I didn’t manage to get to the Life Convention this year but did manage to make it to the EIOPA conference held in Frankfurt the week before. I’ve always found it an interesting conference to attend. This year, as well as our friends in Group Consultatif, there were a number of UK Pensions representatives.
The conference followed the usual format of 3-4 panels and a couple of keynote speeches, this year by Michael Barnier, EU Commissioner for the Single Market and Gabriel Bernardino, Chairman of EIOPA. Interesting as it was to hear the views of these two gentlemen neither served as the highlight of the conference with the panels rather stealing the show. The FT did, however, pick up on Gabriel’s speech for his comments about needing to consider the risk in sovereign debt. I don’t think I was alone in thinking that these were not intended to say anything that we haven’t heard before from EIOPA. Clearly it was very good to have M. Barnier attending the event to lend support, but having been to previous CEIOPS conferences Sharon Bowles has had more in depth comment to make and for my money is a better conference speaker. What M. Barnier did say – many times – was how we all had to stick together to get through the current crisis. Undoubtedly this is at the forefront of his mind as these are dangerous times for the European Union and those who have worked hard over decades on the European Project.
What was more interesting for me were the discussions on Solvency II, Pensions and Consumer Protection each of which held the attention well.
The Solvency II debate was particularly good with Oliver Bate, Group CFO at Allianz and Karel van Hulle, Head of Insurance and Pensions Unit at the European Commission in particularly good form. H. Bate was very forthright in his criticism of Solvency II and the balance sheet volatility that Solvency II was bringing. In particular he cited that the Allianz SCR had moved by around 50% in the space of a month as yield curves shifted rapidly in the summer. This, he told the conference, made it extremely difficult to manage the firm as shareholders needed confidence over the return on capital they were getting and the management needed stability to plan the business. Both Karel van Hulle and Carlos Montalvo pushed back that the framework was necessary to protect policyholders.
The pensions debate centred on the proposals to apply a Solvency II style regime to pension schemes. A green paper had been published on this by the commission and an EIOPA consultation is currently out and being responded to by – amongst others – the actuarial profession. It was good to see a decent contingent of the UK Pensions industry there and questions asked from the floor by representatives of the BT Pensions Fund. They asked if the Commission would drop its proposals if the impact assessment showed the costs to outweigh the benefits. The answer from Karel van Hulle was that the costs and benefits were always considered but to date there had not been proposals made where the benefits didn’t outweigh the costs. I, and others, took that as a sign that the Commission was minded to proceed.
The emerging role of EIOPA in consumer protection was discussed in the final session of the day chaired by Pauline Chantillon of the ACP who has moved on to a consumer protection role in France having led the FINREQ stream of Solvency II for EIOPA. The recent Variable Annuity retail paper (which many may have missed when it came out a couple weeks ago) was referred to many times as an example of how EIOPA was rising to the challenge of protecting consumers on the conduct of business side of regulation too. One of the best points was a long list of things that a consumer would need to know in order to make optimal financial decisions to deliver the outcome they wanted. The point was well made that consumers want to buy an outcome and this is what the financial services sector should focus on giving them. It wasn’t lost on several audience members that the EIOPA conduct of business regulation on VA, if poorly drafted and executed, could yet prevent the delivery of a product line that seeks to deliver a controlled outcome for the customer.
The tone of the EIOPA conference is quite different to those in the UK and it is interesting to observe the styles of this conference in the light of discussion on culture theory with my colleague Neil Cantle and Willis Re’s Dave Ingram over recent weeks. The collegiate nature of our European friends is abundantly evident at the conference with many warm words exchanged between panellists and statements of intent to edge the European project ever-forward. There was little mention of the chaotic collapse of the Euro Zone (EZ) edging ever nearer and (if we are to believe Angela Merkel) with it the end of the European Union. The Germans I spoke to seemed certain the EZ would continue OK but echoed the German fear of hyperinflation and the quantitative easing that has been used in the US, UK and previously in Japan. Little seemed to have changed from a year earlier when I was told by a Bundesbank representative that inflation (even moderate) could never be the answer to the debt crisis. Yet a week after the conference in Frankfurt the German Bund Auction faltered and Bund yields rose above the UK suggesting the pound could become the European reserve currency of choice.
This doesn’t sound like such good news for UK insurers who could well see their discount rates pushed ever lower on a wave of gilt purchases – even if their government bond holdings appreciate in value. One thing that UK insurers with EUR exposure need to be wary of is whether they are tied into using a AAA EUR GOV bond spread. With Belgium (amongst others) downgraded by S&P on Friday pressure may be building on the French AAA rating. If it does fall below AAA the AAA EUR Govt yield curve could fall sharply as the French Bonds get excluded and the German Bunds come to dominate the AAA government curve.
The Bank of England has already told the UK banks to prepare for a dis-orderly default of the EZ in their contingency plans so it would be wise for insurers to consider how they would cope too. Fitch – at least – seems happy that the European insurance sector will not be too badly affected but its always best to have a plan in the bottom drawer just in case, as time will be in short supply and questions will come thick and fast, if and when the EZ does break up. They certainly did in the Autumn of 2008.
It’s the price we pay to live in interesting times.
Some of the conference keynote speeches are here: https://eiopa.europa.eu/press-room/speeches-and-presentations/index.html