Eiopa's Gabriel Bernardino talks Brexit, Solvency II and sustainability

07 December 2018

The chair of Europe's insurance authority was interviewed by Christopher Cundy at this week's Insurance Risk & Capital EMEA conference. In this Q&A he discusses priorities for the year ahead and how Eiopa's powers are likely to grow

Gabriel Bernardino, chair of the European Insurance and Occupational Pensions Authority (Eiopa), joined InsuranceERM in London this week at the Insurance Risk & Capital EMEA conference.

The Q&A below is an edited version of the conversation he had with InsuranceERM managing editor Christopher Cundy, and covers four main topics: preparations for Brexit, the 2018 and 2020 reviews of Solvency II, how Eiopa's powers are likely to grow, and what supervisors and regulators can do to encourage consideration of sustainability in the insurance business.

Do you think Europe's insurers are ready for Brexit?

We've been doing the most we can to make sure that's the case. Since the beginning of this, we've been repeating the famous phrase: "Hope for the best, but prepare for the worst".

We've just published our latest insights [on Brexit preparedness] and the vast majority of companies, especially the bigger ones, have put in place contingency plans. There are a handful of firms with some issues - we are dealing with those together with the PRA [UK Prudential Regulation Authority] and the national authorities – and there are some smaller cases that need to take contingency measures.

We are in a good spot, but there is still more to be done.

One of the big issues is cross-border service continuity. The UK has clarified the temporary permissions regime after Brexit. But we've not had anything back from the EU27. Can supervisors in Europe not do more, and perhaps show more leadership on this subject?

If the European Commission doesn't want to take any actions, we are left with the current regime. That's what we've been living with and we have been clear with the market: don't count on politicians to solve these issues.

In December 2017 we issued an opinion on service continuity, and since then we have seen a lot of cross-border transfers and a number of companies being set up [in EU jurisdictions].

In our conversations with the Commission, we make sure they understand the scale of the issue. But it's up to the politicians to take measures; if they don't, we need to live with what we have.

One of the likely outcomes is the UK becomes a third-country, as regards Solvency II and financial services legislation. In that situation, the UK will seek equivalence with Europe. Have you started assessing UK equivalence? Can the UK expect an easy ride?

According to the Solvency II directive, and the process that we've done with other countries in the past, we don't work by our own initiative. We need a request from the European Commission and then we will do the analysis.

The process for the analysis of equivalence is well-established. There is a technical analysis from our side and then our advice goes to the Commission for a decision.

Eiopa has a mandate to fulfil and, in order to do its job, Eiopa has been seeking some new powers. Could you explain what those extra powers will enable you to do?

The proposal from the European Commission and what has been discussed politically for Eiopa does not mean any radical change from our regime today. For the regulators, Eiopa's co-ordination role should involve consistency in the application [of the rules]. We want to take another step with the tools we have to ensure supervisory convergence.

I will mention three main things: first, it's to make sure there's a clear statement that Eiopa can initiate independent reviews of the practices of national authorities, and issue recommendations relating to supervisory practices.

The second is about cross-border business. In a number of situations in cross-border business, we believe that supervision has not been done in the best way to defend policyholders. We have been putting in place, with the agreement of our board, what we call 'cooperation platforms'.

This has proved to be a very good tool. But we need the regulatory framework to say we can initiate these platforms because today, we need agreement of the home supervisory authority to initiate this, and to be honest it delays the process - and that's not good. We also need the initiative to recommend to the national authorities the outcomes of the conversation. 

The third is about internal models. We believe we need to have access to all the data in internal models, which seems difficult in some interpretations of the regulation. This will enable our independent assessment, to support a level playing field, and again to have the possibility to issue recommendations.

In the 2018 review of Solvency II, the European Commission has adopted most of Eiopa's recommendations. But are you disappointed by the rejection of your interest rate risk proposal?

