advice on insurance recovery and resolution.

Ladies and gentlemen

I hope that I have convinced you that the Solvency II review will not be just a technocratic exercise. Europe’s insurance sector is too important for that – for our economy and society.

Protecting policyholders remains vitally important.

Equally important – in my view - is how the insurance sector can contribute to broader goals.

I already mentioned sustainable and green finance, investing in the real economy in the CMU context, as well as digitalisation and cybersecurity.

It goes without saying that the insurance sector can only make its full contribution if it is financially robust and subject to proportionate rules. This must be a fundamental objective.

We have a year of hard work ahead.

Today’s conference is just the starting point.

I look forward to working with you all during this review exercise.

Together, we must make sure that we get it right. In an uncertain world, insurance is more important than ever.

Thank you.