Sustainability in the European insurance sector

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The world-wide sustainable development goals, SDGs and the sustainability concept in general, are quickly entering various corporate sectors, including such previously distant ones as insurance. Hence the need to show some ways sustainability is already being incorporated into the insurance sector’s development through vitally important innovation and progressive initiatives.   

Insurance services have been historically closely connected to providing necessary support to people, communities and businesses experiencing unexpected and often inevitable events, thus, to assist citizens in creating necessary security and resilience.
According to some accounts, private insurance premiums exceed $7 trillion world-wide; and a significant portion of it is paid out to beneficiaries. Besides, the insurance industry is quite a huge endeavor, i.e. it manages assets of more than $ 40 trillion. These figures illustrate both the ongoing importance of the insurance “industry” to socio-economic development and its vital role in implementing SDG concept: the SDGs are becoming an important part of the business component and the insurance sector is included.
Efforts in climate mitigation and in reducing greenhouse gas emissions have enabled the transition from fossil fuels to clean energy both nationally and locally. These efforts have already received due political and economic attention but correct adaptation still needs time: i.e. quicker and proper SDG-accommodation to insurance activity would require additional efforts to strengthen sector’s resilience and clients’ adaptive capacity to climate-related hazards, digital risks and natural disasters.

Main integrating components
= First, SDGs involvement in the insurance sector transcends previously generally narrow and traditional service’s aspects, e.g. involving in the ecological and environmental quality issues. Of course, present climate changes have casted long shadows on insurance; however, the SDGs are becoming for most insurance companies a multi-faceted commitment inherently “woven into the fabric of corporate strategy”. Besides, the SDGs serve as a long-term perspective in the insurance as an integral concept with such components as economic prosperity, social inclusion, recovery and resilience, etc.

Reference to:

The sector’s corporate responsibility is reflecting cultural, ethical and social customers’ approaches to insurance issues; customers more than often recognise the growing risks of modern challenges to their health, homes and businesses: hence they regard insurance as a “collective protector” providing stability and resilience.

= Second, innovation becomes both a transformational tool in insurance and a necessary component in existing work process. The SDGs have become those innovate solutions that can serve higher ethical and moral consumers’ purpose: e.g. from renewed energy usage and efficiency to reinvigorated approaches to residence/office buildings, and to local/regional development projects and broad-based national initiatives.

= Third, deploying digital technology, e.g. generative AI (genAI) can provide meaningful impacts for insurance sector. From a supply-side, genAI reduces the costs of growth and make products and services more affordable to people; from a client’s connection, it should enable more people to access insurance.
However, financial literacy is a barrier in this process; but genAI can make a difference by educating people about insurance, helping them purchase service online, as well as when customers have queries or need to submit claims.
GenAI might also help insurers to personalise their products and services for low-income and vulnerable populations. Generally, most insurance products have been developed with high- and middle-income populations in mind; but genAI would enable financial inclusion, reducing inequality among people and countries.
However, it’s important to note, argue experts, that genAI, like all digital technologies, will not be beneficial until the exiting “social digital divide” is reduced: i.e. there are still 2.6 billion people in the world without access to the internet, so genAI would facilitate progress in insurance only if the digital services will work through the applicable digital literacy skills.

Source and reference to the article by Lorcán Hall “Insurance and the Sustainable Development Goals: The Need for Transformational Innovations and Partnerships” in:

Integration in the European insurance sector
Insurance’s service, as part of the EU internal market concept, is a shared-division in integration activity between the EU institutions and the member states’ authorities. Therefore, coordination and integration of the member states’ efforts in the insurance sector is performed by the European Insurance and Occupational Pensions Authority, EIOPA which is an independent advisory body to the European Commission, the European Parliament and the Council of the European Union. It is one of the EU Agencies carrying out specific legal, technical or scientific tasks and giving evidence-based advice to help shape informed policies and laws at the EU and national level. EIOPA seeks to protect the public interest by contributing to the short-, medium- and long-term stability, effectiveness and sustainability of the financial system for the Union’s economy, citizens and businesses.
This mission is pursued by promoting a sound regulatory framework and consistent supervisory practices in order to protect the rights of policyholders, pension scheme members and beneficiaries and contribute to public confidence in the EU’s insurance and occupational pensions sectors.
EIOPA is one of three European Supervisory Authorities: the other two are the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA).

