Digitalisation

EIOPA’S DIGITAL TRANSFORMATION STRATEGIC PRIORITIES AND OBJECTIVES

EIOPA’s supervisory and regulatory activities are always underpinned by two overarching objectives:
promoting consumer protection and financial stability. The digital transformation strategy aims at
identifying areas where, in view of these overarching objectives, EIOPA can best commit its
resources in view of the challenges posed by digitalisation, while at the same time seeking to
identify and remove undue barriers that limit the benefits.

This strategy sits alongside EIOPA’s other forward thinking prioritisation tools –

• the union-wide strategic supervisory priorities,
• the Strategy on Cyber Underwriting,
• the Suptech Strategy

– but its focus is less on the specific actions needed in different areas, and more on how EIOPA will support NCAs and the pensions and insurance sectors in facing digital transformations following a

• technologically-neutral,
• future-proof,
• ethical
• and secure approach

to financial innovation and digitalisation.

Five key long-term priorities have been identified, which will guide EIOPA’s contributions on
digitalisation topics:

1. Leveraging on the development of a sound European data ecosystem
2. Preparing for an increase of Artificial Intelligence while focusing on financial inclusion
3. Ensuring a forward looking approach to financial stability and resilience
4. Realising the benefits of the European single market
5. Enhancing the supervisory capabilities of EIOPA and NCAs.
   

These five long-term priorities are described in the following sections. Each relates to areas where
work is already underway or planned, whether at national or European level, by EIOPA or other
European bodies.

The aim is to focus on priority areas where EIOPA can add value so as to enhance synergies and
improve overall convergence and efficiency in our response as a supervisory community to the
digital transformation.

LEVERAGING ON THE DEVELOPMENT OF A SOUND EUROPEAN DATA ECO-SYSTEM
ACCOMPANYING THE DEVELOPMENT OF AN OPEN FINANCE AND OPEN INSURANCE FRAMEWORK
Trends in the market show that the exchange of both personal and non-personal data through
Application Programming Interfaces (APIs) is a leading factor leading to transformation and
integration in the financial sector. By enabling several stakeholders to “plug” to an API to have access
to timely and standardised data, insurance undertakings in collaboration with other service providers can timely and adequately assess the needs of consumers and develop innovative and convenient proposals for them. Indeed, there are multiple types of use cases that can be developed as a result of enhanced accessing and sharing of data in insurance.

Examples of potential use cases include pension tracking systems (see further below), public and
private comparison websites, or different forms of embedding insurance (including micro
insurances) in the channels of other actors (retailers, airlines, car sharing applications, etc.).

Another use case could consist in allowing consumers to conveniently access information about their
insurance products from different providers in an integrated platform / application and identify any
protection gaps (or overlaps) in coverage that they may have.

In addition to having access to a greater variety of products and services and enabling consumers
to make more informed decisions, the transfer of insurance-related data seamlessly from one
provider to another in real-time (data portability) could facilitate switching and enhance
competition in the market.

Supervisory authorities could also potentially connect into the relevant APIs to access anonymised market data so as to develop more pre-emptive and evidence-based supervision and regulation.

However, it is also important to take into account relevant risks such those linked to data

• quality,
• breaches
• and misuse.

ICT/cyber risks and financial inclusion risks are also relevant, as well as issues related to a level playing field and data reciprocity.

EIOPA considers that, if the risks are handled right, several open insurance use cases can have
significant benefits for consumers, for the sector and its supervision and will use the findings of
its recent public consultation on this topic to collaborate with the European Commission on the
development of the financial data space and/or open finance initiatives respectively foreseen in
the Commission’s Data Strategy and Digital Finance Strategy, possibly focusing on specific use
cases.

