28 October 2019

BIS' De Galhau: Insuring in the long term in a short-term world

Speech by Mr François Villeroy de Galhau, Governor of the Bank of France and Chairman of the ACPR, in which he focuses on two main issues: the challenge of low interest rates and ambition for the Solvency II review.

The low interest rates are not only driven by monetary policy – they are primarily the consequence of long-term structural trends, notably resulting from the change in the balance between a high level of savings and a fall in investment linked to an ageing population and the slowdown in productivity. The low interest rates thus reflect the historic low level of what economists refer to as the real natural rate of interest, R*, which has declined by around 2 percentage points over the last 15 years in both the euro area and the United States.

Furthermore, for the last several months, an economic cooldown is experienced. It would go against all logic to raise interest rates now. When there are reasons for supporting demand, which is apparent in the excessively low inflation, active monetary policies have to be maintained. The low interest rates, and even the negative interest rates, are nothing new: what is new is that the low interest rates are going to continue, and have to continue, given the global economic cooldown.

Regarding Solvency II review Mr François Villeroy de Galhau says: “We are entering a consultation period that is absolutely critical and that will lead in June next year to the issuance of an opinion by EIOPA. This opinion, which will be reviewed by the Commission, will form the basis for the negotiations with the Council and Parliament that are scheduled to start in early 2021.”

The new regulatory framework, based on an approach that takes into account all risks to which insurers are exposed, has undeniably strengthened the resilience of the European insurance market. However, the prudential requirements imposed by Solvency II have a number of drawbacks, including being volatile and complex.

Mr François Villeroy de Galhau concludes: “My conclusion aims to be a conviction, one that I hope you will share: we are waging these battles collectively for the benefit of the insurance industry, which is a key player in the economy. We are also waging them to protect policyholders, who are one of the ACPR’s core responsibilities. And we are waging them to prepare for the future and to be able to make the massive investments that will be necessary. Beyond the issue of low rates, therefore, insurance has an essential role to play in this world, which, more than just being “short-term”, is also undergoing major upheavals. A climate upheaval, first and foremost, and I welcome EIOPA’s “sustainable finance” group, cochaired by the ACPR, which will also modify Solvency II to take better account of climate-related risks in the governance and management of insurers’ risks.

“Second, a digital upheaval, which is completely transforming your activities and raising crucial questions about the protection of policyholders’ data, and about the rising threat of cyber risk and how to insure against it. Yes, this world really needs insurance.”

Full speech on BIS

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