The benefits of insurance

About Insurance Europe

Insurance Europe is the European insurance and reinsurance federation. Through
its 34 member bodies — the national insurance associations — Insurance Europe
represents all types of insurance and reinsurance undertakings, eg pan-European
companies, monoliners, mutuals and SMEs. Insurance Europe, which is based in
Brussels, represents undertakings that account for around 95% of total European
premium income. Insurance makes a major contribution to Europe’s economic
growth and development. European insurers generate premium income of more than
€1  100bn, employ almost one million people and invest over €8  500bn in the economy.
Contents
Introduction — meet the family 4

How can our family protect its prosperity? 7

Renewing the family’s protection 10

How do policymakers influence the price of protection? 15

Ensuring people can better provide for old age 18

Providing investment for growth in Europe 21

What happens when an event occurs? 25

How can we increase policyholder protection? 27

The benefits of insurance 3

 Introduction —
meet the family

4 Insurance Europe
We live in challenging times. Europe faces significant economic headwinds,
demands on strained public finances are higher than ever and the impact of natural
catastrophes is rising.

Faced with such uncertainty, policymakers are seeking answers to difficult questions:
•• With more people entering retirement than ever before, how can they
provide for their old-age, without increasing the strain on already stretched
public finances?
•• Where will Europe find the investment it needs to create and support jobs,
and economic growth?
•• How can we better protect our society against unexpected and extreme
events?

While these questions often require complicated answers, the end result boils down
to the everyday lives and businesses of people like Maxine and her family.

Meet the family

Maxine’s family is made up of three generations: two grandparents, Maxine and
her husband, and their two children.

Like most people they have straightforward desires. They want a degree of certainty
and financial security for them and their loved ones, protection of their assets and
possessions, and an economic environment that offers the opportunity to gain
meaningful employment.

The grand parents

•• Both have saved well for their retirement.
•• They own a house, which is in a low risk area and is insured.
•• They both own a car and their premiums are low, due to their age and
responsible driving.

Maxine and her husband

•• They have begun saving for retirement.
•• They are looking to buy a new house, but are wondering whether the cost
of their insurance will increase because the new property is located in a
flood plain.
•• They both have life insurance. Maxine’s husband smokes, so his policy costs
more than hers.

The benefits of insurance 5

 •• They both own a car, and have reasonably low premiums due to their age
and lack of claims.
•• Maxine’s husband has a job and she runs a successful business, which is also
well insured.

The children
•• They have a daughter aged 14 and a son aged 18. The son has a car, with
higher insurance premiums than his parents and grandparents due to the
higher risk associated with drivers of his age. He has recently begun studying
abroad and so has taken out car insurance to cover him in the country where
he is studying.

6 Insurance Europe
How can a family
protect its prosperity?
 We often cannot prevent events such as the death of a loved one, a car accident or
extreme weather from damaging our homes and disrupting our businesses. These
are part of the uncertainties of life. Steps can, however, be taken to mitigate the
consequences of such events.

By pooling the risks faced by policyholders like Maxine’s family, insurers spread the
financial impact of an event that could be disastrous for one policyholder across a
wider group, where it is more easily absorbed. Pooling in this way also allows insurers
to combine different risks to reduce their exposure to any one risk in particular,
which in turn allows them to keep the price of policies at reasonable levels.

Quick fact
Millions of individuals, families and businesses across Europe benefit from
insurance. In 2013 European insurers paid out €952bn in benefits and
claims. That is equal to €2.6bn being paid out to people and businesses
every day.

While Maxine’s family and many others benefit from having comprehensive
insurance cover, there is still much more to be done to extend this protection to the
millions of others who are not yet adequately protected.

From an economic perspective, insurance provides people and businesses with

financial protection, so that when something bad happens they can maintain a
certain standard of living and public finances need not be so burdened. It, therefore,
makes sense for policymakers to enable as many people and businesses as possible
to take out suitable insurance cover.

