European Commission : Insurance distribution in the single market – meeting consumers’ needs in the internet age

Speech to mid-term meeting of BIPAR - the European Federation of Insurance Intermediaries

Jonathan HILL - Commissioner responsible for Financial Stability, Financial Services and Capital Markets Union

I think I should start with a confession and share with you something I have not shared with many people.

My father was an insurance broker. He bought a very small insurance business and, after thirty years or so, I am afraid it was still a very small insurance broking business when he sold it.

But working there in school holidays I learnt a little about the nature of looking after clients, making coffee for the boss, filing, typing and answering the telephone. Not much different from what I do now.

So I know a bit about the part that the hundreds of thousands of people in your industry play in matching customers with the insurance products they need.

Yours is a crucial business. Most obviously insurance helps us lead our daily lives: protecting us from accidents or ill-health, sometimes keeping a roof over our heads, and helping us plan for our future.

But it also, of course, helps our whole economy turn over - insuring businesses against risk, but also investing all those premiums in the wider European economy.

Those sales, and the premiums that you collect, help create one of the foundations of the whole European economy. It is the largest single pool of investment in the European Union - more than 8.5 trillion euros in 2013.

You are an important link in that chain, joining consumers with insurance companies. When that link works well you help build confidence in the insurance industry. I am in no doubt about the importance of what you do.

Ladies and gentlemen, in recent years, the Commission has rightly had to focus on reforms to stabilise the financial system. For the insurance sector this meant measures to make the system more secure. Through the so-called Solvency II legislation the core goal - of protecting part of our financial system whose failure would have serious consequences for people's lives - has been achieved.

Because of the steps taken over the last five years, the financial system is more stable than it was before the financial crisis. But today there is another threat to financial stability: the lack of jobs and growth. That helps shape my approach to regulation. It is why I have said that I want to look at the cumulative effect of the laws we have passed to make sure we have got the balance right between reducing risk and fostering growth. And if we find we haven't got it exactly right, we should be confident enough to make changes. Now I am very conscious that businesses need regulatory stability in order to plan ahead. So I can say, although I will be taking forward measures to implement top level legislation, I do not intend to launch an avalanche of new regulation.

I do not want the financial sector to be isolated from wider society. I want it to be seen as part of the economic mainstream; supporting companies and encouraging growth. For that to happen, though, customers, indeed society at large, need to know that there has been a change since the crisis. Some of that response is regulatory.

But some of it must also be behavioural and values-based. Business leaders need to take responsibility for behaviour and not take refuge in a box-ticking mentality. If we can achieve that - if all operators along the financial value chain take responsibility; if all service providers remember that they are there to serve their customers, then I want to be the champion of that well-regulated industry and I will defend the contribution it makes to growth and to jobs.

I am a strong believer in the role that competition plays in delivering the benefits of the single market to the general public and that includes not only that minority of people who actively move to another country or seek out offers across borders, but also all those who remain in their home countries. They, too, should have greater choice, lower prices and a wide range of products suited to their needs.

Competition also makes it easier for new players to enter the market, forcing incumbents to 'up their game', reminding them of the importance of listening to customers and helping to drive innovation.

Of course, insurance intermediaries can promote competition by providing a distribution channel for new entrants, who are then spared the high costs of building up their own distribution systems. Indeed, I think the customers expect you to take on this role and be their gateway to a wide choice of insurance products.

To be effective, consumer choice relies on transparency. Consumers must be able to get hold of simple information so that they can make an informed decision about the right product or service for them. Again, insurance intermediaries can play a crucial role. Drawing on your knowledge and experience of the market, you can help the consumer to assess their risk tolerance and find the most suitable product for their needs.

When we talk about insurance distribution, the EU rules go back to the 1970s, and were last revised in 2002. They were not suitable for a world of internet sales, of multiple modes of distribution, and insurance products that acted very much like investments.

That was the background to the Commission's proposal for a Directive on Insurance Distribution in 2012. It aimed to improve competition; make sure that customers get better advice and clear information on the people selling to them and how they are paid for it; and to make it easier to provide services across borders.

Now I know already you have been following the progress of the Insurance Distribution Directive very closely and I am glad that it has moved forward considerably in recent months. I am confident that the trilogue negotiations between Parliament, Council and Commission can be finalised under the Latvian Presidency during the first half of 2015.

We certainly have to be aware that there are many differences between insurance distribution systems in the EU Member States. The issue therefore requires a balanced and flexible approach that takes into account those different traditions and practices.

One of the main features of the new Directive will be that it will create a level playing field so that whatever kind of insurance is being sold and however it is sold the same basic rules will apply. It will guarantee that however customers buy insurance they get the same standards of choice and service.

It will also provide for appropriate standards of transparency. This will help consumers make informed choices on the basis of meaningful data. It will also help build trust that the products they are being recommended are not just those that give the adviser the highest commission.

And there will be specific rules for insurance-based investment products in order to give consumers who want to invest their savings comparable levels of protection.

In short, we hope that this Directive will help intermediaries to compete in a fair market, to sell services more easily across borders and build relationships with their clients on the basis of transparency and trust.

Now one of the big priorities of the Commission is a new push on an old subject: how to build a strong Single Market. Why? Because that should mean more opportunities for business, more choice for consumers lower prices and better services.

So we have now three major Single Market projects underway: in a single digital market, in energy union and in my own portfolio, how to build a Single Market in capital.

