[Co-Author: Davide Valloni]

On 18 June 2020, the Italian Insurance Regulator (IVASS) published its annual report on the supervisory activity carried out in 2019. The Chairman of IVASS Mr. Daniele Franco in his considerations introducing the report pointed out that at the end of 2019 the Italian insurance industry was in good health since the total amount of premiums collected increased by around 4% compared to 2018 and also profitability and solvency indicators improved in 2019. The amount of own funds held by Italian insurance companies on average was about 2.4 times the minimum capital requirement. However, the recession triggered by the pandemic from COVID-19 has changed this scenario. The significant strains in the financial markets as well as the uncertainty over the development of the economic and financial situation immediately advised extreme attention. Given the importance that rules and governance structures have for the soundness and good functioning of the insurance system, IVASS highlights the main topics on which it intends to focus its attention in the next future.

On 18 June 2020, IVASS – the Italian Insurance Supervisory Authority – published its annual report on its supervisory activity carried out in 2019 (the "Report"), which was introduced by the considerations made by its President Mr. Daniele Franco.

The Italian insurance market in 2019

The insurance industry closed year 2019 with positive results, with a total premium collection amounting to around 140 billion euros, increased by about 4% compared to 2018, reaching 7.8% of the Italian GDP.

A large expansion was registered in life insurance class where premiums increased of 4%: the strong growth in class I products (life insurance products, +9.7%) more than compensated the decrease, for the second year in a row, of class III products (unit-linked products, -6.6%).

Non-life insurance production increased by 3.2%, driven by the accident and health classes of business as well as fire and other damages to property classes, which grew by 7.5% and 4.5% respectively; on the other hand, premiums collected for compulsory insurance against civil liability in respect of the use of motor vehicles fell by almost 1%.

Profitability and solvency indicators also improved in 2019. The ROE (Return On Equity) was slightly higher than 12%, sharply up from 6.4% of 2018 and also higher than the results of the previous two years. The average amount of own funds held by Italian insurance companies was about 2.4 times the minimum capital requirement.

The first impact of the health emergency from COVID-19

However, the recession triggered by the pandemic from COVID-19 has changed the scenario depicted above. The significant strains in the financial markets as well as the uncertainty over the development of the economic and financial situation immediately advised extreme attention.

The solvency position of insurance companies has recorded an average decrease of 25% at the end of March compared to the end of December. Since mid-March, IVASS has integrated the supervisory reporting flows by starting a periodic monitoring of the solvency situation, which has recently been extended to the liquidity position.

In the presence of a significant reduction in solvency ratios or situations of weakness in capital requirements on prospective risk factors, intense dialogue with companies has been initiated. This was followed by specific interventions of IVASS aimed at requesting capital strengthening initiatives necessary to restore the solvency levels set as a target. In particular, action was taken against companies which, in the course of the monitoring, showed solvency ratio values lower than the 130% threshold. In the current context, which is characterised by high volatility, it is essential that companies' own resources remain adequate for the risks taken, even in situations of market strains.

The future of the Italian insurance sector: focus of IVASS activity

The events of the first months of 2020 have confirmed the importance that the rules of governance for groups and companies have for the soundness and good functioning of the insurance system.

These are the aspects on which IVASS intends to focus its attention in the next future:

