PORTUGAL: An Introduction to Insurance
Introduction
The data released by APS (the Portuguese Insurers Association) reveals a good year for the insurance industry, with 13.1 billion euros of written premiums in total for Life and Non-Life insurance business.
According to the information provided by the ASF (the Portuguese regulator), there was an overall growth of 34.2% in the production of direct insurance compared to the previous year. This growth was essentially driven by the Life insurance business, which showed a significant increase of 7%, while the Non-Life insurance business increased only 4.8%.
This increase in the Life insurance business was driven by a shift in the risk paradigm of the banking channel customers, who began to accept investing in products with no guarantee of return or of the capital invested, with a growth of 144.1% in unit linked life insurances. Retirement Savings Plans also recorded a growth of 61.2% in relation to the previous year, representing 24.7% of the Life insurance business.
Non-Life insurance business grew by approximately 257 million euros in comparison with the previous year, exceeding 5,622 million euros. The growth of 8.8% in the Sickness class should also be highlighted, whose relative weight reached 18.4%. Fire and Other Damage and Motor and Occupational Accidents also showed increases respectively of 5.8%, 1.3% and 6.6%. The structure of the Non-Life insurance portfolio did not undergo significant changes, with only the Motor insurance business falling 1.2%.
Overall, at the end of the 2021 financial year, the provisional net results of insurance undertakings under ASF prudential supervision exceeded 649 million euros. The provisional Solvency Capital Requirement (SCR) coverage ratio of all undertakings under ASF prudential supervision at the end of 2021 was 206.6%, an increase of 13.5% compared to the end of 2020.
Sanctioning Activity of the ASF
In 2021, the ASF initiated 45 new administrative offence proceedings and concluded 34.
Of the administrative offence proceedings concluded, 27 resulted in convictions, 6 of which corresponded to the application of serious, very serious and particularly serious administrative offences.
The total sum fines levied in administrative offence proceedings amounts to EUR 206,892.
Administrative offence proceedings covered the following subject matters: breaches of the framework governing occupational accident and occupational disease compensation (28), breach of the rules regarding the complaints book and the rules of the legal framework for Insurance or reinsurance mediation (1), and breaches of the provisions established in the legal framework on the taking-up and pursuit of the business of insurance and reinsurance activities (5).
COVID-19
The COVID-19 pandemic led to the application of multiple measures with an impact on the insurance market. Until 30 September 2021, an exceptional and temporary framework was in force establishing flexibility measures for insurance contracts, namely moratoria, reductions and fractioning of insurance premiums and the removal of automatic termination or non-extension in the event of default on premium payment. The framework resulted from the temporary decrease in insured risks due to the significant slowdown, or even suspension, of the insured persons’ activity, as well as the economic difficulties experienced by families due to the current COVID-19 pandemic crisis.
The exceptional and temporary framework applied to compulsory insurance and to insurance covering risks pertaining to the affected activities, such as professional or general liability insurance, occupational or personal accident insurance, compulsory sports insurance or assistance insurance, excluding large risks, life insurance, crop and livestock insurance.
This framework mitigated the effects of the pandemic on families, as well as on companies with turnover losses of approximately 40%, which performed activities that were suspended or whose respective establishments were closed. The aim was to maintain insurance contracts and the insurance activity, while reflecting the total or partial reduction of insured risks due to the pandemic crisis, with the ultimate goal of protecting families and the economy.
The agreement between the insurers and the insured in the application of the framework implied necessary conditions that were more favourable to the insured persons. It finally came to be subscribed by a significant number of insurance companies, demonstrating that in periods of crisis the principle "sacrifice today to enjoy the benefits tomorrow" prevails.
According to data provided by the ASF, in the period from 13 May 2020 to 30 September 2021, more than 12.7 million insurance contracts were covered by the framework establishing more favourable premium payments for the policyholder or, in the absence of an agreement, by the maintenance of a mandatory 60-day coverage, which corresponds to 86.4% of the cases in which the exceptional framework was applied. This framework was mostly applied to Motor insurance, which accounts for 61.1% of the cases. The evolution of the application of measures over this period showed a slowing trend in the number of cases.
Regulation of the legal framework governing Insurance and Reinsurance Distribution
In 2021, the ASF regulation on the legal framework governing Insurance and Reinsurance Distribution came into force. The new ASF regulatory standard establishes the requirements applicable to the new ancillary insurance intermediary category, the revision of the procedures applicable to the assessment of suitability and control of qualifying holdings, as well as the implementation of the applicable duties concerning the treatment policy of policyholders, insured persons, beneficiaries and injured third parties and complaint management.
With the introduction of the Legal Framework governing Insurance and Reinsurance Distribution in 2019 and the regulation on appropriate qualification, training and continuous professional development of the same year, the qualification requirements have become more demanding. Many insurance intermediaries, namely tied intermediaries, who have been placed into the ancillary insurance intermediary category, were required to attend courses in order to obtain the appropriate qualification.
