Many in the sector are taking a well-deserved break over summer. However, the world of regulation continues to turn. As policymakers and regulators also withdraw into the summer heat, there are several new pieces in the puzzle for the sector to adapt to.
I took a look at the regulatory landscape at the end of 2022 and highlighted a few notable trends. I pointed to the ongoing discussions in Europe on insurance and banking rules, as well as the prominence of questions about systemic risk and sustainability. These topics have all maintained their standing and have even been joined by a few others in recent weeks.
So, as we look to the second half of the year, what are some of the key developments in regulation and policy happening today which impact the trade credit insurance and surety sectors? Below, I discuss several of the key points and how we at ICISA are developing our positions.
Solvency II is the starting point for many in our sector when it comes to regulation. As the basis for the insurance prudential rules under which most of our sector operates, how this regime evolves is of critical importance. And beyond the EU, the principles seen here have already been taken up in other regimes. With the advancement of the Insurance Capital Standard by the IAIS, this kind of risk-based capital regime will be seen even more widely around the world.
The UK too is in the process of reviewing and updating its retained version of Solvency II post-Brexit. While it will hold onto a recognizable core to the system in the EU, long-called for changes in approach to the risk margin and matching adjustment have been put forward. This will primarily benefit the strong Life sector in the UK and potentially reduce capital requirements for some insurers. Overall, the approach of UK regulators will focus on ways to boost the competitiveness of the insurance sector there.
On the EU front, discussions were delayed within the European Parliament (EP) with agreement failing to be reached on a draft text. Differences in approaches relating to the treatment of sustainability and climate risk were among the contentious topics which held up progress. However, on 18 July, the ECON Committee of the European Parliament (the Committee on Economic and Monetary Affairs, which is responsible for considering financial services related matters) finally approved their version of the draft text. This paves the way for negotiations on a final text with the European Council and Commission in the autumn. Among the areas agreed on in the draft EP text was the softening of proposals which would require internal model users to produce and report the standard formula Solvency Capital Requirement to national supervisors.
A risk had been identified in the Commission’s proposals in this area which could lead to the standing of the internal model being weakened and additional burden being placed on firms using it. This would see those (re)insurers also have to report an estimation of the standard formula SCR calculation at the same time as the internal model results. The concern is that this undermines the internal model and places more weight on the standard formula. This is despite the Directive identifying that the internal model is a more accurate reflection of the risks an insurer is exposed to than the standard formula. How this topic plays out in trilogue discussions remains to be seen; however, it is hoped that some agreement can be reached which preserves the strength of the internal model as the effective supervisory tool it is.
At the same time, EIOPA has also issued a consultation on its expectations on the supervision of third country reinsurance arrangements by European insurers. A third country reinsurer means those from non-EU markets, which includes several key jurisdictions in the global reinsurance market, including the UK, Switzerland, Bermuda, US and Japan. While equivalence arrangements are in place with some of those mentioned, the proposed approach could see added friction through additional requirements or regulatory intervention regardless of these.
Reinsurance works best when it operates on an open basis, where risk can be spread efficiently throughout the global market. The additional capacity and diversification of risk which reinsurance markets deliver to sectors, such as trade credit insurance and surety, have clear follow-on benefits to the real economy by supporting primary insurers in the delivery of their services. While there are genuine concerns which EIOPA has raised and which must be addressed, it is important they do this in a way that ensures the effective functioning of the market. ICISA is engaging with others in the sector and will respond to the consultation to highlight these concerns.
Also making progress this summer have been parallel discussions on the implementation of updated Basel standards into regulatory frameworks in the EU and elsewhere. ICISA has worked with a number of other trade associations to address the treatment of credit insurance policies under the EU and UK banking rules. It is hoped that through this work, an appropriate recognition is given to credit insurance for its role as an important credit risk mitigation technique for banks. With hundreds of billions of Euro worth of financing to the real economy benefiting from the protection provided through credit insurance and other related non-payment products, it is critical that a reasonable treatment is found.
Discussions in the EU have advanced to the trilogue stage where negotiations on a final text are held between the Commission, Council and Parliament. Political agreement has been reached on some marquee issues, such as the output floor. However, technical trilogues which focus on several other important topics are still to be concluded. This is also where the treatment of credit insurance will be dealt with.
With the European Parliament in recess, we await further news on this topic when discussions resume in autumn. From there, there will be limited time for the European regulators to report on the use of credit insurance by banks and for the Commission to develop relevant text. However, significant effort is being put into this issue from across the insurance and banking sector to support these efforts.
We also saw the publication of the long-awaited feasibility study on an EU export credits strategy earlier this summer. This report examined aspects of the export credit, financing and credit insurance markets for short, medium and long term risks in the EU. The analysis identified certain gaps which impact the ability of EU exporters to compete with counterparts from China, the US, Canada, Japan and others where there seems to be more direct support. While several of the issues identified require action, what is less clear is that the proposals accurately identify the source of problems, nor the most effective solutions to these.
ICISA will look to engage further with DG Trade on this matter in several areas. The best approach to boost EU exports will be one which builds on the strength and experience of the private sector. The concern is that a new entity with a broad and poorly defined scope may not have sufficient distinction from what the private market delivers. This could then see it operating in a way that crowds out the private market, rather than addressing the true gaps which exist in distinct segments or locations. ICISA has also identified a small number of areas requiring clarification in the feasibility study, which will be relayed to DG Trade.
Digitalisation is another hugely important topic across the insurance sector. This goes beyond the regulatory agenda and focuses on efficiencies in the operating practices of insurers and traders. However, regulators too have their input on this topic and have honed in on a number of important areas. The European Supervisory Authorities (EIOPA, ESMA, EBA) have jointly consulted this summer on a number of these elements. Speaking with ICISA members, it is clear that requirements relating to operational resilience are generating some additional burden, even where these have a clear benefit in promoting resilience and better security.
In the UK, the Electronic Trade Documents Act (ETDA) also recently passed into law. This important piece of legislation paves the way for greater use of electronic documents in lieu of paper originals in the trade sector. Discussions at the ICISA Annual Meetings in Brussels recently touched on several aspects of trade which are prone to fraud, and the lack of digitalisation was cited as such area. Efforts are also underway elsewhere to adopt similar measures.
ICISA is actively engaged in the International Chamber of Commerce’s ongoing Digital Standards Initiative which seeks to “…accelerate the development of a globally harmonized, digitized trade environment, as a key enabler of dynamic, sustainable, inclusive growth”. Developing a standardised approach to this topic across jurisdictions is as important as the acceptance of the use of electronic documents themselves. Promoting these initiatives is firmly within the interest of ICISA and its members and we are pleased to participate.
With autumn fast-approaching, and regulators and policymakers due back soon, it is clear that there is a full agenda ahead for them for the second-half of 2023. ICISA will continue to speak loudly on behalf of the global credit insurance and surety sector, highlighting the important work our members do in keeping trade and other key economic activities going around the world. To that end, we look forward to hosting our next edition of Trade Credit Insurance Week from 2-5 October to do just that. We hope you can join us there too!