ADVISING ON THE DEVELOPMENT OF PENSIONS DATA TRACKING SYSTEMS IN THE EU
European public pension systems are facing the dual challenge of remaining financially sustainable
in an aging society and being able to provide Europeans with an adequate income in retirement.
Hence, the relevance of supplementary occupational and personal pension systems is increasing.
The latter are also seeing a major trend influenced by the low interest environment consisting on
the shift from Defined Benefit (DB) plans, which guarantee citizens a certain income after
retirement, to Defined Contribution (DC) plans, where retirement income depends on how the
accumulated contributions have been invested. As a consequence of these developments, more
responsibility and financial risks are placed on individual citizens for planning for their income after
retirement.

In this context, Pensions Tracking Systems (PTS) can provide simple and understandable information
to the average citizen about his or her pension savings in an aggregated manner, typically
conveniently accessible via digital channels. PTS are linked to the concept of Open Finance, since
different providers of statutory and private pensions share pension data in a standardised manner
so that it can be aggregated so as to provide consumers with relevant information for adopting
informed decisions about their retirement planning.

EIOPA considers that it is increasingly important to provide consumers with adequate information
to make informed decisions about their retirement planning, as it is reflected in EIOPA’s technical
advice to the European Commission on best practices for the development of Pension Tracking
Systems. EIOPA remains ready to further assist on this area, as relevant.

TRANSITIONING TOWARDS A SUSTAINABLE ECONOMY WITH THE HELP OF DATA AND TECHNOLOGY
Technologies such as

• AI,
• Blockchain,
• or the Internet of Things

can assist European insurance undertakings and pension schemes in the implementation of more sustainable business models and investments.

For example, greater insights provided by new datasets (e.g. satellite images or images taken by drones) combined with more granular AI systems may allow to better assess climate change-related risks and provide advanced insurance coverage. Indeed, as highlighted by the Commission’s strategy on adaptation to climate change, actions aimed to adapt to climate change should be informed by more and better data on climate-related risks and losses accessible to everyone as well as relevant risks assessment tools.

This would allow insurance undertakings to contribute to a wider inclusion by incentivising
customers to mitigate risks via policies whose pricing and contractual terms are based on effective
measurements, e.g. with the use of telematics-based solutions in home insurance. However, there
are also concerns about the impact on the affordability and availability of insurance for certain
consumers (e.g. consumers living in areas highly exposed to flooding) as well as regarding the
environmental impact of some technologies, notably concerning the energy consumption of certain
data centres and crypto-assets.

Promoting a sustainable economy is a core priority for EIOPA. For this purpose, EIOPA will
specifically develop a Sustainable Finance Action Plan highlighting, among other things, the
importance of improving the accessibility and availability of data and models on climate-related
risks and insured losses and the role that EIOPA can play therein, as highlighted by the
Commission’s strategy on adaptation to climate change and in line with the Green deal data space
foreseen in the Commission’s Data Strategy.

PREPARING FOR AN INCREASE OF ARTIFICIAL INTELLIGENCE WHILE FOCUSING ON FINANCIAL INCLUSION
TOWARDS AN ETHICAL AND TRUSWORTHY ARTIFICIAL INTELLIGENCE IN THE EUROPEAN INSURANCE SECTOR
The take-up of AI in all the areas of the insurance value chain raises specific opportunities and
challenges; the variety of use cases is fast moving, while the technical, ethical and supervisory issues
thrown up in ensuring appropriate governance, oversight, and transparency are wide ranging.
Indeed, while the benefits of AI in terms of prediction accuracy, cost efficiency and automation are
very relevant, the challenges raised by

• the limited explainability of some AI systems
• and the potential impact on some AI use cases on the fair treatment of consumers and the financial inclusion of vulnerable consumers and protected classes

is also significant.

PROMOTING FINANCIAL INCLUSION IN THE DIGITAL AGE
On the one hand, new technologies and business models could be used to improve the financial
inclusion of European citizens. For example, young drivers using telematics devices installed in their
cars or diabetes patients using health wearable devices reportedly have access to more affordable
insurance products. In addition to the incentives arising from advanced risk-based pricing, insurance
undertakings could provide consumers loss prevention / risk mitigation services (e.g. suggestions to
drive safely or to adopt healthier lifestyles) to help them understand and mitigate their risk
exposure.

