Insurance Companies in the World of Old Age Provisioning Eureko conference (30 November 2007)

1. Insurance Companies in the World of Old Age ProvisioningEureko conference (30 November 2007) Michaela Koller Director CEA

2. About CEA • European Insurance and Re-Insurance Federation • Brussels-based, founded in 1953 • Committed to the creation of a favourable regulatory framework for European insurers and re-insurers • Active at European and International level 2

3. About CEA • Through its 33 member bodies, the national insurance associations, CEA represents all types of insurance and reinsurance undertakings, e.g. pan-European companies, monoliners, mutuals or SMEs • In all CEA represents 94% of total European insurance premiums   3

4. CEA’s Member Associations Source CEA 33 National Member Associations: 27 EU Member States + 6 Non-EU Markets Switzerland, Iceland, Norway, Turkey, Liechtenstein, Croatia 3 Observers Russia Ukraine AISAM Source CEA

5. Content • World of Life Insurers – Society in Motion • Old Age Provisioning • Current Challenges

6. World of Life Insurers Society in Move

7. Economy and markets Consumer and Society Science and Technology Legal order World around us Consumer preferences & financial education Macroeconomic environment & globalization Gender, age, disability etc. non-discrimination Taxes Demography Insurance products Financial markets Social Services of General Interest Contract & insurance law Biometrics Medical progress Accounting & solvency Data protection Etc.

8. Population above age of 65 (2000 & 2015) 2015 2000 Source: Global Health Facts

9. Dependency ratio (under 15 + above 65) (2000 & 2015) 2050 EU (25) EU working population to decline by 67 mil. Dependency ratio 76,5% (Eurostat, 2005) 2050 Source: Global Health Facts

10. EU population (2050) Financial means Financial means and care Source: Global Health Facts

11. Old Age Provisioning Old Age Provisioning

12. 3 pillars • 1st pillar • benefits paid out by public schemes are in most of Member States related to the career and the level of earning (Defined Benefit schemes) • but some Member States (IT, SWE) are paying pension revenues according to the principle of Defined Contribution schemes • some Member States also privatised (to some extent) the first pillar (FIN, POL, SK and 2 months ago RO)

13. 1st pillar and public debt EMU: Stability and Convergence Programme • Long-term sustainability of public finances • Projections on age-related expenditures • Pensions impacts most decisive (more than health, long-term care etc. related expenditures) • 2000 – 2050 • EU average growth 4%, • but ES, CZ, L, PT, CY, HU or IE more than 7% • Without a change: in 2050 MS(27) public debt = 200% EU(27) GDP (see Maastricht criteria: public debt - 60% GDP, budget deficit – 3% GDP)

14. Less contributions Contribution & Pay-out Phase Problems • Effective retirement age • 1960s: 60+ yrs, • 1970s: 60 yrs, • since 1980s: but still less than in 1960s • Increase in the age of entering the labour market • starting education late, • education long, • [military service etc] etc.

15. And again demographics Growth of life expectancy at the age of 60

16. Peak of EU-wide pension spending Source: CEA, 2007, preliminary results, 84% CEA population

17. Gross replacement ratesDecline in most of EU statutory schemes Now • LUX more than 100%; • AT, HU, IT, SP some 75%; • F, ICE, NO, SK some 50%; or • IRL - average earning. Source: Stylised illustration from 2006 Current and Prospective Theoretical Pension Replacement Rates by Indicators SubGroup (ISG) of the Social Protection Committee (SPC) and OECD Pensions Models. Percentage of the average salary

18. Solutions?Commission: Structural and macroeconomic reforms Commission(Open Method of Co-ordination on Pensions, i.e.“Joint Report on Pensions”)? • Reduce Public Debts • Labour Market Reform • higher employment rates – work longer (Lisbon Agenda: 50% of 55-64yrs + 5yrs more of active work); and more women?; flexicurity? • Statutory Pension Systems Reform • adaptability to structural changes • minimum pensions and solidarity idea • private pensions complementing public PAYGs ones

19. Solutions?Awareness raising! • Financial Literacy & Pension Calculators • Insurance Associations • GER: GDV “Rentenrechner” • IRL: Insurance Federation “Pension Calculator” • Insurance Associations and other stakeholders • UK: ABI and FSA “Pension Calculator” • NL: Verbond van Verzekeraars et al “Pensioencalculator“ • SWE: Insurance Assoc. et al “Minpension” • State/Public Sector itself (as to 1st pillar only) • GR: Two Pension Calculators, i.e. for Private and Public Sector • BEL: “Ken uwpensioen”

20. Solutions?2nd and 3rd pillar private provisioning • 2nd Pillar: Pension Funds: IORPs and non-IORPs • 3rd Pillar: • Life Insurers; but also savings products by - • Banks; • Public debt, structured products and other complex financial products etc.; or • UCITS and non-UCITS (UCITS, private equity, hedge funds, money market and mixed investment funds etc.) etc.