I'd say the glass is half full. We are satisfied the Commission took most of our advice into consideration, including things like the loss absorbing capacity of deferred tax, where there was a lot of differences throughout Europe.

Of course, we are disappointed about interest rate risk. We did a lot of work, we tested it, we worked to understand the impact, so we believe that we've done our job properly. And it's basically using what internal model companies are using.

I understand the Commission wants to move it to the 2020 review. What I'm disappointed about is that we don't do the same analysis for other areas. Right now there's a possibility of changing the calibration of equity charges for certain types of portfolios, which I believe deserves wider analysis. We are actually starting that now.

What is on the agenda for the next review in 2020? The directive states the review should look into the long-term guarantee package and the equity risk measures. But will other things be included?

We will wait for the Commission [to send its call for advice] in January, but from our side, there are a number of other elements we'd really like to put on the table.

One is the treatment of long-term products. We launched a discussion paper on how we're going to look at that, and then we'll look at assets that are covering those liabilities, to see how we can fine tune the treatment.

In relation to the risk margin, we will be interested in looking at the overall construction in the 2020 review. What I'd like to do, for certain type of products like annuities and long-term products, is to see if we can do some adjustment on it.

Then there's the issue of proportionality. We all hope to focus on proportionality again in the 2020 review. We'll be looking at reporting and disclosure, and specifically on the SFCR [solvency and financial condition report], where I think there's a possibility to get a better outcome. We see a lot of copy-paste text that adds to volume without much added value. So streamlining some elements in the SFCR is possible.

At the same time, we want to have more standardisation. It's a clear message we're getting from analysts and investors. One aspect that is mentioned to me very often is to have a standardised way of looking at the sources of change from period to period in the own funds and the SCR.

We will also look at captives. For certain types of captives we believe it's possible to have more proportionality.

Finally, there is the agenda related to the macroprudential measures. In our view the macroprudential elements should be in Solvency II and we should not to build a separate pillar. We have been doing work and we will continue next year.

Eiopa has come out with a proposal recently on how to encourage sustainability. How can regulations - and supervisors - help make insurers more sustainable?

There are two stages to this. We recently published some changes that will come soon into Solvency II and the Insurance Distribution Directive [IDD]. It's basically fine-tuning requirements, including the general risk management approach of insurers both in investment and underwriting.

Then for the 2020 review, there will be an overall analysis of how sustainability links to Solvency II. Of course, we need to deal with issues relating to capital. You know our position: we really don't see that you should give capital incentives to any type of assets. But we need to look at that as part of the request of Commission.

Everybody needs to understand this issue of sustainability in the insurance sector is not a consequence of a political wish. If you look from the risk perspective, both in terms of the physical risks and definitely in terms of transition risks, there needs to be action taken now by insurers in their investment and underwriting policies. When you invest today in an asset, you need to integrate in your analysis the possible consequences of, for example, climate change.

On top of this is the stewardship role that insurers should have as one of the major institutional investors. From an investment policy perspective, you really should engage and not have just a zero/one decision that I only invest in this and forget about that.

We need to make sure institutional investors give the right incentives to move to a lower-carbon intensive economy. This stewardship role will be the most important thing at the end of the day, because if all the institutional investors start to invest only in certain parts of the economy and dump all the [high-carbon] assets, then we have a problem.

What are Eiopa's priorities for the coming year?

The board has approved, and we will publish in the coming weeks, our views on conduct risk assessment: a framework for supervising culture and strategy.

Next year we will focus on the consistency and convergence agenda. On technical provisions, specifically on contract boundaries, and the expected profit from future premiums ... these are areas we want to start looking at in December in order to see if there is consistency of approach.

We will also think about the impact of digitalisation, and how we prepare for that from a regulatory and supervisory perspective.

We're working now on having some expectations on operational resilience, from IT, but also from a cyber perspective. We are exploring the possibility of having a common European framework to perform cyber penetration tests.

Gabriel Bernardino (EIOPA) @ Insurance Risk & Capital 2018