Speech by Krystian Wiercioch, Deputy Chair of the KNF, opening the 11th PIU Congress in Sopot The speech is available at: https://www.youtube.com/watch?v=7Rkp4FY8HCA.

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Ladies and gentlemen,

first of all, I would like to thank the PIU for the invitation and the opportunity to speak at the already 11th PIU Congress. I’m happy I can participate in this event in person, as a representative of the financial supervision authority. Both today’s and tomorrow’s panels include speeches that will be delivered by my colleagues from the KNF Office. An opportunity to have an open discussion and exchange opinions is a great value of this meeting. 

We’re celebrating 20 years of Poland’s membership of the European Union and that naturally provokes a reflection on what the insurance market in Poland looked like the day before the accession and what it looks like today. It’s also natural to ask how the Polish insurance sector has used those past 20 years to build a competitive advantage and seize the opportunities offered by the European Union. 

In my speech, I’m going to refer to insurance products, Poland’s membership of the European Union, and the latest topics related to the insurance market and the supervision authority. As in previous years, I’d like to share our plans and point to the matters that are going to be of importance to the KNF and to you in the nearest future.

Sector’s stability

With regard to the main task of the KNF, which is to ensure the stability and solvency of the financial sector, let me summarise the current state of the market in terms of performance and solvency.

The financial statements of insurance undertakings confirm, and this is good news, that all KNF-supervised insurance undertakings meet the solvency requirements, which means they hold own funds in an amount exceeding the level set by the solvency capital requirement. It doesn’t mean, though, that we can forget about that basic requirement. Solvency shouldn’t be taken for granted; it should be secured and taken care of at the level of each insurance undertaking and reinsurance undertaking. Especially when the sector is exposed to so many risks that require monitoring and proper management.

Each year, in cooperation with the market, we successfully identify the current risks and prepare scenarios that allow us to test the preparedness of each insurance undertaking for the consequences of risk materialisation. The test results allow us to prepare ourselves in terms of capital and organisational arrangements. 

This year, we have focused on testing the risk of climate change in a multi-annual perspective by introducing new scenarios. The consequences of climate change are to be an important issue for insurance undertakings in upcoming years due to a possible increase in the occurrence of catastrophic events in the territory of Poland. The lack of appropriate historical data makes it difficult to properly estimate the impact of climate changes on the financial standing and any capital needs of insurance undertakings on a multi-annual basis. 

One shouldn’t forget about the risk that may arise for the insurance sector from an inappropriate approach to managing relations with customers. Relations with customers used to generate material risks for the insurance sector in the past, for example in the context of unit-linked insurance or damages under a motor third-party liability insurance contract. The risk has materialised in the banking sector for loans in Swiss francs, generating huge financial and social costs, which means that the prudent approach to managing relations with the insured and beneficiaries should remain a priority for both each insurance undertaking and the PIU. 

Remaining close to the topic of stability of the insurance sector, I’d like to mention the results generated by it. 

The good news is that at year end the sector generated a positive financial result of PLN 9.5 billion. The result is higher than the result for 2022. Although for most classes of insurance the sector is making technical profits, we notice a growing scratch when it comes to performance in terms of motor third-party liability insurance. At year end, the sector as a whole recorded a loss. 

For the past few years, we’ve drawn your attention to factors that cause an increase in the costs of compensation and benefits and to the need to take actions aimed at balancing the revenue and the expenditure. The sector can’t afford a situation where any line of business is permanently unprofitable. For entities making a loss in particular segments of insurance products permanently, today we don’t accept explanations that someone is surprised by the current situation and they couldn’t anticipate it. A loss is often a consequence of many years of negligence in management and failure to make decisions to adjust the level of insurance premiums to the anticipated level of compensation and benefits to be paid, and to the costs of the business.

20 years of Poland’s presence in the European Union

During the 20 years of Poland’s membership of the EU, the Polish economy has captured undisputed economic and social benefits, as confirmed by basic macroeconomic indicators. From 2004 to 2022, Poland’s GDP per capita by purchasing power parity increased by nearly 100%. 

