Geopolitical uncertainties are shaping the financial markets, and technology is playing an increasingly important role both as a competitive advantage and a source of potential risks. To ensure their future success, insurers need to tackle three key issues.

Julia Wiens, Chief Executive Director of Insurance and Pension Funds Supervision.

Are German insurers equipped for the future?

As supervisors, we want an insurance industry that is innovative and fit for the future. Many companies have addressed important issues in recent years. They have made changes that were economically necessary. They have launched new products and explored potential applications for innovative technologies.

However, in our day-to-day work, we are also seeing areas in which the industry still needs to improve. These include investment risk management, the use of artificial intelligence (AI) and value for money.

Ensuring appropriate investment risk management

With regard to capital investments, alternative investments such as private equity, private debt and real estate pose particular challenges for insurers. Liquidity can be a critical factor, especially for companies with significant hidden liabilities in their bond portfolios and little new business. Insurers in this situation that also hold a high proportion of illiquid investments can run into difficulties if the portfolio has to be restructured.

If companies are to be fit for the future, they need appropriate investment risk management for all asset classes. They should only make investments that they actually understand and not rely solely on third-party expertise. This is especially important if they hold investments indirectly, for example via funds.

We will continue to monitor this issue closely. Alternative investments will remain a relevant asset class, even if fixed-interest bonds now offer a better risk/return profile again.

Seizing the opportunities offered by artificial intelligence

To prepare for the future, insurers should also seize the opportunities offered by innovative technologies – while at the same time keeping an eye on the risks. This applies above all to artificial intelligence. At present, companies are primarily using AI to improve efficiency. We encourage insurers to explore additional benefits of AI that go beyond just streamlining processes. At the same time, insurers must bear in mind that innovative technologies also entail risks. Those in positions of responsibility must therefore ask themselves how the risk landscape will change if AI plays a bigger role.

The European AI Act is currently high on the agenda of companies and supervisory authorities. With regard to this regulation, some things are still unclear. For example, the exact scope of high-risk applications. The precise interpretation of the regulation will therefore be decisive. From our perspective, a pragmatic definition of AI and high-risk AI applications is especially important. Normal statistical methods should not be categorised as high-risk AI.

BaFin will most likely be responsible for market surveillance in the financial sector. We are very keen to ensure that the introduction of the AI Act is efficient for the industry. This includes preventing contradictions and overlap between different sets of regulations, for example between the AI Act and DORA, the European Regulation on digital operational resilience for the financial sector.

At the same time, we expect companies to implement the AI Act with a forward-looking approach, and to work with us in a constructive and transparent manner. After all, we all have the same goal: for insurers to achieve better value for money for their customers and secure their future viability through the use of fair and secure AI models.

Creating appropriate value for money

When we talk about future viability, we must also address the question of whether insurance products provide appropriate value for money for customers. One thing is clear: if an insurer only focuses on short-term business interests, it is not operating in a way that will ensure its future viability.

Conduct of business supervision continues to gain momentum. And it is having an effect. There was a significant improvement in the reduction in yield of unit-linked life insurance policies with regular premiums. In some cases, reduction in yield fell by more than 40 basis points compared to 2021. This was the finding of a recent survey by BaFin. The decline is likely in part attributable to our activities.

In addition to endowment life insurance, we are now also focussing on property and casualty insurance. Here, too, every newly developed or significantly modified insurance product must offer value for money.

Establishing risk-oriented price differentiation

In property and casualty insurance, companies are free to set their premium rates. They should calculate their premiums according to actuarial principles and in line with the risks. However, conduct of business supervision places some limits on this freedom.

A representative survey by BaFin has shown that, in some cases, there are considerable differences in the premiums charged by property and casualty insurers. And such discrepancies are not fully attributable to actuarial calculation variations. As part of conduct of business supervision, we will take a closer look at some of these approaches to price differentiation. For example price walking. In other words, repeated premium increases that are not related to the insured risk or the insurer's costs. The European Insurance and Occupational Pensions Authority (EIOPA) has rightly pointed out that price walking is not compatible with the principles of conduct of business supervision.

As a general rule, price differentiation that is risk-oriented and transparent aligns with the requirements of conduct of business supervision. Our aim is to identify outliers and take action against them.

It is not only in the customers’ interests for insurers to offer products that are appropriately priced and good value for money. It is also in the interests of the companies themselves. Insurers that are fit for the future know this and act accordingly.

This article is based on a speech given by Julia Wiens on 29 October at BaFin’s Annual Insurance Supervision Conference (only available in German).