François Villeroy de Galhau: Pushing back the limits of insurability
Closing remarks by Mr François Villeroy de Galhau, Governor of the Bank of France and
Chairman of the Autorité de contrôle prudentiel et de resolution (ACPR), at the 10th international
conference on insurance, Paris, 26 October 2018.
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Ladies and Gentlemen,
I am delighted to be with you today to give the closing remarks at this tenth international
conference on insurance, organised under the aegis of President Bernard Spitz. We don't say it
often enough: the financial sector is one of the French economy's key strengths. Another point
that bears repeating is that, within this financial sector, insurers play a critical role in financing our
economy. This will be the first point that I touch on. I will go on to look at regulatory developments,
hailing the progress made in the last year and picking out some European challenges that we
must face together. I will close by speaking about "the limits of insurability": your theme today is
as old as your profession, which dates back to the bottomry arrangements used to protect
shipping ventures in ancient times and the first recorded insurance policy written in Genoa in
1347. But the question has taken on a renewed urgency today with the emergence of new risks,
particularly those relating to climate change.
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I. Insurers play a critical role in financing the economy.
The ACPR recently published its annual statistical report, which showed that the French
insurance sector is in good shape. I recommend giving it a read: the report itself is a treasure
trove of data, and the results do you credit. The average solvency capital requirement (SCR)
coverage ratio on the French market climbed from 222% in 2016 to 238% in 2017. What's more,
in the first quarter of 2018, the French insurance market overtook Germany and the United
Kingdom to become Europe's number-one market, with over EUR 35 billion in direct premiums
written in non-life insurance and over EUR 2.100 trillion in technical provisions. It also leads in
investment capacity: commanding total assets of EUR 2.7 trillion in September 2018, France's
insurance sector is far and away the largest institutional investor in Europe, accounting for over
one-third of the total assets of euro area insurers. In comparison, France makes up 21% of euro
area GDP.
Insurers, then, are a crucial asset for France, and their critical role in financing the economy can
and indeed must grow further. Corporate equity is vital to innovation and hence to a vibrant
economy, but in mid-2018 equity was equivalent to just 77% of GDP in the euro area and 76% in
France, compared with 124% in the United States.
II. Tapping into regulatory opportunities.
I would like to start this section off by noting that France's introduction of a flat tax on capital
income on 1 January has not had the slightest detrimental effect on life insurance, despite fears
on this score within your industry. I am also delighted that the new which was
Pacte Bill,
recently adopted at the first reading by the National Assembly, seeks to promote equity
investment as well as long-term investment. Our discussions in the lead-up helped to shape this
legislation, with the result that the bill includes measures to reform "eurogrowth"
(Eurocroissance) life insurance products at long last, setting an ambitious target - with which
you are all familiar - of EUR 20 billion in outstandings, compared with EUR 2 billion at present.
Accordingly, France's lawmakers have expanded the tools put in place to achieve this goal. Now
it is time to deliver. We are entitled to expect a fresh start, with a reset for eurogrowth products
and innovative and energetic sales and marketing efforts by your industry, once the framework
has been simplified. Retirement savings, meanwhile, have been the subject of a lively annuity
versus lump sum debate. Like you, I am glad that the ability to receive annuity payments - and
above all the principle of an annuity product - has been maintained across the board, not to
defend one industry against another, but because a lifetime income is closer to a retirement
product and because this timeframe should support more equity investment. Here again, though,
it is up to you to take the steps to enable retirement savings to finally take off in France and
ensure that your approach to asset/liability management better takes into account the longer
durations of these products. The needs are huge, and the goal of increasing assets held in
retirement savings products from EUR 200 billion to EUR 300 billion is well within our reach. I
would also stress the need to ensure that policyholders are adequately informed about retirement
savings products, especially - as with all unit-linked products - if they do not include a capital
guarantee.
Within Europe, the forthcoming Solvency 2 review must include a full and frank assessment of
the framework that has now been in place for three years. Of course, insurers have significantly
improved their risk and capital management under Solvency 2, and the insurance market is now
more resilient and better equipped to cope with financial crises. But these positives must not be
allowed to overshadow the questions that need to be asked after such a radical change,
particularly about the impact on equity investment and the financing of the European economy,
along with issues relating to volatility and complexity. The very fact that we're calling it a "review"
for 2020 means that, by definition, maintaining the status quo cannot be an option. As the
preparatory work gets underway, I would like to see every topic, even the most awkward, raised
and dealt with. I urge insurers to play an active role in the consultations and I can assure you that
the ACPR will make its presence felt in the coming discussions. In this regard, we are naturally
supporting efforts by the French Treasury and insurers to improve the prudential treatment of
long-term equity investments already during the 2018 review.