There’s a reason why I mention this, because an increase in wealth of our society after joining the EU also created favourable conditions for the development of insurance products and an opportunity for reducing the insurance protection gap – a topic often discussed within the industry. 

The OECD’s international statistics show that in 2003 Poles spent 2.9% of the GDP on insurance and in 2008 the expenditure reached its historical peak, i.e. 4.6% of the GDP. However, at the end of 2022 the rate was already 2.2% and was one of the lowest among all EU countries. The 4.5% median of that rate in the EU is a clear sign that the room for insurance development in Poland is enormous. We need a joint reflection on why Poles are not interested in insurance on a wider scale and we need to prepare a strategy for insurance development in Poland. The strategy would aim to raise the revenue from insurance premiums and reduce the insurance protection gap. 

When building the insurance development strategy, it’s worth drawing on the conclusions from the studies and reviews conducted by EIOPA to explore the issue of protection gap for catastrophic insurance. As a result of that work, several barriers and factors have been identified at the EU level that may negatively affect the willingness of households to buy insurance. Some of the barriers could be eliminated by the insurance sector itself, for example with new clear standard terms and conditions of the most popular insurance contracts and through the simplification of the process of concluding such contracts. 

Our presence in the EU has allowed Polish insurance undertakings to enter markets in other European countries. The Solvency II regime has established uniform standards for insurance undertakings in all EU countries. It ensures comparability by assessment of financial standing, solvency. The EU principle of freedom of establishment and freedom to provide services allows the offering of insurance services in all EU countries based on an authorisation to carry out the business of insurance issued in any EU country. According to available data for 2022, Polish insurance undertakings benefited from that opportunity on a moderate scale, acquiring an insurance premium at PLN 284 million, which accounted for 0.4% of their total insurance premium. 

The actions of EU authorities are often aimed at harmonising the existing standards or introducing new ones. In regulation, this is done with EU directives, i.e. acts indicating a legal framework that can be adapted to the Polish specificity, or with EU regulations, providing for specific solutions for all EU countries.

In both cases the insurance sector can have an influence on the new regulatory regime. This requires, first of all, cooperation between all entities and institutions in the insurance sector, coming up with a joint position and speaking with one voice. Secondly, the sector has to be open to solutions that are inevitable and to an attempt to shape those solutions so that they can best fit in the Polish reality. Questioning and trying to block new solutions usually ends with failure, and the winners are those who are active, flexible and open to change. 

Approach to the customer 

One of the areas of work and priorities of the EU authorities is the enhancement of consumer protection. Considering its mandate, the KNF is also actively interested in this topic and pursues an agenda that aims to find solutions that materially mitigate the risk related to an inappropriate approach to the customer. The solutions I’m referring to are connected to the manufacture and distribution of insurance products and the performance of obligations under an actual contract. 

Each of those phases of the product’s life cycle requires that the customer’s best interest is taken into account. 

With regard to the manufacture of the product, we point to the requirement that the product should be designed in a way that provides value for money and achieves the objectives of the insurance. For Section II insurance, the objective of the insurance is to protect the customer’s property against loss. In order for those objectives to be best fulfilled, the contract should provide for the widest possible coverage, a minimum scope of exemptions and the sum insured that corresponds to the value of a possible loss. However, provisions of law do not specify any standards for a contract of insurance other than compulsory insurance. There also appear to be no detailed sector-specific standards. 

The KNF Office’s work on the Recommendation on insurance distribution focuses on indicating the minimum value for money for each type of insurance, with the aim to eliminate products that offer no value for money. 

As regards the performance of obligations under a contract of insurance, the KNF Office makes efforts to introduce standards that will allow the determination of the amount of compensation in a manner that is predicable both to the insurance undertaking and the injured party. The cooperation within the insurance industry and the understanding of the need for uniform standards is the key. We should try to minimise the incidence of cases where such standards are set by courts, beyond the control of the insurance sector. Awaiting further resolutions of the Supreme Court, the market remains uncertain as to the future outcome. This generates materials risks to both the valuation of obligations under the existing insurance contracts and the valuation of future obligations.