From a different perspective, digital communication channels, new identity solutions and
onboarding options could also facilitate access to insurance to certain customer segments.
On the other hand, certain categories of consumers or consumers not willing to share personal data
could encounter difficulties in accessing affordable insurance as a result of more granular risk
assessments. This would be for instance the case of consumers having difficulties to access
affordable flood insurance as a result detailed risk-based pricing enabled by satellite imagery
processed by AI systems. In addition,

• other groups of potentially vulnerable consumers deserve special attention due to their personal characteristics (e.g. elderly people or in poverty),
• life-time events (e.g. car accident),
• health conditions (e.g. undergoing therapy)
• or people with difficulties to access digital services.

Furthermore, the trend towards increasingly data-driven business models can be compromised if adequate governance measures are not put in place to deal with biases in datasets used in order to avoid discriminatory outcomes.

EIOPA will assess the topic of financial inclusion from a broader perspective i.e. not only from a
digitalisation angle, seeking to promote the fair and ethical treatment of consumers, in particular
in front-desk applications and in insurance lines of businesses that are particularly important due
to their social impact.

EIOPA will routinely assess its consumer protection supervisory and policy work in view of
impacts on financial inclusion, and ensuring its work on digitalisation takes into account
accessibility or inclusion impacts.

ENSURING A FORWARD LOOKING APPROACH TO FINANCIAL STABILITY AND RESILIENCE
ENSURING A RESILIENT AND SECURE DIGITALISATION
Similar to other sectors of the economy, incumbent undertakings as well as InsurTech start-ups
increasingly rely on information and communication technology (ICT) systems in the provision of
insurance and pensions services. Among other benefits, the increasing adoption of innovative ICT
allow undertakings to implement more efficient processes and reduce operational costs, enable
data tracking and data backups in case of incidents, as well as greater accessibility and collaboration
within the organisation (e.g. via cloud computing systems).

However, undertakings’ operations are also increasingly vulnerable to ICT security incidents,
including cyberattacks. Furthermore, the complexity of some ICT or a different governance applied
to new technologies (e.g. cloud computing) is increasing as well as the frequency of ICT related
incidents (e.g. cyber incidents), which can have a considerable impact on undertakings’ operational
functioning. Moreover, relevance of larger ICT service providers could also lead to concentration
and contagion risks. Supervisory authorities need to take into account these developments and
adapt their supervisory skills and competences accordingly.

Early on, EIOPA identified cyber security and ICT resilience as a key policy priority and in the years to come will focus on the implementation of those priorities, including the recently adopted cloud computing and ICT guidelines, and on the upcoming implementation of the Digital Operational Resilience Act (DORA).

ASSESSING THE PRUDENTIAL FRAMEWORK IN THE LIGHT OF DIGITALISATION
The Solvency II Directive sets out requirements applicable to insurance and reinsurance undertakings in the EU with the aim to ensure their financial soundness and provide adequate protection to policyholders and beneficiaries. The Solvency II Directive follows a proportional, risk-based and technology-neutral approach and therefore it remains fully relevant in the context of digitalisation. Under this approach, all undertakings, including start-ups that wish to obtain a licence to benefit from Solvency II’s pass-porting rights to access the Internal Market via digital (and non-digital) distribution channels need to meet the requirements foreseen in the Directive, including minimal capital.

A prudential evaluation respective digital transformation processes should consider that insurance undertakings are incurring in high IT-related costs, to be appropriately reflected in their balance sheet. Furthermore, Solvency II requirement on outsourcing and the system of governance requirements are also relevant, in light of the increasing collaboration with third-party service providers (including BigTechs) and the use of new technologies such as AI. Investments on novel assets such as crypto-assets as well as the trend towards the “platformisation” of the economy are also relevant from a prudential perspective and the type of activities developed by insurance undertakings.

