François Villeroy de Galhau: Insurance and pensions - institutional
innovation, economic innovation, technological innovation
Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the7th annual
EIOPA Conference, Frankfurt am Main, 22 November 2017.
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Ladies and Gentlemen,
It is a pleasure to be in Frankfurt today for this 7th Annual EIOPA Conference and I wish to
warmly thank EIOPA's Chairman Gabriel Bernardino for his kind invitation. I must say that
I feel at home, since we are not far away from the ECB building where I take part in the meetings
of the Governing Council at least every two weeks. But today I will speak in my capacity as
President of the French supervisory authority, the Autorité de Contrôle Prudentiel et de
Résolution (ACPR), which belongs to the board of supervisors of EIOPA, and which is in charge
of the supervision of both insurance companies and banks in France. This is an important
responsibility as the French insurance market is the second largest in the European Union, just
behind the United Kingdom, with an aggregated balance sheet of approximately EUR 2,600 bn.
Given that I am speaking before the panel dedicated to innovation, I will take this opportunity to
focus on three kinds of innovation, which in my view can lead us to rethink insurance and
pensions: institutional innovation, economic innovation and technological innovation.
1. Institutional innovation
Let me start with institutional innovation. On this issue, I would like first of all to pay tribute to
EIOPA which has done remarkable work to promote sound and consistent European regulation
and harmonised supervisory practices within the European Union, since it was established in
January 2011. The creation of EIOPA, following the Larosière report, reflected the need to move
towards more integrated European supervision following the 2007-08 financial crisis, and I
believe that it has been a success. In a context of increasing financial market integration, EIOPA
has contributed to ensuring a true level playing field for all actors in the insurance and
occupational pensions sector at the EU level, in coordination with national authorities and the
other European Supervisory Authorities (ESAs). This well-balanced supervisory framework helps
us deal with the "institutional" innovation - this is my first point - that we are starting to see as a
consequence of the Brexit vote. Some British entities are indeed considering the possibility of
simply setting up empty shell corporations in the European Union, mere company nameplates,
while keeping their resources in the United Kingdom. I fully agree with EIOPA that vigilance is
called for in this respect. Moreover, Brexit brings with it certain risks, and consequently the need
for contingency plans. I am thinking in particular of the European policyholders who took out
insurance directly with British undertakings and who should continue to benefit from the same
protection. EIOPA, in liaison with the British authority, has rightly made British insurance
undertakings aware of the necessity to draw up plans to deal with Brexit, irrespective of the fact
that negotiations are still underway. This is particularly important to ensure that Brexit takes place
as smoothly as possible, with limited effects for policyholders.
For the future however, it is worth considering the need to adjust the European institutional
framework, so that it remains as efficient as possible. The review of the ESAs should prompt us
to strengthen EIOPA missions. There are two areas in particular where enhanced convergence
is needed, so that all European consumers are protected wherever the insurer is located in the
European Union: construction and medical liability insurance. EIOPA has already launched
cooperation platforms in order to facilitate information exchanges regarding construction liability
insurance. We are strongly in favour of pursuing these initiatives and adopting measures to
harmonise supervisory practices in this regard. At the same time we should maintain a clear
distinction between the day-to-day supervision entrusted to National Competent Authorities
(NCA) and the regulatory harmonisation role that has to be played by EIOPA. In line with this
principle, the validation of internal models, for instance, should preferably remain the
responsibility of the NCA in order to reflect the close link between this decision and the on-going
dialogue that takes place between the insurer and its national supervisor; EIOPA for its part could
concentrate more efficiently on the essential task of enhancing the harmonisation between
national practices.
In addition to these desirable adjustments of the European institutional framework, there is a
need to make concrete progress towards which would
a European resolution mechanism,
provide more adequate tools to limit the impact of an insurer failure and increase trust and
confidence. France has been working along these lines at national level and such a mechanism
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will be in place in our country before December. The French resolution insurance regime
requires insurers of a certain size to set up preventive recovery plans, which will form the basis
for preventive resolution plans. Moreover, the ACPR is entrusted with several powers to be used
in a resolution context, such as the possibility of appointing a resolution administrator in the
insurance undertaking, limiting the distribution of dividends, or organising portfolio transfers to
another insurer.
2. Economic innovation
Let me now turn to my second point: economic innovation. As Europe's economy is close to the
"technological frontier", businesses need to innovate more. As such, they need to be able to take
more risks, which requires more financing, over the long term, rather than debt financing.
equity
In this regard, the euro area is seriously lagging behind: equity capital amounted to only 68% of
GDP at end-2016, compared with 128% in the United States. And yet, resources are abundant:
the excess of savings relative to investment is around EUR 350 billion per year, which is more
than 3% of GDP. It is therefore crucial for the euro area's economy to better steer these savings
towards productive investment across borders, notably by shoring up equity which is the key to
an innovation economy. Start ups are well aware of this, but our European scale-ups, midcaps
and SMEs also need greater access to equity leverage. The insurance sector has a key role to
play since it is the largest institutional investor in the euro area, with total assets of close to
EUR 7,800 billion in the second quarter of 2017.
In practice, what is the way forward? A large part of the solution lies at the European level. The
efforts so far are going in the right direction, but work should now be accelerated with what I call
a "Financing Union for Investment and Innovation". This Financing Union is the
microeconomic accelerator that we need to make concrete progress towards a genuine
Economic Union in the euro area. The building blocks for such a Financing Union for Investment
and Innovation already exist: the Capital Markets Union, which promotes the diversification of
private financing; (ii) the Juncker Investment Plan, which channels a mix of public and private
investment towards the real economy; and (iii) the Banking Union, which addresses persistent
financial fragmentation. These initiatives, however, lack the unified governance of a Financing
Union, which would help circumvent bureaucratic barriers and foster synergies. In addition, for
this Financing Union to be effective, progress is still needed in four key areas: first, providing
incentives for cross-border investments, mainly in equity, through accounting, taxes and
insolvency laws; second, developing pan-European long-term saving products and investment
vehicles like European venture capital funds - I will focus on this area of progress which is of
particular interest to the insurance sector; third, completing the Banking Union; and fourth,
controlling financial activities and risks that are of vital importance for the euro area, such as
supersystemic CCPs.
