The current financial, social and technological challenges which the European Union is facing today will profoundly affect the environment in which European insurers and supervisors will be operating in the coming years. The current contribution aims at identifying the main challenges in order to shed light on the potential evolution of the business model of insurers, its regulation and supervision in the medium-to-long term.
The insurance sector in a challenging environment
An important financial-economic challenge for the insurance sector is the low interest rate environment. This is not likely to change in the medium term, partly as a result of the accommodative monetary policy in Europe. Even negative rates have materialised over the short term, a scenario considered improbable a few years ago. The weak macro-economic environment, in which 2
government bond yields and Euro area corporates yields remain at very low levels and the potential for outreach to emerging markets remains limited due to increasing risks, further narrows the scope for (geographical) diversification of investments. This development affects in particular life insurance companies with long-term liabilities, particularly in markets with a significant portion of guaranteed return products, posing challenges to the profitability of the insurance business and the sustainability of its long term obligations towards policyholders. In their search for yield, insurance companies expose themselves to investment risk and possible excessive risk taking. In combination with high volatility on the financial markets and increasing risk premia, the insurance industry is prone to a double-hit scenario: increased present value of liabilities due to low interest rates and at the same time decreasing asset prices due to a potential re-pricing of risks.
Partly due to financial constraints, but also as a result of social and technological developments, insurance companies are increasingly under pressure to offer complementary services besides purely financial guarantees or are shifting away from guaranteed financial products into unit-linked products, moving the investment risk on the consumers. This may lead to some insurers becoming “full service financial institutions” investing further in product innovation and personalisation of insurance contracts for long term advisory services. The emergence of personalised life-cycle products, by which customers are supported in individually managing their risks in a flexible manner, in line with personal circumstances and tailored to, for example, patient-specific health treatment is an expression of a new consumer-centricity. An increasing number of so-called “restitution in kind”-services by insurers can be observed in the life and health business (e.g. secured hospital treatment) and in non-life insurance (e.g. replacement of insured objects). Also, the social and demographic challenges of increased life expectancy, high long-term and youth unemployment represent major challenges on (life) insurance products, and personal saving products more generally. In particular the effect of higher life expectancy for older ages, and increasing medical costs are leading to changes in products (higher living benefits), and are likely to have a measurable impact on insurance pricing and availability.
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