However, already in 2018, researchers proposed so-called “early warning system”, a model composed of macro-financial and company-specific indicators that could help to anticipate a potential market distress in the European insurance sector. The model was using a sample of 43 listed insurance companies; the empirical evidence showed that economic overheating that could be manifested by high economic growth and inflation as well as high interest rates had negative impact on insurance sector’s stability.
Regardless of great global increased decision-makers’ interest in predicting systemic crises and an elaborated view of “early warning system”, not much research was devoted to the insurance sector. Despite close connection to the financial system, insurance has been at the margin of research interest and, as a consequence, several aspects of its potential sources of systemic risk are still partially latent. The limited focus on measuring risk in the insurance industry derives from the traditional view of insurers being considered safer than other financial institutions. Notwithstanding, the government bailout during and in post-pandemic period has drastically changed this point of view. Indeed, the events of the recent financial crisis showed that turmoil can be extended even to non-banking institutions such as money market funds or insurance companies. Whatsoever the origins of distress, neither existing literature nor contemporary models pay much attention to identify and develop possible measures of systemic risk, designed to facilitate monitoring and regulation of insurers.
Some risks can be mitigated through supervision guidance both at the national and European level ensuring level playing field for insurance undertakings across the continent. Interest rate as well as other macroeconomic features and related risks are the main sources of instability in the sector. In particular, the empirical evidence reveals that market imbalances are anticipated by economic overheating, characterized by high interest rates, positive unsustainable growth and high inflation. When further determinants of economic growth are considered, investment growth, terms of trade, and household disposable income could explain a potential distress in the insurance sector.
Citation and references to: European Insurance and Occupational Pensions Authority (EIOPA); Statement reported e.g. by Valckx et al. (2016) in the third chapter of the Global Financial Stability Report by the IMF (2016). Source:

European insurance strategy
Through its work, EIOPA contributes to sound, effective and consistent supervision in Europe, protecting insurance policyholders and beneficiaries, and pension scheme members.
The Single Programming Document covering 2023-2025 sets out EIOPA’s strategy: under the EU-wide twin objectives (digital and climate) and ensuring consumer protection and safeguarding financial stability, EIOPA will pursue six strategic priorities: 1. Sustainable finance, 2. Digital transformation, 3. Supervision, 4. Policy, 5. Financial stability and 6. Internal governance areas.
In more detail these priorities include reaching the following goals:
1. Contribute to building up sustainable insurance and pensions, including by addressing protection gaps, for the benefit of EU citizens and businesses.
2. Support the supervisory community and industry to mitigate the risks and seize the opportunities of the digital transformation, including by further promoting data driven culture.
3. Promote sound, efficient and consistent prudential and conduct supervision throughout Europe, particularly in view of increased cross-border business.
4. Deliver high-quality advice and other policy work taking into account changing and growing needs of society as well as the effects of new horizontal regulation.
5. Further enhance financial stability, with particular focus on the analysis of financial sector risks and vulnerabilities, and emerging threats.
6. Created a model EU supervisory authority setting global high standards of corporate governance and fostering efficient cooperation within the EU and globally.
Source of reference:

EU-wide guidelines are addressed to national competent authorities or insurance undertakings. They are aimed at establishing consistent, efficient and effective supervisory practices and to ensuring the common, uniform and consistent application of Union law. Even though they are not legally binding, competent authorities and financial institutions shall make every effort to comply with them. EIOPA can issue guidelines and recommendations according to Article 16 of Regulation No 1094/2010 (so-called EIOPA Regulation).

The European Insurance and Occupational Pensions Authority’s main purpose is to foster safe and strong insurance and occupational pensions sectors that deliver for Europe’s citizens, businesses and the economy.
At a time of constantly evolving risks and challenges, EIOPA continues to contribute to the recovery of the EU economy by building more resilient insurance and pensions sectors and further strengthening the EU-wide supervisory culture.
As financial services become more connected, a number of horizontal regulations will be introduced in the future. The EIOPA will make sure that the voice of insurance and pension is heard and the specifics of the sectors taken into account; besides, cross-sectoral approach to legislation also calls for more cooperation among different EU authorities.
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