EIOPA considers that it is important to assess the prudential framework in light of the digital transformation that is taking place in the sector, seeking to ensure its financial soundness, promote greater supervisory convergence and also assess whether digital activities and related risks are adequately captured and if there are any undue regulatory barriers to digitalisation in this area.

REALISING THE BENEFITS OF THE EUROPEAN SINGLE MARKET
SUPPORTING THE DIGITAL SINGLE MARKET FOR INSURANCE AND PENSION PRODUCTS
Digital distribution can readily cross borders and reduce linguistic and other barriers; economies of scale linked to offering products to a wider market, increased competition, and greater variety of products and services for consumers are some of the benefits arising from the European Internal Market.

However, the scaling up the scope and speed of distribution of products and services across the Internal Market is an area where there is still a major untapped potential. Indeed, while legislative initiatives such as the

• Insurance Distribution Directive (IDD),
• Solvency II Directive,
• Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation,
• or the Directive on the activities and supervision of institutions for occupational retirement provision (IORP II)16

have made considerable progress towards the convergence of national regimes in Europe, considerable supervisory and regulatory divergences still persist amongst EU Member States.

For example, the IDD is a minimum harmonisation Directive. Existing regulation does not always allows for a fully digital approach. For instance, the need to use non-digital signatures or paper-based requirements as established by Article 23 (1) (a) IDD and Article 14 (2) (a) PRIIPs Regulation can limit end-to-end digital workflows. It is critical that the opportunities – and risks, for instance in relation to financial inclusion and accessibility – that come with digital transformations are fully integrated into future policy work. In this context, the so-called 28th regime used in Regulation on a pan-European Personal Pension Product (PEPP)17, which does not replace or harmonise national systems but coexists with them, is an approach that could eventually be explored taking into account the lessons learned.

EIOPA supports the development of the Internal Market in times of transformation, through the recalibration where needed of the IDD, Solvency II, PRIIPS and IORP II from a digital single market
perspective. EIOPA will also explore what a digital single market for insurance might look like from
a regulatory and supervisory perspective. Furthermore, EIOPA will integrate a digital ‘sense check’
into all of its policy work, where relevant.

SUPPORTING INNOVATION FACILITATORS IN EUROPE
In recent years many NCAsin the EU have adopted initiatives to facilitate financial innovation. These
initiatives include the establishment of innovation facilitators such as ‘innovation hubs’ and ‘regulatory sandboxes’ to exchange views and experience concerning Fintech-related regulatory issues and enable the testing and development of innovative solutions in a controlled environment and to learn more as to supervisory expectations. These initiatives also allow supervisory authorities to gather a better understanding of the new technologies and business models taking place in the market.

At European level, the European Forum for Innovation Facilitators (EFIF), created in 2019, has
become an important forum where European supervisors share experiences from their national
innovation facilitators and discuss with stakeholders topics such as Artificial Intelligence,
Platformisation, RegTech or crypto-assets. The EFIF will soon be complemented with the Commission’s Digital Finance platform; a new digital interface where stakeholders of the digital
finance ecosystem will be able to interact.

Innovation facilitators can play a key role in the implementation and adoption of innovative
technologies and business models in Europe and EIOPA will continue to support them through its
work in the EFIF and the upcoming Digital Finance Platform. EIOPA will work to further facilitate
cross-border / cross-sector cooperation and information exchanges on emergent business models.

ADDRESSING THE OPPORTUNITIES AND CHALLENGES OF FRAGMENTED VALUE CHAINS AND THE PLATFORM ECONOMY
New actors including InsurTech start-ups and BigTech companies are entering the insurance market,
both as competitors as well as cooperation partners of incumbent insurance undertakings.