8 Insurance Europe
How can we further reduce uncertainty for our society?
Do’s
•• Help insurers to respond to real concerns of the public and keep the
cost of insurance as low as possible by keeping regulation efficient
and by avoiding unnecessary costs.
•• Provide insurers with the flexibility to innovate and provide products
tailored to their individual national markets, to better meet the needs
of policyholders. This will allow more people and businesses to access
appropriate cover.
•• Make access to insurance more straightforward; for example keep
a wide diversity of distribution channels and allow consumers to
purchase insurance with or without advice.
•• Take prevention measures, for instance in the area of natural
catastrophes, in order to adapt society to the increasing effects of
climate change, and thereby make insurance available and affordable
to more people.

Don’ts
•• Do not propose, issue or review legislation without considering
the real benefits for the policyholders. Often when a new rule is
proposed or created, or a current one reviewed, it costs insurers –
and ultimately their policyholders.
•• Do not be too prescriptive, thereby restricting insurers’ product
design, such as by requiring pan-European mandatory coverages
where they are not appropriate. This can stifle innovation and lead
to products that do not properly protect policyholders.
•• Do not impose EU solutions on issues which do not have a strong
single market dimension (for example, personal pension products
(PPPs) or liability law).

The benefits of insurance 9

Renewing the family’s
protection
The time has come for Maxine and her family to renew their policies. While doing
this they notice that the price of some policies differs for different members of the
family, and that some prices have risen in comparison to the year before, while
others have fallen.

Why this happens: Understanding underwriting

In order to price a policy, insurers need to analyse the risk a policyholder wants to
transfer to them. This enables insurers to price policies according to the risk they
are taking on, which is called risk-based pricing. To analyse the risk, insurers need
to use data.

Why is data so important in pricing insurance policies accurately?

Each policyholder wishing to be insured presents insurers with a different level of
risk; for example, a timber house is at greater risk of fire than one made of brick.
To ensure that each policyholder pays a fair premium, insurers analyse data to
determine the level of risk that they are taking on. In this example, this data could
include: the materials the house is made from and its geographical location.

By analysing this data insurers can predict the premiums they need to build sufficient
financial capacity for the payment of future claims. This ensures that premiums
accurately reflect the risk policyholders wish to transfer to an insurer, while also
encouraging behaviour that reduces the risks.

An example of this is Maxine’s son who has recently moved abroad to study. He has
found that his car insurance premiums differ in the new country that he is staying
in. This is due to the fact that his risk profile is now based on the new country’s
risk specifics, including local accident statistics, vehicle damage values and medical
costs.

The benefits of insurance 11

 Keeping policyholders informed
While renewing her family’s policies, Maxine notices that the amount
of paper work that she is meant to read and sign in order to renew her
policies keeps increasing. What she really wants to know are the terms and
conditions of her policy and how much it costs. However, she feels that year
on year she is being deluged with more and more information with little
relevance at the time when she makes the decision.

There is a tendency for EU policymakers to concentrate on the quantity of

information that insurers need to provide to policyholders. Paradoxically,
policyholders may not get the most relevant and useful information out
of this measure, because too many documents may simply discourage
policyholders from reading them, and as a result may make them less
informed about products.

It is, of course, crucial that policyholders are provided with the most relevant
information to enable them to compare products and understand the
cover that they are buying. However, bombarding policyholders with too
much information can in fact distract them and obscure the most relevant
information.

How data protects policyholders against fraud

Data is also very important in enabling insurers to fight fraud. In order to do this,
insurers must have access to the relevant information needed to detect repeating
patterns of fraud. For example, there have been many examples where members of
criminal gangs pose in differing roles in fraudulent claims.

However, proposed EU legislation on data protection that was originally developed

to stop the profiling of online consumers, could allow insurance fraudsters to
demand the removal of their data from insurers’ databases. If this legislation comes
into force unchanged, it could make it harder for insurers to fight fraud, which
would lead to the price of premiums increasing for honest policyholders.

12 Insurance Europe
Avoiding adverse selection

Analysing data allows insurers to make an objective analysis and align the price of
the policy with the risk the policyholder poses. Consequently, insurers differentiate
to ensure that the premium charged accurately reflects the risk.

Without such risk assessment, there is a risk of adverse selection. This is where
policyholders with a higher risk profile are more incentivised to take out insurance
than those posing a lower risk.

For example, if smokers and non-smokers are offered life insurance at the same
price, the premium will be better value for smokers — who are more likely to
generate a claim against the policy — than for non-smokers. As a result, it is likely
that more smokers than non-smokers will take out the insurance. The insurer will
then likely face a high volume of claims, which means it will have to increase the
cost of premiums for policyholders in order to ensure that it maintains the ability to
pay all claims.

