An Overview of the Italian Insurance Market
Contributor: Nicolò Juvara
Firm: Molinari e Associati
In February 2021, based on the statistical data published by IVASS (the Italian insurance regulator) regarding Q3 of 2020, the Italian insurance market has shown a significant decrease (−6.5%) in the gross premium collection, compared to Q3 2019. The drop is more significant in the life sector (−8%) than in the non-life sector (−2.2%). Several aspects contributed to the slowdown of the industry, mainly:
a) the COVID-19 pandemic: the emergency measures taken by the Italian government to combat the spread of the virus have affected the insurance industry under several aspects:
- a general deterioration of the solvency position of the insurers, reflecting the performance of the financial markets in the first half of 2020 (with a sharp drop of the market value of many asset classes and a great volatility on Italian government bonds);
- a significant decline of the premium volumes collected through agents and banks, during the lock-down months, partially recovered in the following months after summer 2020;
- in the life sector, a sharp decrease of unit-linked products (due to a simultaneous increase in financial market volatility) and an increase in surrenders (due to a liquidity crisis among consumers); and
- in the non-life sector, a substantial decrease in the new business for motor insurance, partially compensated by a fall of the claims reporting activity (caused by the stop of the motor traffic);
b) the increasing digitalization process;
c) the competitive environment; and
d) the implementation of the Insurance Distribution Directive (EU) 2016/97 (IDD) and regulatory compliance with the corporate governance local rules in accordance with Solvency II regulations.
To give some numbers, as of 30 September 2020, the insurers and reinsurers authorized, and directly supervised, by IVASS are 99 (vs. 101 as at end 2019): these figures confirm the on-going consolidation process of the market, which started a few years ago.
Among such companies, 96 are national insurers, whilst only 3 are branches of non-EEA based carriers. In fact, over the past 10 years, there has been a gradual reduction of the number of national insurers, from 151 to 96, mainly due to the cost of the capital and own funds required by Solvency II regime.
As at the same date, 106 EU insurers are authorized to operate in Italy under the freedom of establishment regime, while more than a thousand are authorized under the freedom of services. Over the past 10 years, the number of insurers passported to Italy has become considerable, and whether this trend will continue after Brexit is to be verified in the near future. For the time being, in the past two years, Brexit has caused many international insurance groups to establish licensed subsidiaries in Continental Europe and relocate their EU business, including the Italian one, outside the UK.
As regards intermediaries, in 2020 the number of agents and brokers has been gradually dropping compared to the past, due the impact of the IDD, which proved to be particularly burdensome in terms of governance and conduct rules. Other distribution channels, such as banks, internet and innovative platforms, have become more and more active.
II. THE DEFINITIVE IMPLEMENTATION OF THE IDD
The IDD has produced a legal framework in which distribution is conceived not only from the market players’ perspective (insurers and intermediaries), but also and particularly with the aim of protecting consumers. Following the IDD implementation in the national legal framework, IVASS issued three regulations to:
- provide an organic framework for the distribution activity (Regulation no. 40/2018);
- establish a specific set of rules regarding pre-contractual obligations, including new standardized documents in addition to those provided for by the IDD (Regulation no. 41/2018); and
- set out specific provisions on insurance product oversight and governance requirements, similarly to those applicable to the banking industry (Regulation no. 45/2020, in force from 31/03/21). This regulation, issued in 2020, completes the Italian legal framework at regulatory level by implementing the rules under the EU Commission Delegated Regulation (EU) 2017/2358 supplementing the IDD. Regulation 45 governs in detail:
i) the approval and distribution processes to be adopted, respectively, by manufacturers and distributors; and
ii) specific rules for the approval and the distribution of IBIPs (investment based insurance products).
Within this framework, Regulation 45 also identifies – in compliance with EIOPA’s guidelines – the corporate bodies’ and functions’ duties in the product approval process and, for banks operating as insurance distributors, in the distribution process. It also sets out detailed rules to identify the Target Market, preventing distributors from selling products to customers who fall within the Negative Target Market or which, in the case of complex IBIPs, are not appropriate to customers following personalised advice; however, distributors are allowed to establish Effective Target Markets, specifying the perimeter set out by manufacturers. Furthermore, Regulation 45 requires manufacturers and distributors to agree upon reciprocal information flows, their modalities and frequency.