• IDD: IVASS has paid close attention so far to the consolidation of the product oversight and governance processes required to operators by the Insurance Distribution Directive (IDD), as well as to the correctness of conducts in the distribution stage. IVASS will focus on promoting product and cost comparability in the distribution phase and, with respect to claims settlement, the correct application of the contract and timely compensation for damages. IVASS Regulations completing the implementation of the IDD on Product oversight governance (POG) and additional requirements for the distribution of Investment Based Insurance Products (IBIPs) are expected to be issued shortly. In the presence of a division of competences between IVASS and CONSOB (the Italian Supervisory Authority on Financial Markets) regarding the supervision of the distribution of IBIPs, the two Authorities have worked together to ensure equal treatment of operators and protection of policyholders. A homogeneous set of rules has been drawn up to supplement the IDD with measures and rules similar to those set under the current regulatory framework governing the distribution of financial products, in consistency with the European legislation on the distribution of insurance products.
• Mystery shopping: IVASS is engaged in discussions at institutional levels to ensure that the national regulatory framework allows it to resort to the so-called mystery shopping (i.e. the power to purchase goods or services as test purchases, where necessary, under a cover identity, as defined under Regulation (EU) 2017/2394) with the aim of field testing processes and conducts during the distribution phase and to detect improper conducts in a timely manner.
• Insurance Arbitrator: despite the difficulties of the current period, the preparatory activities for the start of the new insurance Arbitrator continue. The out-of-court dispute resolution system will be added to those already in place in Italy for the banking and financial sectors. The open fronts are many: the regulatory one, through collaboration and discussion with the competent Ministries for the definition of the regulatory system; the technological one, aimed at setting up, with the support of the Bank of Italy, an IT system and a website allowing consumers to easily access the Arbitrator and to interact with applicants, companies and intermediaries in a streamlined way; the organizational-logistical one as well as the training of staff.
• InsurTech: IVASS is closely monitoring the impact of technological innovation on the insurance market, with a view to promoting solutions that expand and improve the offer within a framework of modern consumer protections. No less important is IVASS's focus on the robustness and security of IT infrastructures due to the links with InsurTech developments and cyber risk management. In this perspective, in addition to participating actively in European initiatives, IVASS has provided, in close cooperation with the Bank of Italy and CONSOB, its contribution to the Italian Ministry of Economy and Finance for the drafting of the regulation on the Italian Sandbox for the experimentation of innovative ways of offering financial, banking and insurance services and products (please refer to our latest news on this topic). In order to facilitate digital operators, IVASS has in place an Innovation Hub which was recently further strengthened. The Hub is a point of contact for stakeholders to discuss issues related to technological innovation in the insurance sector and regulatory, supervisory, prudential and market conduct aspects. Experimental projects are underway to offer fully digital policies through blockchain and smart contracts. An important economic and organizational effort has been made to innovate the IT equipment and technological infrastructure of the Integrated Anti-Fraud Archives and the Claims Database. The process of dematerialisation of insurance contracts and documents has found new impetus in the current emergency situation: in collaboration with the Agency for Digital Italy (AgID), IVASS is promoting the diffusion of digital identity tools (SPID) and electronic signature for the benefit of remote identification processes.
• Insurance education: the pandemic has brought the risks of underinsurance to the attention of the general public: the emergence of widespread needs for protection must be rapidly accompanied by insurance education to enable consumers to assess which products can respond to their specific needs and which operators can legitimately provide them. In this regard, IVASS is directing its activities along two lines: the involvement of an increasingly wide range of citizens in training programmes and the use of both traditional and innovative tools.

Conclusions

IVASS calls on the insurance sector to contribute to mitigate the impact of the current economic crisis resulted from the pandemic. There are many areas to focus on: infrastructures, the transition to the green economy and digitization, the coverage of risks that threaten the natural and cultural heritage and the manufacturing activity of Italy.

A combined and transparent action could make it possible to distribute risks more rationally, speed up recovery and support actions and make social policies more manageable.

IVASS will not miss its contribution on these issues, as well as on the projects to make the offer of motor liability contracts more competitive, as well as on the work for the review of Solvency II that are entering the decisive phase. Consumer protection will be enriched with new instruments capable of improving its effectiveness.

The next strategic plan will give space to initiatives aimed at encouraging the use of artificial intelligence for the assessment of compliance with the regulations by operators (RegTech) and for the performance of IVASS controls and supervisory analysis (SupTech). IVASS aims to rationalize and simplify compliance, increase the effectiveness of controls and reduce bureaucracy.

The pandemic has taught that more has to be done to be prepared to deal with emergencies, but at the same time it reminded that mutualising risks, i.e. facing them jointly, is a useful response.

Click here to download the Report and here to download the introducing considerations made by IVASS Chairman (both available in Italian only).

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