The new rule also sought to overcome the dispersion among various regulatory instruments of normative provisions governing insurance, reinsurance and ancillary insurance intermediaries. A vast set of matters have now been concentrated in a single regulatory rule, such as the definition of the minimum conditions of the professional liability insurance to be subscribed by insurance, reinsurance and ancillary insurance intermediaries and their financial reporting.
The lack of professional civil liability insurance and the new requirements for compliance with qualification and training largely led to the cancellation of the registration of intermediaries with the ASF. 4,550 registrations were cancelled, corresponding to an increase of 250% compared to the previous year. Such cancellations had the effect of automatically transferring the rights and duties regarding the contracts in which the insurance intermediary was involved to the respective insurance undertakings.
Acquisitions and increases of qualifying holdings
An adjustment of the existing framework was required following the European Supervisory Authorities’ Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the banking, insurance and securities sectors, which clarified the procedural rules and criteria for the prudential assessment of acquisitions and increases of qualifying holdings in financial sector entities.
The ASF was responsible for issuing a regulatory standard establishing the criteria for verifying the existence of qualifying holdings by acting in concert or through indirect shareholdings.
It also defined the elements and information that must be included in the prior notification of plans to acquire, increase or reduce a qualifying holding in an insurance or reinsurance company or pension fund management company and the communication of the formation of encumbrances or charges on qualifying holdings in an insurance or reinsurance company and a pension fund management company.
Challenges and trends
Cyber risks
Cyber security is receiving increased attention as a growing risk, as highlighted in World Economic Forum’s Global Risk Report 2022.
Portugal confirms the trend of an increase in cyber-attacks, particularly on a multinational mobile operator, affecting around 4 million people in various sectors (namely, banking and civil protection). This is expected to foster the demand for cyber risk insurance.
InsurTech
There has been an increase of partnerships between insurers and InsurTechs, with the aim of creating customised processes and offers that meet the specific needs of today’s buyer/client, adapting according to new trends.
However, the definition of regulatory requirements for the implementation of technological innovations cannot be neglected. Therefore, it is important to promote the dialogue with the financial system's supervisory authorities.
In July 2018, the Bank of Portugal (the central bank of Portugal), the CMVM (the Portuguese Securities Market Commission), the ASF and the Portugal Fintech Association created "Portugal FinLab - where regulation meets innovation", a platform which aims to develop the FinTech, InsurTech and RegTech ecosystem in Portugal, establishing a communication channel between regulators and companies that is efficient and geared towards innovative projects. According to the ASF, Portugal FinLab is also very important for the supervisory authorities themselves, inter alia for the pursuit of functions such as market monitoring and knowledge, consumer protection and anticipation of issues impacting their regulatory perimeter.
The creation of this platform with the involvement of the ASF demonstrates the Portuguese market's opening and receptiveness to technology and innovation in the insurance industry. This is one example of the many initiatives that have been developed in Portugal, anticipating a growth in the InsurTech industry.
Artificial Intelligence
In June 2021, EIOPA (the European Insurance and Occupational Pensions Authority) published a report from its Consultative Expert Group on Digital Ethics in insurance setting out a series of Artificial Intelligence (AI) governance principles for ethical and trusted AI in the European insurance sector.
The report builds on recent international and EU developments in the area of digitalisation and artificial intelligence, highlighting the proliferation of artificial intelligence in insurance. Three of the main advantages of AI are to enable insurance companies to carry out more granular risk assessments and pricing practices, to increase efficiency in claims management processes, and to increase effectiveness in the fight against fraud more effectively. However, ensuring fairness, non-discrimination and transparency are challenges that need to be addressed.
The report aims to assist insurance companies in implementing risk-based and proportionate measures by providing guidance on how to implement key principles in practice throughout the lifecycle of an AI application.
Portugal has yet to implement a regulatory framework governing AI. Therefore, soft law such as the EIOPA report is to be welcomed, and it might be used as a basis for future policy and/or legislative initiatives.
Environmental Social and Governance
Stakeholder demands with respect to environmental, social and governance issues are growing and the insurance industry does not escape these concerns.
The implementation of ESG principles in the investment processes and in products and services, increasingly including corporate social responsibility, is on the agenda.
How insurers manage their business when faced with these risks will impact their competitiveness, climate-related disputes exposure and the reputation level in the marketplace. The company culture and the ability to attract and retain talent are also expected to be affected by the implementation (or its lack) of ESG principles.
In light of the growing and unavoidable importance of the topic of climate change and sustainable finance, the ASF is continuing to develop initiatives in this field. In February 2022, it published a study analysing the environmental dimension and the application of ESG ratings to the insurance sector’s investment portfolio in Portugal. It was found that a majority proportion of the climate risk exposure is allocated to polluting underlying assets/technologies, with ¾ of the pool of insurance entities included in the sample showing a minority green exposure.
The APS considers the subject of climate change and the transition to a green and low carbon economy to be a priority, not only at the level of the insurance companies' capacity as risk managers, but also as institutional investors and underwriters. There is still a long way to go as far as the insurance sector’s alignment is concerned. Particularly in terms of the exposure of its investment portfolios, the conditions inherent to a sustainable transition and the low carbon paradigm, and the ASF emphasises the importance of adopting an active attitude and greater degree of dynamism in this regard.