The domestic IDD-based framework has been completed by IVASS with another recent measure (Rule no. 97/2020), which covers the following main areas:
i) distributor’s pre-contractual information duties, so as to streamline operators’ obligations and simplify documents’ contents;
ii) D&Ns test: before the policy is taken out by the customer, distributors must always provide a suitability statement to customers confirming that the policy is consistent with customers’ demands and needs;
iii) conduct rules applicable to distributors when selling IBIPs, similarly to the approach set out by MiFID II for the distribution of financial products, including suitability and appropriateness verifications.
This further measure (in force from 31 March 2021) requires distributors to take further steps towards putting the customers’ needs at the centre of their business model: they will be no longer allowed to adopt a “comply-or-explain approach” thus, distributing insurance products that are not fully consistent with the customer’s D&Ns, even if the customer is informed of such inconsistency but declares to intend completing the purchase process.
III. SHAREHOLDER RIGHTS DIRECTIVE II AND ITS IMPLICATIONS FOR THE ITALIAN MARKET
The Shareholder Rights Directive II (SHRD II) aims to improve the governance of listed companies through a more intensive and transparent involvement of shareholders. The main objectives are:
i) to ensure that all investors are incentivized to participate in the life of the company in the long term;
ii) to facilitate the identification of shareholders through the intermediaries;
iii) to encourage transparency in investment strategy;
iv) to influence the remuneration of the company’s directors.
In this context, particular attention is paid to institutional investors, i.e., entities that regularly invest in listed companies, which are subject to special disclosure requirements towards the market. They mainly need to a) produce and publish an engagement policy, which describes how such investors monitor listed companies, exercise voting rights and other rights attached to shares, cooperate with other shareholders, and manage conflicts of interests; b) publicly disclose, on an annual basis, how their engagement policy has been implemented; and c) publicly disclose how the main elements of their equity investment strategy are consistent with their liabilities, in particular long-term liabilities, and how they contribute to the medium to long-term performance of their assets.
The companies authorized to carry out insurance and reinsurance activity in the life sector (together with pension funds) are by definition institutional investors for the purposes of the SHRD II.
The Italian legislator in transposing the SHRD II into Italian law, essentially in line with the provisions of the Directive, has also taken the opportunity to complete the implementation of Solvency II in relation to two aspects of corporate governance which were not entirely regulated by the previous legislation. In particular, the Italian Insurance Code has been amended to (i) reiterate the importance of companies adopting a remuneration policy that promotes sound and effective risk management and does not encourage risk taking that exceeds the risk tolerance of the insurers (although the remuneration issue is already fully regulated by IVASS Regulation no. 38/2018 on corporate governance); (ii) to establish fit and proper requirements of persons who effectively run the insurers or have the responsibility of key functions or have an interest in the share capital of insurers, in line with EU legislation and EIOPA recommendations.
IV. ANALYSIS OF INSURANCE PRODUCT TRENDS IN ITALY
The COVID-19 pandemic has accelerated the already on-going process of digital transformation in the insurance industry. To digitalize insurance offers, companies are either signing agreements with external providers, or investing directly in the creation of business incubators dedicated to the insurance sector.
There have been several initiatives aimed at helping the customer due to the spreading of the COVID-19 pandemic: MTPL has granted discounts at renewal; health insurance has granted extensions to certain professional categories such as healthcare professionals; and companies have provided specific indemnities to the employees of small and medium-sized enterprises.
In addition, new products have been launched in the mobility, home, cyber risk and health sector. The most interesting product concerns an insurer which has launched the first insurance service to defend the online reputation of companies and entrepreneurs.
It is too early to assess the impact of the pandemic on the Italian insurance market. However, it is very likely that the mobility restrictions will lead to a wider offer in the life and protection segments.