Background and context
The latest trends in the insurance industry have shown a decrease in the market value of financial assets and liabilities and an increase in claims costs, also as a result of the current inflationary trend and rising interest rates. The changed market environment has led to an increase in the ratio of surrenders to premiums in the life sector. Overall, the case of Eurovita, a medium-sized Italian insurance company characterised by inadequate risk management, limited capital endowment as well as shareholders' disengagement, together with other market events have emphasised the need to reflect on the adequacy of the current regulatory framework, on a national and European level, with reference to life insurance and in particular to class I policies characterised by return guarantees.
As a result of the aforementioned trends, the focus of IVASS in liquidity risks has increased and a number of future intervention to improve the current regulation have been outlined by the Chairman of IVASS in two recent speeches.
Considerations on the supervisory activities carried out by IVASS in the year 2022 and future regulatory actions
In his considerations on IVASS supervisory activities carried out in 2022 as well as in the subsequent intervention at the annual assembly of the National Association of Insurance Companies (ANIA), the Chairman of IVASS took the chance to draw the line of future regulatory intervention in the insurance sector which can be summarised as follows:
- Life insurance sector regulation requires a full review to ensure that life insurance products have their insurance nature and purpose emphasised against the trend in recent years of insurance-based investment products being used to replace pure financial investments. In this regard, a broad review of life insurance regulation with focus on linked policies is ongoing with the aim - among others - to revising the rules on with-profit policies with the option of introducing a guarantee fund for existing contracts, also in the light of experiences in other European countries. Following the public consultation launched in March 2022, a second public consultation on the proposed new regulation is going to be launched by IVASS during the summer;
- the risk relating to massive early surrender trend seems to weigh heavily, therefore, irrespective of the outcome of the European Solvency framework reform process, it is deemed necessary to intervene in a targeted manner at a national level for non-harmonised aspects (contractual, civil and fiscal aspects of life insurance products);
- liquidity risk profile: IVASS has intensified its supervisory action over this risk. In light of the volatility of the solvency ratio of life insurance companies in the first months of the year, the supervisory expectation is that companies review their liquidity risk safeguards in prospective and structural terms when designing products and managing risks. Possible implications related to liquidity risk should also be assessed when drafting underwriting risk guidelines. In general, it is argued that less liquid liabilities allow for more profitable medium and long-term investment choices even for investors with a low appetite for risk;
- product literature and contractual documents: the need to further improve the wording of clauses as to clarity, simplification and transparency is emphasised, as these are considered key factors in boosting customer confidence. In this regard, IVASS has recently held a workshop during which the results of scientific research on the clarity and language of insurance contracts were presented and discussed with academia, the market and consumer associations. The study aimed at identifying qualitative and quantitative indicators to measure the readability of a text, and thus its comprehensibility on the basis of objective linguistic syntactic parameters. IVASS expects that starting with the contracts examined, and then to follow for all the others, insurance companies will seriously question the need to establish a clear relationship between the clarity and comprehensibility of the contract and the target customers.
- product governance and governance processes are also considered crucial for the abovementioned purposes;
- distribution and pre-contractual information: the opening of a public consultation in order to simplify the conduct rules provided for by IVASS Regulations 40 and 41 of 2018 has been anticipated. The objective of the future measures is to increase the appropriateness of the information (that must be simple and immediately intelligible) to be provided to policyholders. The intention of the authority is to introduce a modular scheme at the time of subscription that provides the necessary information on the protection options and guarantees that the consumer actually chooses, with the obligation to update such information in the event of contractual changes;
- insurance arbitration: with the purpose of litigation deflation, IVASS expects the implementation process to be concluded as soon as possible;
- EU undertakings operating in Italy under the freedom to provide services: from the point of view of coordination with the other European authorities in the insurance sector it is deemed necessary to review and strengthen existing procedures, centred on EIOPA (the European insurance supervisory authority), making them more streamlined and effective, with a view to better functioning the European single market;
- consumer protection: IVASS Chairman mentioned the proposal for a directive and regulation to be adopted by the European Commission in order to implement the Retail Investment Strategy, with the aim of strengthening consumer protection in relation to investment products, including insurance-based investment products. IVASS' attention to the developments of this pending legislation is expressed and the need to ensure a balance between legal protection and the objective of avoiding excessive regulatory complexity is emphasised.;
- value for money of insurance products, especially in relation to IBIPs: it is considered important for companies to be fully aware of the value of products in relation to the needs of policyholders, including with respect to the costs applied. It is also necessary to ensure adequate training of the distribution networks and to implement greater clarity in contracts;
- inducements: in light of the failure of the Commission's proposals to provide for a general ban on inducements, IVASS calls attention on the need, for the European industry, to make inducement mechanisms more effective and transparent, so as to reduce the risk of more radical interventions.
Authored by Silvia Lolli, Davide Valloni and Federico Bastoni.