Concerning the latter, incumbent undertakings reportedly increasingly revert to third-party service
providers to gain quick and efficient access to new technologies and business models. For example,
based on in EIOPA’s Big Data Analytics thematic review, while the majority of the participating
insurance undertakings using BDA solutions in the area of claims management developed these
tools in-house, two thirds of the undertakings reverted to outsourcing arrangements in order to
implement AI-powered chatbots.

This trend is reinforced by the platformisation of the economy, which in the insurance sector goes
beyond traditional comparison websites and is reflected in the development of complex ecosystems
integrating different stakeholders. They often share data via Application Programming Interfaces
(APIs) and cooperate in the distribution of insurance products via platforms (including those of BigTechs) embedded (bundled) with other financial and non-financial services. In addition, in a
broader context of Decentralised Finance (DEFI), Peer-to-Peer (P2P) insurance business models
using digital platforms and different levels of decentralisation to interact with members with similar
risks profiles have also emerged in several jurisdiction; although their significance in terms of gross
written premiums is very limited to date, it is a matter that needs to be monitored.

EIOPA notes the opportunities and challenges arising from increasingly fragmented value chains and the platformisation of economy which will be reflected in the ESAs upcoming technical advice on digital finance to the European Commission, and will subsequently support any measures within its remit that may be needed to

• encourage innovation and competition,
• protect consumers,
• safeguard financial stability
• and ensure a level playing field.

ENHANCING THE SUPERVISORY CAPABILITIES OF EIOPA AND NCAS
LEVERAGING ON TECHNOLOGY AND DATA FOR MORE EFFICIENT SUPERVISION AND REGULATORY COMPLIANCE
Digital technologies can also help supervisors to implement more agile and efficient supervisory
processes (commonly known as Suptech). They can support a continuous improvement of internal
processes as well as business intelligence capabilities, including enhancing the analytical framework, the development of risk assessments and the publication of statistics. This can also include new capabilities for identifying and assessing conduct risks.

With its European perspective, EIOPA can play a key role by enhancing NCAs data analysis capabilities based on extensive and rich datasets and appropriate processing tools.

As outlined in its SupTech strategy and Data and IT strategy, EIOPA has the objective to promote its own transformation to become a digital, user-focused and data driven organisation that meets its strategic objectives effectively and efficiently. Several on-going projects are already in place to achieve this objective.

INCREASING THE UNDERSTANDING OF NEW TECHNOLOGIES BY SUPERVISORS IN CLOSE COOPERATION WITH STAKEHOLDERS
Building supervisory capacity and convergence is a critical enabler for other benefits of digitalisation; without strong and convergent supervision, other benefits may be compromised. With the use of different tools available (innovation hubs, regulatory sandboxes, market monitoring, public consultations, desk-based reports etc.), supervisors seek to understand, engage and supervise increasingly technology-driven undertakings.

Closely cooperating with stakeholders with hands-on experience on the use of innovative tools has proofed to be useful tool to improve the knowledge by supervisors, and also for the stakeholders it is important to understand what are the supervisory expectations.

Certainly, the profile of the supervisors needs to evolve and they need to extend their knowledge into new areas and understand how new business models and value chains may impact undertakings and intermediaries both from a conduct and from a prudential perspective. Moreover, in view of the growing importance of new technologies and business models for insurance undertakings and pensions schemes, it is important to ensure that supervisors have access to relevant data about these developments in order to enable an evidence-based supervision.

EIOPA aims to continue incentivising the sharing of knowledge and experience amongst NCAs by organising InsurTech roundtables, workshops and seminars for supervisors as well as pursuing further potential deep-dive analysis on certain financial innovation topics. EIOPA will also further emphasise an evidence-based supervisory approach by developing a regular collection of harmonised data on digitalisation topics. EIOPA will also develop a stakeholder engagement strategy on digitalisation topics to identify those actors and areas where the cooperation should be reinforced.