By taking smoking into account in the underwriting process, however, the insurer
ensures that a fair premium will be charged to a smoker, which in this case is
Maxine’s husband, who then pays more than Maxine, who does not smoke.

The benefits of insurance 13

 How can we keep increasing value for policyholders?
Policymakers can play an important role in enabling insurers to continue
delivering more value to policyholders, and in keeping them better informed.

Do’s
•• Make information understandable. Develop disclosure requirements
which are actually read and understood by policyholders while
avoiding excessive costs.
•• Only require insurers to provide the most relevant information to
policyholders when they are choosing insurance products.
•• Ensure that insurers have adequate access to data in order to allow
them to price according to the risk and to fight fraud.
•• Allow insurers to continue to differentiate between risks, in order to
ensure that policies are accurately priced.
•• Allow insurers to use data to develop more innovative products,
and in doing so create more competition, which benefits
policyholders, society and the economy as a whole.
•• Promote financial literacy to enable people to make better financial
decisions.

Don’ts
•• Do not introduce rules that restrict insurers’ access to data
necessary for a contract or inhibit their ability to use it to analyse
the risks they face.
•• Do not require insurers to provide an ever increasing amount of
technical information that can distract policyholders from the
important information that they require to make a decision.
•• Do not introduce overlapping, duplicative and contradicting
information requirements, which could confuse policyholders.

14 Insurance Europe
How do policymakers
influence the price of
protection?
 The choices that policymakers make directly affect the price of insurance policies
for people like Maxine and her family. Legislation is, of course, crucial in both
protecting the public and businesses, and in providing confidence in the financial
system. However, policymakers must bear in mind that every time they issue a new
proposal or enact new legislation or additional supervisory rules, it may cost insurers
a huge amount of money to research, understand and implement it in their systems.
While good regulation can improve protection for consumers, the costs of excessive
regulation can often exceed its benefits.

While insurers’ shareholders absorb some of the costs, there is only a certain amount
that they can accept before withdrawing to invest somewhere else. Shareholders
— which often include members of the public and organisations that invest the
savings and pensions of people like Maxine and her family — need to search for
adequate return on their investments. If those returns reduce by a greater degree in
one particular business sector, they will naturally look elsewhere.

Consequently, insurers need to pass the majority of any additional costs on to their
policyholders through higher premiums. Unfortunately this can:
•• Lead to policyholders paying more than is necessary.
•• Discourage people and businesses from taking out insurance policies, leaving
them without financial protection.
•• Even result in insurers withdrawing certain products altogether, if they
become unprofitable.

These outcomes are in no one’s interest, as they can leave large swathes of the
population and businesses without adequate financial protection, resulting in
governments, and therefore taxpayers, taking on risks that could have been covered
by insurance policies when a loss event occurs.

16 Insurance Europe
How can policymakers ensure more people are protected?
Regulation can either encourage more policyholders to benefit from adequate
insurance protection, or discourage them and leave them vulnerable.

Do’s
•• Raise people’s awareness of the risks they face and of the value of
taking out insurance to protect them.
•• Provide insurers with a regulatory framework that allows them
to innovate and improve insurance solutions or reduce costs for
policyholders.

Don’ts
•• Do not ignore the unintended consequences of poorly designed
regulation on availability of products, customer access to products,
and cost of products.

The benefits of insurance 17

Ensuring people can
better provide for old
age
All the adults in Maxine’s family have saved for their retirements using both
occupational pensions and insurance savings products. They have also encouraged
the children to begin saving as soon as possible for their future and retirements.

This is a very good idea, because as the proportion of Europe’s population in

retirement increases compared to the population of working age, it is likely that
society will become much more dependent on personal savings products to fund
people’s retirements.

Why are long-term investments important to pension holders?

In order to provide pension holders with the best possible return and to match their
liabilities, insurers need to make long-term investments. By pooling the funds of
many investors and investing in a diversified portfolio of assets, including illiquid and
long-term investments, insurers can both better manage their investment risks and
achieve greater returns for policyholders.

Pooling investments also enables insurers to provide people like Maxine’s family
with access to investment opportunities that they would otherwise not be able to
reach, such as infrastructure investments.

