EIOPA in double warning

The European Union’s regulator has urged insurers to prepare for the departure of the UK from the single market as its Chairman warned the impact of COVID is far from over.

With Brexit talks reaching a critical stage and two and half months before the end of the withdrawal agreement, the European Insurance and Occupational Pensions Authority (EIOPA) has warned re/insurers on both sides of the channel to ensure they are ready for all eventualities.

The freedom of movement for financial services has been a key negotiating tool for the European Union. However, it looks increasingly likely, barring an eleventh hour climbdown by the EU negotiating team, that passporting for financial services will not be renewed.

It was against this background that EIOPA issued a statement to say it expected firms to be ready at the end of December.

“The UK transition period according to the Withdrawal Agreement will end on 31 December 2020. Following this date, all Union primary and secondary law will no longer apply to the United Kingdom, including the Solvency II Directive as well as the Directive on Insurance Distribution (IDD),” it said. “The insurance sector needs to be prepared for the consequences of UK and Gibraltar insurance undertakings becoming third-country undertakings and no longer benefiting from the Solvency II authorisation to provide services in the EU. There are moreover other legal repercussions concerning insurance contracts, insurance disclosure and group supervision.”

“EIOPA urges the insurance sector to finalise preparations and implement suitable and realistic contingency plans in advance of the end of the UK transition period,” it continued. “In particular, EIOPA expects re/insurance undertakings to have measures in place to prevent insurance activity without authorisation and ensure service continuity of cross-border business, as specified in the EIOPA Opinion issued in 2017, in order to minimise the detriment to policyholders and beneficiaries.”

The authority said underwriters and insurance intermediaries had a duty to inform customers about the possible impact of the withdrawal of the UK from the EU on insurance contracts.
As the authority issued its warning, its Chairman, Gabriel Bernardino, told a hearing of the Economic and Monetary Affairs Committee of the European Parliament that the COVID-19 pandemic remained a threat to insurers.

He said whilst the Solvency II regime had enabled EU re/insurers to withstand the impact of the pandemic, there was more work to do as the pandemic continued.

“Overall, we should not be complacent,” he said. “The crisis is not over and the level of uncertainty is still very high. The full economic impact is still far from being revealed and the insurance business model will continue to be challenged, both on the asset and on the liability side.”

He added the experience from the crisis reinforced EIOPA’s approach to the review of Solvency II – an evolution rather than a revolution.

“As the pandemic has evolved, we have seen an increase in digitalisation across the insurance value chain, all the way from product design to claims handling,” explained Mr Bernardino. “We have increased our work on topics like cyber risk and cyber resilience and we are looking at the ethical use of data by insurers.

“The pandemic has also shone the spotlight on protection gaps. EIOPA recently published a paper on how the insurance sector can contribute to strengthen the resilience of the society to a future pandemic.

“The frequency of sudden, far-reaching and potentially systemic shocks is increasing, be it pandemics, natural catastrophes or cyber attacks and we need solutions as a society. Insurance is not a silver bullet, but it can and should be part of the solution – not part of the problem. At EIOPA, we believe that the EU should have a role in this framework to ensure that we do not increase economic fragmentation and that European citizens have access to similar levels of protection. I would encourage the European Parliament to take a lead in this area.”

Looking toward a future recovery Mr Bernardino said the industry had a significant role to play.

“Insurers and pension funds as long-term investors have a particular interest in investing to mitigate the impact of climate change and to facilitate the transition to a more sustainable and resilient economy,” he added. “That is why EIOPA has been implementing an ambitious strategic plan on sustainability and climate change.

“A strong recovery also needs a Capital Markets Union that delivers on other objectives like increasing future pension’s adequacy and this can be achieved by fostering the implementation of occupational pensions throughout the EU.”