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The European Insurance and Occupational Pensions Authority, EIOPA plays a vital role in the EU-wide financial stability, e.g. in avoiding risks, in formulating digital strategy and transformation, as well as in using blockchain framework, crypto currencies and in approaching supervisory technologies.
Dealing with risks to financial stability
One of EIOPA’s aims is to take preventive action and forward looking in approaches to the EU-wide financial stability. Thus, the core of EIOPA’s efforts in financial stability is to bring together risk analysis and vulnerability analysis in order to assess the stability of the sector at a certain point of time.
EIOPA has a responsibility to inform other European supervisory authorities, i.e. the European Systemic Risk Board, ESRB as well as the European Parliament, the Council of the EU and the European Commission, of the emergence of such risks and vulnerabilities. In this way, EIOPA performs its role as part of the European System of Financial Supervision, ESFS.
EIOPA also carries out regular insurance stress tests to assess how well the European insurance industry is able to cope with severe but plausible adverse developments of financial and economic conditions. Stress test results help supervisors identify the vulnerabilities of the insurance industry and find ways to improve its resilience.
Occupational pension’s stress tests are a regular supervisory tool that EIOPA uses to assess the resilience of the European occupational pensions sector.
Additionally, EIOPA carried out in 2022 its first climate stress test to gain insights into the effects of environmental risks on the European occupational pension sector.
More on EIOPA in: https://www.eiopa.europa.eu/index_en
Twice a year, EIOPA publishes its Financial Stability Report, a key publication that sheds light on the key developments and risks in the European insurance and pension sectors; the report includes additionally some issues having specific importance. The EIOPA’s risk dashboard presents a quarterly risk assessment of the EU-wide insurance sector using Solvency II data: it looks at different types of risk, such as those related to macro, credit, market, liquidity and funding, insurance underwriting risks or ESG-related risks. At the same time, it covers market perceptions, as well as profitability and solvency.
EIOPA provides statistical data on insurance undertakings and groups in the EU and the European Economic Area, EEA. The statistics contain aggregated country level information about balance sheet, own funds, premiums, claims and expenses, asset exposures, use of transitional and LTG measures. EIOPA provides statistical data on how institutions for occupational retirement provision in the EU and the European Economic Area perform. The statistics contain aggregated country level information about the basic information, balance sheet, asset exposures, expenses, member data, contributions, benefits, and transfers.
Source: https://www.eiopa.europa.eu/browse/financial-stability_en
Digital strategy and transformation
Rapid technological developments are changing the way insurance and pension products are developed and the way consumers shop: these developments bring benefits to businesses and consumers, but can carry certain risks.
Fast-changing digital transition brings opportunities and challenges to supervisors: EIOPA keeps pace with different aspects of innovation to make sure that the regulatory and supervisory frameworks account for both the opportunities and risks that innovation brings. The EIOPA proactively assesses these changes so that its members are ready to address impacts for insurance and pensions sectors.
In October 2023, EIOPA published its Digital Strategy (see references below*), which provides and integrates its view on how to support the digitalisation of the insurance and pensions sectors, of national competent authorities, NCAs and of EIOPA itself. EIOPA is putting the best interest of consumers first and adopts a technology neutral approach, while remaining flexible in keeping pace with innovation.
In its strategy, EIOPA has identified some long-term priorities and core principles guiding its work to ensure consumer protection and financial stability. Among core principles are: neutral technological effect and respect for wellbeing; EIOPA is open towards innovation and/or traditional approaches among different technologies; and firmly rooted flexibility.
Successfully guiding the digital transformation of the insurance sector requires EIOPA to adopt a flexible approach towards innovation while remaining firmly rooted on its mission.
Blockchain and crypto assets
The adoption of blockchain technology and the so-called “smart contracts” in the insurance industry is still at an early stage in the EU compared to other technologies such as IoT and AI. However, it could theoretically be used throughout the entire insurance value chain as blockchain has the potential to reduce duplication of processes, increase process automation, lower operating costs and improves data management within various organisations. However the adoption of Blockchain may also trigger new risks to insurance undertakings, supervisors and consumers.
Blockchain is a subset of distributed ledger technology, DLT using ‘blocks’ of information to keep track of data transactions in a distributed network of multiple nodes or computers.
Practically blockchain works in the following way: a transaction with party B is requested by party A, such as transferring money, setting up a contract, or sharing records. This transaction is broadcasted to a distributed network of ‘nodes’ or computers which will validate it according to an agreed set of rules called ‘consensus’ mechanism. When the transaction is validated, a new ‘block’ will be added to the Blockchain and is time stamped, a pointer to the previous block in the chain is provided and the transaction data entered. The new block is processed by the cryptographic technique of hashing where a hash is calculated on the hash of the previous block plus the data contents of the new block; the result then becomes the hash of the new block.
This process ensures that each block is linked to the previous one, thereby forming a chain of blocks (hence the name ‘blockchain’). The unique record that forms a blockchain is shared by each node or computer in the network and is constantly updated and synchronized. As a database or ledger, blockchain ultimately stores the records of all transactions executed across the network. Thus, a blockchain is essentially a continuously growing list of records and blockchain technology could be used for such cases as recording events, managing records, processing transactions and tracing assets.