How can people be convinced to save more?

It is important for people to save adequately for their retirement, and for them to
access the best return on those investments. The level of return on retirement savings
can make the difference between being comfortable in retirement and struggling to
pay the bills. For example, an additional 1% extra return on investment can increase
income during retirement by 25%1.

Given the increasing challenge that governments face in providing for their retired
citizens, it is very important for people to begin saving more for their old age. Often,
however, people do not realise the importance of saving for their retirement or how
much they need to save.

1 This example is based on a person investing over 40 years, and increasing their investments
from 1% to 2% of their earnings.
The benefits of insurance 19
 One example of how this can be addressed is to directly inform people of how much,
given their current saving habits, they are likely to receive during their retirement. For
many people the news would be an unpleasant surprise. The Swedish government
developed a scheme, dubbed the Orange Envelope programme, which did just
this. This simple and effective way of communicating the information led to people
saving more prudently for their retirements.

How can we further strengthen people’s financial security in

retirement?
It is in everyone’s interests for people to have more financial resources in
their old age.

Do’s
•• Encourage people to save for their retirement through a combination
of education and incentives, as well as taking into account how real
people behave in practice.
•• Ensure consistently high levels of protection for all occupational
pension holders irrespective of where they get their pension from, ie
an insurance company or a pension fund.
•• Ensure that policyholders and beneficiaries of occupational pensions
are clearly informed of whether their pension promise is guaranteed
or can be adapted.

Don’ts
•• Do not leave the situation as it is. Action must be taken to increase
peoples’ retirement provision to avoid bigger problems down the
line.
•• Do not allow people to be confused about the level of protection
they have. If there is a risk that their pension fund may have to
reduce benefits to their members, those members should be made
aware.
•• Do not ignore the specificities and differences of national pension
models.

20 Insurance Europe
Providing investment
for growth in Europe
 Like most people, Maxine’s family want to know that the companies they do business
with invest responsibly in our society. Insurers will usually use premiums to make an
investment that matches the expected time when claims and benefits would be paid.

Insurers are Europe’s largest institutional investors, and in 2013 had over
€8 500bn of assets under management. This is roughly equivalent to 60% of the
entire Gross Domestic Product (GDP) of the EU.
Chart 1: European insurers’ investment portfolio — 2004–2013 (€bn)
€bn
9 000 15%

8 000
10%
7 000

6 000 5%

5 000
0%
4 000

3 000 -5%

2 000
-10%
1 000

- -15%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Total insurers’ investment
Total insurers' investment portfolioportfolio Growth
Annual growth rate, % (lhs) rate

Quick fact
Insurers hold approximately 25% of all European government bonds and
approximately 21% of European corporate bonds, as well as a significant
percentage of all listed equities and billions of euros in assets such as
infrastructure and private equity.

By making these investments insurers encourage stability and growth through

enabling governments and companies to make investments themselves. Therefore,
insurers’ investments are important for the whole economy, especially when
refinancing banks and the real economy. Insurers also contribute directly to
important infrastructure projects, such as bridges, hospitals and new housing, and
while these do not make up a large percentage of insurers’ investments, they are
certainly an asset class that could be suitable for more investments in the future.

22 Insurance Europe
Defending against downturns

People and businesses tend to keep paying their insurance premiums during times
of economic downturn. This constant flow of premiums enables insurers to continue
to fund the economy during difficult times. It also enables them to buy suitable
assets that others need to sell, which in turn helps to kick-start recovery. In this way,
insurers help to reduce volatility in the financial markets.

Chart 2: Premiums provide a stable source of funding even during

downturns
Premiums (€bn) Euro Stoxx 50 index
1 200 5 000

4 500
1 100

4 000
1 000

3 500

900

3 000

800
2 500

700
2 000

600 1 500
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Gross Written Premiums, €m DJ Euro Stoxx 50 (historical values in €)

Regulation could reduce investments

While there is wide-spread insurance industry support for the new risk-based
regulatory regime for European insurers, called Solvency II, there are some important
details that need improving. In particular, there are significant concerns because this
new regulation treats insurers as if they invest like traders and are faced with the
same risk as traders.

