European insurers’ global reach challenged by cyber threat

netherlands_2013.jpg [ Alexandre Dulaunoy/Flickr]

This article is part of our special report EU policies and the insurance sector.

SPECIAL REPORT / Europe plays a leading role in the global insurance business. But maintaining this position will depend on its ability to respond to emerging threats in the digital economy, analysts warn.

Insurers are Europe’s largest institutional investors, and in 2013 had over €8,500 billion’s worth of assets under management, according to Insurance Europe, an industry federation.

Equivalent to 60% of the entire Gross Domestic Product (GDP) of the EU, it is unsurprising that the sector claims to be relevant to the wider economy.

“Insurers also contribute directly to important infrastructure projects, such as bridges, hospitals and new housing,” according to the group’s latest report on the sector’s financial impact, published in March.

Juncker investment plan

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,” the report adds.

Such infrastructure projects make up the lion’s share of the Juncker Investment Plan proposals from member states, showing how relevant an investor the sector could be.

The Juncker Plan is designed to kick start the flagging eurozone and alleviate Europe’s youth unemployment crisis.

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.

The insurance business is also relatively insulated from the crisis, since premiums continue to flow in, enabling the sector to continue its investments.

“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,” according to Insurance Europe’s report.

Digitisation: A threat and an opportunity

But the changing nature of the financial services industry, and the relentless onset of digitised services, is challenging the insurance industry, revolutionising not only the way people buy insurance products, but also the risk environment that the sector exists to protect.

Cyber-attacks are increasing in number, sophistication, scope and impact, and represent the most salient non-traditional security issue on the global agenda.

Companies in almost all sectors are exposed to cyber threats, with the potential for causing enormous damage in terms of reputation and physical losses, liabilities, and regulatory costs.

There is an inadequate global cyber governance framework, and since cyber-attacks do not respect national borders, a comprehensive global cyber security governance is lacking.

This creates a gaping need for a global cyber governance framework, and this will represent a clear opportunity for the insurance industry.

“To remain competitive going forward there is a need for innovation and there is also the cyber liability market which has yet to be fully explored with sales currently very low,” according to British MEP Catherine Stihler MEP (Socialists & Democrats).

The development of rules to deal with the cyber threat, and the role that Europe’s risk protection industry play in framing these, will play a critical role in determining the extent to which the insurance sector can maintain its current leading role on the European and global stage.

Global reach

How succesful insurers are in dealing with cyber risks could define tomorrow’s insurance market and determine whether European companies maintain the leading global role they currently enjoy.

“Europe has 35% of the global insurance market, making it the largest in the world and a huge contributor to GDP,” according to British MEP Catherine Stihler MEP (Socialists & Democrats).

“The closest global competitor is the US, and the main difference between the two markets, is that the US is primarily focused on domestic sales. As a result (Americans) don’t have the same obstacles we do in Europe,” she added, alluding to the still patchy EU single market.

But Europe’s market position is threatened by lawmakers, according to some in the industry who believe that new rules introduced since the financial crisis could have a freezing effect.

Detractors claim that the effect of the European Solvency II rules is to treat insurers as if they invest like traders and are faced with the same risk as traders.

“Treating insurers like traders exaggerates the actual risks involved in long-term investing,” according to Insurance Europe’s recent report.

“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,” the report said.

The EU Directive on insurance mediation is aimed at achieving a market throughout the EU for insurance intermediaries.

The current directive, adopted in 2002, is up for a revision which the European Commission tabled in July 2012.

The Commission says its goal is to upgrade consumer protection by creating common standards across insurance sales and ensuring proper advice.

The EU executive believes the market is still fragmented and complains about "significant inconsistencies", in particular regarding the information requirements imposed on sellers of insurance products.

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