Whereas crypto-assets can be defined as a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology.
Risks and opportunities for the markets
Blockchain could also enable the development of new products and services, for instance by facilitating the uptake of insurance platforms and ecosystems, improving the interaction with third parties or by enabling completely decentralized peer-to-peer (P2P) insurance business models. However the adoption of blockchain may also trigger new risks to insurance undertakings, supervisors and consumers.
As Blockchain technology is still evolving, several challenges are emerging, such as the complexity of the technology, data protection and privacy issues, cyber risks, integration with legacy infrastructures, or interoperability and standardization issues between different Blockchains. Concerns about the legal status of smart contracts also have been reported; specifically concerning crypto-assets, potential benefits include more efficient and cheaper transactions when purchasing insurance products, a wider range of investment opportunities for consumers with different risk profiles, or to foster financial inclusion (e.g. amongst those populations that do not have easy access to banking institutions).
Concerning the risks of crypto assets, their high volatility, the fact that they don’t have any underlying intrinsic value and that they are mostly unregulated, make them unsuitable for most retail consumers.
Source: https://www.eiopa.europa.eu/browse/digitalisation-and-financial-innovation/blockchain-and-crypto-assets_en
EIOPA in dealing with the blockchain
EIOPA published a discussion paper and launched public consultation on Blockchain and smart contracts in insurance in 2021. The outcome of this discussion paper will help to better understand the developments and risks and benefits for the insurance industry. EIOPA’s work in the area of Blockchain and smart contracts aims to: = facilitate information sharing; = identify the main use cases, best practices, as well as risks and opportunities; = monitor future developments and trends; and = promote level playing field and convergence of supervisory and regulatory approaches in the EU.
Moreover, in cooperation with national competent authorities EIOPA regularly monitors the developments of crypto assets markets and their impact on the insurance sector from a consumer protection and prudential perspective. This includes using Solvency II data to assess the evolution of investments of insurance undertakings on crypto assets, which are relatively limited to date and commonly take place via unit-linked life insurance products.
In September 2020, the European Commission presented a legislative proposal for a regulation on markets in crypto-assets, MICA. The proposal provides a comprehensive framework with a view to protect consumers and the integrity and stability of the financial system. However the proposal remains subject to the outcome of the co-legislative process and therefore consumers still don’t benefit from the safeguards foreseen in that proposal.
Blockchain could also provide opportunities for both prudential and conduct supervisors, so-called SupTech as well as facilitate RegTech solutions. The combination of smart contracts and blockchain could help to automate regulatory reporting and make it more efficient and transparent, improve consistency and data quality across firms and allow regulators to get data on new areas of interest or to gain real-time access to signed contracts and the information they contain (so-called, real-time regulatory monitoring).
More on blockchain in the EIOPA’s booklet (2021) in: https://www.eiopa.europa.eu/document/download/80627e1d-4fd8-47ad-9718-5a3696e8b694_en?filename=Discussion%20paper%20on%20blockchain%20and%20smart%20contracts%20in%20insurance
EIOPA in addressing supervisory technology
Improving the efficiency and effectiveness of the Supervisory Review Process is a strategic priority for EIOPA and is therefore fertile ground for SupTech.
In its SupTech strategy, EIOPA lays the ground for the establishment of a mid- and long-term coordinated plan for the development of SupTech-based supervisory tools and processes.
EIOPA and national supervisors have identified the following as possible areas for the use and application of SupTech: = Improve data collection and data sharing, by promoting more efficient registers and enhancing cooperation and collaboration between national supervisors; and = Support market monitoring, in particular with regards to regulatory disclosure documents: how to automate the assessment of information, to identify missing information or to best gather it.
More in: https://www.eiopa.europa.eu/browse/digitalisation-and-financial-innovation/supervisory-technology_en
Note
Petra Hielkema has been the Chairperson of the European Insurance and Occupational Pensions Authority, EIOPA since September 2021. She expresses her views about the recent changes in the office, as well as on digitalisation and the EIOPA’s priorities in the new policy cycle for 2024-29.
More in interview with the EIOPA’s chair Petra Hielkema in:
https://finance.ec.europa.eu/news/petra-hielkema-2024-07-22_en
Additional information: = general source: European Commission’s Finance news hub, which is hosted by the Directorate-General for Financial Stability, Financial Services and Capital Markets Union.
= On the EU finance news hub in: https://finance.ec.europa.eu/finance-news-hub_en
= On digital finance*): Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions “Digital Finance Strategy for Europe”, COM(2020)591, in: http://ec.europa.eu/finance/docs/law/200924-digital-finance-strategy_en.pdf.
= Proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto-assets and amending Directive (EU) 2019/1937, COM (2020) 593.
= Proposal for a Regulation of the European Parliament and of the Council on a Pilot Regime for market infrastructures based on distributed ledger technology, COM (2020) 594.