On a topical note, I would add that it is crucial for supervisors to apply all prudential requirements
with equal rigour. The string of failures by insurers doing business on the French market under
the FPS, particularly in construction insurance, is a reminder of the importance of this. The
ACPR is obviously working hard to deal with this crisis, which is affecting tens of thousands of
French policyholders. But the requisite convergence of supervisory practices also needs to
become a reality very soon. I know that Gabriel Bernardino and EIOPA are making this a priority.
Finally, let me be clear: it is unreasonable to apply the new IFRS17 accounting framework right
now, given the current state of the discussions. Aside from the complexities of creating a
European governance framework for these standards, there is also an obvious issue of timing,
and fortunately, the IASB appears to be reopening discussions on this. Implementing IFRS17,
which will be costly and complex, will follow on from implementation of Solvency 2, a process
that has kept insurers very busy. Beyond the question of timetabling, there are major substantive
issues. We want an agreement on identifying groups of loss-making contracts. As it stands, the
draft is unworkable. We also want to see completion of the discussions on the treatment of
reinsurance contracts held. At this point, there is too much room for interpretation in the
standard, which could interfere with comparability and consistent application across countries.
III. Addressing the emergence of new risks
I turn now to the new risks that are emerging as challenges for the insurance sector. I would like
to single out three for comment, each with a longer time horizon than the next: Brexit,
cybersecurity and climate risk.
In the short term, Brexit is, alas, the issue that will keep us busiest. The ACPR is working
actively to ensure a smooth transition, but the time has come for insurers to set their contingency
plans in motion. That means talking with supervisors in the UK and Europe. It will also mean
getting new authorisations, transferring portfolios, relocating European companies and setting up
third country branches. Even if we hope to avoid it, we must be ready for a no-deal scenario. In
this respect, it would be preferable to have European legislation in place to ensure that every
relevant issue is dealt with in a harmonised manner; however, if need be, and as a backstop, the
enabling legislation presented to the Council of Ministers on 3 October will allow us to take legal
steps in France to manage - for those individuals insured in France - situations where UK firms
have not already transferred their contract portfolios. I would like to mention that joint work by the
European Central Bank and the Bank of England to assess financial risks looked specifically at
insurance contracts, and we believe the risks in this area to be manageable, provided we can
properly guarantee the protection of policyholders.
In the medium term, against the backdrop of the digital revolution, cyber security is a growing
concern for all businesses. Insurers are of course among the main ones affected because they
hold sensitive data. Your industry would certainly be well advised to draw on your experience with
cyber-risk to build up your own cyber-insurance offering.
I come last to which occupies the longest time horizon of all, but which
climate risk,
nevertheless requires tangible action to be taken right now. As today's discussions have shown,
the natural disaster insurance regime needs an overhaul and I know that reforms are coming in
2019. But this is also a very important area of investigation for supervisors because, over the
long run, climate stability is a determining factor in financial stability. In June of this year, the
ACPR published a study revealing that an estimated 10-20% of all securities held by French
insurers are exposed to risk in relation to the transition to a low-carbon economy. The Banque de
France and the ACPR have set up and are actively coordinating the Network of Central Banks
and Supervisors for Greening the Financial System (NGFS). Launched in Paris last December,
the NGFS started out with eight trailblazing supervisors but has since grown to include 19
members and five observers, including the Sustainable Insurance Forum (SIF). We are working
hard on two subjects where insurers are in the vanguard: disclosure of current climate risks and
the projection of dynamic stress tests based on future risks. A report detailing the network's first
year of work and making recommendations will be presented at a conference in Paris on 17 April
next year.
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I have called green finance "the new frontier for the 21 Century". Today, you are talking about
"pushing back the limits of insurability". These images testify to your pioneering role and evoke
your spirit of entrepreneurship and innovation. The risks facing the world in 2018 are
unquestionably growing, and we need these qualities more than ever before. Thank you for your
attention.