23 November 2017

François Villeroy de Galhau: Insurance and pensions - institutional innovation, economic innovation, technological innovation

The Governor of the Bank of France focuses on three kinds of innovation that can lead us to rethink insurance and pensions: institutional innovation, economic innovation and technological innovation.

Institutional innovation

On this issue, Mr. Villeroy de Galhau pays 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 he believes that it has been a success. 

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 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.

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 equity financing, over the long term, rather than debt financing. 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.

Mr. Villeroy de Galhau says: “ 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.

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 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. Mr. Villeroy de Galhau underlines two topics that he considers as 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. 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 he focuses 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.

Mr. Villeroy de Galhau says: “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.”

Full speech

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