Insurers invest to match the promises they make to their policyholders and for
most of their business this makes them very long-term investors — the opposite of
traders. Treating insurers like traders exaggerates the actual risks involved in long-
term investing.

The benefits of insurance 23

 As a result, the capital requirements related to long-term investments are set too
high. This will create unnecessary costs and problems for insurance companies
wanting to offer long-term products to policyholders where they have to invest
long-term to match their promises to policyholders.

This will make long-term insurance products (such as pension products with
guaranteed returns) more expensive than needed and could also reduce the
availability of these products. It will also limit the insurance companies’ ability to
maintain their traditional role as patient long-term investors, providing stability in
times of financial crisis and in turn reduce their ability to invest in long-term assets,
such as infrastructure. The regulatory requirements governing insurance business
must, therefore, take into account the long-term perspective.

How can we ensure those investments create more jobs and growth?
As long-term investors, insurers are particularly suited to make investments
that create jobs and stimulate economic growth.

Do’s
•• Ensure regulation is adapted to accurately reflect the long-term
investment risk that insurers face.
•• Remove regulatory hurdles for insurers investing in infrastructure
projects and small to medium-sized businesses, which have a more
direct positive impact on economic growth and employment than
other types of investment.
•• Take steps to improve the supply of and access to long-term
investments, such as infrastructure, so there are more suitable assets
for insurers to invest in on behalf of their policyholders.

Don’ts
•• Do not treat insurers as if they act like traders and instead recognise
that their long-term liabilities can reduce their exposure to market
volatility.
•• Do not ignore the potential unintended consequences of regulation
on insurers’ investments and therefore the economy.

24 Insurance Europe
What happens when
an event occurs?
 A couple of months later Maxine and her husband buy the new house. Unfortunately,
just as they finish moving in a local river breaks its banks, causing a flood that
severely damages the ground floor of their new home.

Because of the flood many of their possessions need to be replaced and extensive
repair work is required. Following all of the expense of their recent move, it could
not have come at a worse time. Luckily, they had already got a new insurance policy
for both the house and its contents.

This meant that their insurers arranged the repairs to the house, using their local
network of suppliers to get the work done, as well as paying for the family to stay
in a hotel while the work was carried out and replacing their possessions as quickly
as possible. The insurer’s assistance, therefore, helped to alleviate a stressful event
for the family.

26 Insurance Europe
How can we increase
policyholder
protection?
 Following the flood the family wants to become better prepared against events and
occurrences that could cause them financial loss or even physical harm.

Protection through prevention

They do some research and find out that their national insurance association
provides advice on a wide range of risk prevention subjects to both the government
and the public, and that their local insurer also holds awareness events.

Reducing costs for policyholders

The way that insurers price insurance premiums can also have a wider
impact on society by encouraging better risk prevention and management
practices. The prospect of lower premiums and deductibles can encourage
individuals and businesses to reduce their risks by altering their behaviour or
by taking preventative measures.

Examples of this include individuals giving up smoking to reduce their

life insurance premiums, fitting intruder alarms to reduce their household
insurance costs and businesses implementing more effective risk
management systems to reduce their liability premiums.

28 Insurance Europe
How can we further reduce losses and costs to policyholders and
governments?
In order to help everyone to live safer and more prosperous lives, there are
several things that policymakers can do.

Do’s
•• Warn people about the risks of living in areas that are highly
susceptible to natural catastrophes, such as flood plains, and if
possible, stop building houses in those areas completely.
•• Invest in prevention measures, such as flood defences.
•• Enforce building codes, improve the resilience of urban infrastructure
and conduct responsible land-use planning.
•• Engage in more open dialogue with the insurance industry,
particularly at national level, to understand what more can be done
to reduce exposure to risks and enhance the insurability of risks.

Don’ts
•• Do not ignore the significant issues society faces regarding natural
catastrophe risks.
•• Do not ignore insurers’ concerns over disaster prevention and the
insurability of risks. Buildings resilient to the effects of climate
change and natural catastrophes, and more people and businesses
being covered by insurance, are a better result for everybody.

The benefits of insurance 29

© Insurance Europe aisbl
Brussels, 2015
All rights reserved
Design: Insurance Europe

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Insurance Europe does not accept any responsibility for the accuracy or the comprehensiveness
of the information given. The information provided is for information purposes only and in
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information.
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