In this context, insurers have an essential role to play by taking the lead on new forms of life
insurance that are compatible with the low interest rate environment, with the euro area's need
for equity financing and with the expectations of euro area households - old age provision is now
the second most important motive for saving. This means insurers should pursue reflections to
develop new long-term pan-European savings products. These products should offer, over time,
the higher returns provided by equity, and they can be less liquid, while also featuring a form of
capital protection. However it remains crucial that product innovation continues to be carried out
carefully, without undermining the protection of policyholders. In this respect, specific attention
should be paid to the pan-European personal pension product (PEPP). The PEPP is an avenue
to develop pan-European products and responds to the need for insurers to break away from the
dual capital-liquidity guarantee. Yet it also raises several concerns: information on the risks
incurred under the different types of guarantee may not be clear enough to consumers; in
addition, the guarantee may ultimately depend on the financial company that is offering the
PEPP, as there is a difference for instance between insurance companies abiding by Solvency II
and asset managers, which have lower capital requirements.
This brings me to the issue of regulation. Here too, insurers have to play their part, by actively
contributing to the review of the Solvency II Directive's new regulatory framework. In many
respects, Solvency II represents a very significant step forward for the insurance sector. But this
does not mean that it's perfect: we must analyse its impacts closely, particularly its effects on
investment behaviour and the financing of the economy, in order to propose the adjustments that
prove necessary. Progress has already been made on the financing of infrastructure projects
and businesses, thanks to two amendments that came into effect in April 2016 and September
2017, respectively, which adapted the calibration of capital requirements. More generally though,
the reviews of the standard formula and long-term guarantee package measures planned for
2018 and 2020 respectively, are important opportunities to make essential improvements. The
work is already underway and I welcome the proposal published by EIOPA early in November to
reduce the capital requirement for unrated debts and unlisted equities under certain conditions.
The Commission specifically requested that it look at those unlisted or unrated investments. But
we may want to look more widely and encompass other types of long-term investments with
innovative proposals for amending Solvency II, with the aim of striking the right balance between
effective supervision and the financing of the real economy. It is now up to the industry to seize
this opportunity to share its views and experience: tomorrow's regulation should benefit from your
ideas. Looking at the overall picture of solvency calculation, the correlation between assets
classes, for example, to fully recognise the benefits of the diversification of long-term
investments, could be an innovative way forward.
3. Technological innovation
Let me now elaborate on my third and last point: technological innovation. The digital revolution is
creating many opportunities for both financial players and consumers, including an increasing
number of more accessible financial services, and more complete customer satisfaction. In
France, the ACPR is mobilised to support innovation, as demonstrated by the creation of the
Fintech Innovation Unit and the Fintech Forum with the French financial markets authority. Within
this Fintech Forum, we work closely with other public authorities to promote the development of
Fintechs and Insurtechs in France. A year ago, the ACPR authorised the first fully digital
insurance company in the health sector, the Insurtech "Alan".
In the case of insurers, the digital revolution starts with a complete overhaul of customer
relationships and user habits. But it goes further than that. In the digital revolution, the insurance
sector can bring stability and protection - it is this that has always been the raison d'être of
insurance. I'd like to underline two topics that I think are essential: cyber-insurance and big data.
Coverage against cyber-risk, first, is a very real concern that affects all companies - both
small and large - as cyber-attacks are becoming increasingly frequent and costly: in 2016,
cyber-attacks were estimated to cost businesses about USD 450 billion a year at the global level,
according to a report by Lloyd's and Cyence. Despite these threats, the cyber-insurance market
is still underdeveloped. Insurers can and should take inspiration from their own experiences in
tackling cyber-risk, and use it to develop a more mature European cyber-insurance offering.
The second subject I'd like to focus on is personal data and big data. Naturally, the spread of
connected objects that is triggering an exponential rise in the amount of data available on
insurance policyholders represents an opportunity for the business of insurance, which consists
precisely in collecting and exploiting data in order to quantify and put a price on risk. Nonetheless,
insurers should take a responsible approach: we need to strike the right balance between
segmentation and the sharing of risk between policyholders. The basic principles of solidarity and
risk-pooling that are intrinsic to insurance are at stake. And we must not lose sight of our
collective values regarding individuals' right to privacy.
To conclude, I wish to stress that all these innovations require some creativity, on the part of both
supervisors and insurers. John Maynard Keynes, who profoundly renewed economic thinking,
was well aware of this need to think "out of the box". He wrote in the preface of The General
Theory: "The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify,
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for those brought up as most of us have been, into every corner of our minds." Let's have the
courage to think differently. In this respect, as insurers, it's up to you to shape the insurance of
the future and, as I said, a lot has to be done. As supervisors, we also have to demonstrate
enough flexibility so as to foster your innovations, while ensuring that the key principles that I
mentioned earlier are respected. I am very happy that this very issue will be developed in the next
panel discussion this afternoon. I wish you a fruitful reflection. Thank you for your attention.
1
"Loi Sapin", 9 December 2016; definitive framework adopted before December 2017 via "ordonnances"
2
J.M. Keynes (1935), The General Theory of Employment, Interest and Money.