21. Current distribution across the pillars Total premium income Source: CEA, The role of insurance in the provision of pension revenue (2007), 84% of CEA population, in bn €

22. Current Challenges Facing Current Challenges

23. Challenges in 2nd pillar (I) • 2nd Pillar: IORPs • Review of IORP Directive in 2008 • Cross-border (CEIOPS (Jan. 2007): some 50 cases only) – does it really work properly (Article 20)? – threat of regulatory/supervisory arbitrage? • Social and labour law & information rules – what to disclose? – when to disclose?

24. Challenges in 2nd pillar (II) […] Review of IORP Directive in 2008 • Are also – investment rules; – ring-fencing spread across the Directive; and – risk capital clear enough? • Now only 3 infringement procedures for incorrect transposition • Solvency I (exemptions & transition up to 2010) • Solvency II (level playing field issue) when IORPs offer same or similar products as life insurers

25. Challenges in 3rd pillar & distribution (I)Top 20 financial services players by market capitalisation 1998 2006 Rank Company Coun-try Mkt. cap ($bn.) Rank Company Coun-try Mkt. cap* ($bn.) 1 1 AIG US 82 Citigroup US 239 2 Allianz GE 74 2 Bank of America US 212 3 Fannie Mae US 66 3 HSBC UK 190 4 Lloyds TSB Group UK 60 4 AIG US 172 5 Nationsbank Group US 51 Mitsubishi UFJ Fin JP 156 5 6 First Union Corp US 51 6 JP Morgan Chase US 145 7 HSBC Holdings UK 48 7 Berkshire Hath. US 139 8 Aegon NL 45 8 UBS CH 119 9 Travelers Group Inc US 43 9 Wells Fargo US 107 RBS UK 103 10 Citigroup US 42 10 Mizuho Financial JP 98 11 ING Group NL 42 11 12 Munich Re GE 41 12 Al Rahji S-A 91 13 UBS CH 41 13 Santander SP 91 Wachovia US 88 14 Bankamerica Corp US 41 14 15 ZFS CH 39 15 ING NL 87 Sumitomo Mitsui JP 82 16 Chase Manhattan US 37 16 BNP Paribas F 78 17 AmEx US 36 17 18 Allstate Corp US 35 18 Barclays UK 76 19 Fed Home Loan US 34 19 Unicredito I 75 20 Generali I 33 20 Merrill Lynch US 75 Companies with major insurance activities * Market cap as of 3/31/2006 Source: MR Economic Research

26. Challenges in 3rd pillar & distribution (II)Point-of-sale regulation (I)? 3rd Pillar – To be substitute or not to be substitute • Two studies tendered and 2006 White Paper on UCITS: UL and UCITS are different • But now “Call for evidence” as to whether UL, some annuities and UCITS are so-called “substitutes” (not real substitutes) • No EU-wide empiric and microeconomic evidence as to their interchangeability

27. Challenges in 3rd pillar & distribution (III)Point-of-sale regulation (II)? UL and UCITS – we are comparing “apples with pears” • Yes! See White Paper on UCITS (November 2006) • Why? • Prudential and regulatory framework (own funds) • Life cover • Ownership

28. Challenges in 3rd pillar and distribution (IV)Current EU regulatory framework UL and UCITS – distribution • Reflections • IMD review in 2008 – implementation varies widely as Member States make use of discretionary powers • Pending DMD review • Pending belated MiFID implementations, i.e. • Disclosures • Inducement • Information requirements

29. Challenges in 3rd pillar & distribution (V)Point-of-sale regulation (III)? UL and UCITS – distribution EC now: point-of-sale regulation horizontally for selected financial markets products • And what about others, i.e. • pension funds? • health/sickness funds/mutualities? • hedge funds? • state bonds etc.?

30. Challenges in 3rd pillar (VIII)Social services of general interest (SSGI) Social Services of General Interest (SSGI) • Evidence of non-level playing field when SSGI providers offer life (but also health and accident) insurance products beyond the scope of their statutory and solidarity-based services

31. Challenges in 3rd pillar (IX)SSGI – examples of distortions Examples of Non-Level Playing Field Across EU by SSGI Providers • Competition law does not apply (no problems with sharing the information vs. limitations under BER) • Insurance prudential and supervision rules do not apply • Consumer protection laws do not apply • Transparency requirements as to financial relations with the Member State is not imposed • No Chinese Walls between the solidarity and economic activities built • Public procurement laws do not apply

32. Concluding remarks • Need more information on current products offered in the markets • Need clarification on definitions we use • Need - based on sound evidence - to assure level playing field between substitute products

33. For more information www.cea.assur.org