Clear transparent standards defining the type and scope of assistance each insurance undertaking should offer to the injured party build the confidence in the insurance industry. 

Plans 

Now let me say a few words about the projects that are soon to be carried out by both the KNF Office and the insurance sector. 

1 April 2024 was the date of entry into force of Recommendations for insurance undertakings on the assessment of suitability of life insurance with an investment component. We’re reviewing the ‘comply or explain’ statements that have been submitted. The statements are available on the KNF website. In the next step, we’re going to carry out an assessment of adaptation to the recommendations. 

I’ve mentioned the ongoing work on the Recommendation on insurance distribution. The internal work is nearly done, we’re soon taking the draft to the consultation stage and we look forward to your active participation. We’re also working on a formula under which we will share our observations on insurance distribution with the agents and brokers. 

We’re introducing a new supervisory approach to the review of customer service practices. We’re reviewing reports from policyholders, the insured and the beneficiaries under insurance contracts and we’re engaging in dialogue with various insurance undertakings. It is my wish that the process on our part is as transparent and effective as it can be, so that, on one hand, it is in line with our supervisory objectives but, on the other hand, it doesn’t consume the resources of the supervisor and each insurance undertaking too much. For that reason in the second half of this year we’re planning to invite your representatives to a meeting at which we’re going to give you an overview of our approach and ask for your comments and suggestions. 

This year we’re planning to start analysing the insurance protection gap in Poland, in particular in relation to catastrophe risks that are specific to the Polish market. When preparing the study, we’re going to use the lessons learned as part of the cooperation with EIOPA, particularly the measures that have been prepared to assess the insurance protection gap. We’re going to review the data concerning the current scope of insurance contracts and the data on natural disasters in Poland. The final result of our work will be a set of gaps and barriers in the development of catastrophic insurance. 

We’re working closely with statutory auditors to audit the solvency and financial condition reports and financial statements. With that cooperation, we want to eliminate as many irregularities as possible and draw the auditors’ attention to the risks the supervision authority identifies as part of its ongoing supervision activities. High quality of insurance undertakings’ financial statements is of vital importance not only to the supervision authority but also to the users of the services offered by insurance undertakings. 

Legislative work is under way on a Regulation on specific rules for investing the assets under insurance contracts under which the investment risk is borne by the policyholder. The initiative has been submitted to the Ministry of Finance by the supervision authority. The goal was to improve the protection of customers of insurance undertakings by equating the principles of insurance undertakings’ investment policy in relation to the funds for customer risk with the principles applicable to open-end investment funds – equating the principles considering the specific nature of the business carried on by insurance undertakings with the applicable provisions of the sector-specific law. The proposal that is being consulted on already implements those objectives, so the discussion should involve very careful introduction of changes, so that the objectives can be maintained.

For proposals for official positions that are being prepared by the KNF Office, we would like you to engage in the process. Last year we adopted an approach involving a working consultation on proposals for positions to be conducted with the market. Similar consultations have taken place for the purpose of the Position on the management of risk associated with investing the assets of unit-linked funds in contingent convertibles and in other assets whose value depends on the value of contingent convertibles, Position of the KNF on the uniform rules for applying point 20 of Recommendation U, and Position of the KNF on outsourcing. 

Positions of the KNF indicate how the supervision authority interprets regulatory requirements. We conduct consultations on draft positions because we want you to submit comments aimed at improving the wording so as to avoid disputes over the meaning of specific requirements at the stage of implementation of the relevant solutions.

To close my remarks today, I wish you inspiring talks and panel discussions, including those involving representatives of the KNF Office. The panel dedicated to regulatory cycle will feature the Chair of the KNF, Prof. Jacek Jastrzębski, and the panel dedicated to the regulatory framework for compensation – Sławomir Pomarański, Director of the Insurance Inspection Department. If you want to chat with us, we remain at your disposal during the breaks and at any other time for unofficial casual talks.

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