The IDD is a step forward in terms of strengthening that Single Market in insurance. But I think there are still a number of open questions as to how we can strengthen it further.

The first of these concerns the transparency and comparability of insurance products. As you know, for packaged retail and insurance-based investment products, the recently adopted PRIIPS Regulation has introduced a common standard of transparency. But what is the situation when it comes to other insurance products - to home cover, motor insurance or pure life policies for instance? I think that Consumers need information in a manner that allows them to make an informed decision. Can we be sure that the way information is presented is not being used as a means to shift responsibility from insurers to consumers?

There are also issues around geographical limitations on insurance products in terms of coverage, validity and availability. Is this harming consumers moving between Member States or shopping across borders? Is it right that someone paying into a supplementary health insurance scheme for decades suddenly discovers that he can't make use of it when he retires to another EU country?

And then, the limited cross-border access to insurance products. Most consumers can only buy insurance products in the Member State where they live and often they don't have access to insurance products in another Member State, even though those products may be cheaper and better suited to them. Is this fragmentation of national markets still desirable in the single market of 2015?

Now since I've arrived in this job many people have pointed out to me how car insurance and travel insurance costs vary widely between member states. Insurance providers tell me that there are good and unavoidable reasons for this: that deep rooted legal factors, differences in taxation or quite simply that because the cost of fixing things vary widely across the EU.

But consumers may point out that people also said there were good reasons why a true single market in air travel or roaming would never be possible.

I will always be led by the evidence and I think we should hear the evidence on this from both sides.

It is the Commission's duty to look at things from the consumer's vantage point: why a service is available in one Member State but not another, why prices vary between them? We should always be seeking to create tangible benefits for consumers from the Single Market, and preferably from the bottom up, not from the top down.

My colleague Elzbieta Bienkowska is in the lead on much of this, and I will do what I can to support her in her work.

As you know, this Commission's absolute priority is jobs and growth for the citizens of Europe.

The 315 billion euro investment plan that Commission President Juncker launched before Christmas will help to kick-start the process of unlocking investment in Europe's infrastructure and Europe's companies. But to help investment for the long term, we need to build a single market for capital - a Capital Markets Union which has to be for all 28 EU Member States.

Essentially, the question which must be at the heart of CMU is how we more effectively marry savings with growth. I want to take a practical approach, identifying barriers to the free flow of capital, and then knocking them down one by one.

As the guardian as one of the biggest sources of funding in Europe, the insurance sector will, I hope, be a big part of that project. I, like many in insurance industry, would like to see insurance companies investing more directly in the economy, either through our new European Long-Term Investment Funds or directly into long-term assets like infrastructure projects - roads, schools, hospitals; the very fabric of the world around us. So in the Green Paper that we'll be publishing shortly we will be looking to identify ways in which we could help make that happen more effectively.  

I know Solvency II has had an important effect on the kinds of investments insurance companies are making. I am therefore very keen to know from all interested parties what role insurance companies can play in the Capital Markets Union.

I hope you will let me have your views and give me any practical suggestions you have. I am very clear that the CMU is a project with the industry, not do it to you.

While I am absolutely clear about the importance of the insurance industry, I am also very aware that your industry faces the disruptive challenge of new technology.

Consumers are harnessing the power of the internet to get informed about, shop around for, and to buy insurance. The use of social media and collaboration tools is a trend that's going to accelerate. And advanced IT tools are making it easier for insurers and intermediaries to communicate, allowing them to conduct business in real time and to meet customers' expectations.

The internet is changing markets in new ways all the time. Business models in the automobile sector, for instance, are being profoundly shaken up by developments like car sharing schemes and self-driving cars. How will the insurance sector respond to that?

Now, if people want to get an insurance quote, they are no longer obliged to consult a broker or agent. All they have to do is take out their mobile phone, check a few websites of direct insurance companies or use a comparison site and within minutes have all the information that they think they need. So the challenge I know you are intensely focused on is how you and your members show how you still add value for your clients, proving how the products you suggest for them match their expectations and delivering a highly effective service when it comes to claims handling.

Another significant trend is the development of big data and analytics in the insurance industry. Insurance companies obviously gather huge volumes of data from their customers. Internally, they are used to refine their risk assessment and optimise premiums. But what about the transfer of sensitive personal data for insurance purposes? Data collected in a car on a policy holder's driving habits or sensitive information held by his health professionals. How does the industry handle the transfer of such data to the insurance company?

These are big changes, and change is unsettling, but these challenges also create opportunities for you to discover new ways to do business and new ways to service your clients. In the face of those challenges sharing new thinking has never been more important, and I am sure that BIPAR will play an invaluable role in doing that.

The insurance industry plays a vital role in our economy. Two million jobs in Europe depend directly or indirectly on the insurance sector.

If these jobs are to be sustained; if the insurance sector is to continue making its significant economic contribution, then - as is ultimately true everywhere - the sector will have to continue to evolve. Not only as an investor and provider of capital that our economies so desperately need. But as a bedrock of the single market; an open, competitive sector that develops in line with new challenges and with customers' expectations.

The big technological change when I worked for my father's broking business was the early version of the fax machine. I learnt to type using carbon paper and a labour-saving new device called Tippex. So much today is different. But the underlying principles of the industry you work in have not changed at all: calculating risk, managing investment, looking after customers, helping people manage their lives.

So long as the industry sticks to those principles, it will continue to flourish - and long may it do so.