Check against delivery.

Ladies and gentlemen,

Firstly, I would like to thank Mr Benchimol for his kind introduction. I was delighted to accept the invitation to come to Brussels, although it did lead me straight into my own personal Bermuda triangle. I have to admit that it took a great deal of willpower for me to walk past the Maison Antoine¹ earlier and not succumb to the temptations of their world-famous pommes frites.

Since reading that our Chancellor eats there² and that King Albert II had their high-calorie delicacies delivered for his 70th birthday, at least I now know that I am in good company with my culinary passion.³ Anyway: the first responsibility of a dinner speaker is to be inspiring, but longer than 15 minutes. So I will focus on three particularly appetising topics: the persistently low interest rates, climate change and cyber risks.

The effects of the prolonged low interest rate environment for reinsurers are twofold: lower yields hit the asset side of the balance sheet – a situation they have in common with all insurers – and increased competition affects the liabilities side. Just as before, the industry is proving stable, but investors are being drawn to the alternative reinsurance industry (the ART market) like bees to a honeypot. The yields are comparatively attractive, and the correlation between insurance and market risks is relatively low. Cat bonds have been enjoying particular popularity.

The consequences of this are well known: reinsurance prices fall because the market is flooded with capital. This oversupply is not noticeably diminishing – even after severe natural catastrophes such as the hurricanes Harvey, Irma and Maria in 2017, which was the most loss-intensive year in insurance history.⁴ Quite the reverse, in fact: 2018 saw the highest ever issue volume for Cat Bonds based on insurance-linked securities (ILS): almost 14 (13.8) billion US dollars. Outstanding ILS added up to an all-time high of approximately 38 (37.6) billion.⁵

The total amount of so-called alternative risk capital is approaching 100 billion US dollars. Investors have become more cautious. After all, 2018 was another loss-intensive year – we only have to think of the forest fires in California. This means that the alternative reinsurance market has not grown so markedly this year, and the downward pressure on rates has abated somewhat.

Neverthelesss, we are not currently seeing the classic reinsurance cycle; in other words, severe natural catastrophes are not immediately being counterbalanced by increased rates. As before, a large proportion of alternative capital is deployed in US natural catastrophe risks. Reinsurers, who primarily underwrite such risks, are of course particularly exposed to the pressure on profitability resulting from the ART market, and many of these reinsurers are domiciled in the Islands of Bermuda. I fear that the pressure these companies face is not going to subside in the near future. Let´s see whether and to what extent Dorian will impact market sentiment, rates and capital supply.

The low level of interest rates is now almost old hat. So are the risks from the advancement of climate change – at least for insurers, and particularly reinsurers. They have been warning of the effects of climate change for decades. Reinsurers need to look at this issue from two different perspectives – both as risk carriers and as investors.

Anyone who can add two and two together can work out that climate change will cause major and very likely rincreasing losses for reinsurers. Policies and risk models are constantly reviewed and adapted, but the impact on pricing, as mentioned before, was limited so far.

In the long term, looking at climate related risks, there will be two fundamental questions to be answered: in the future, will insurers still be able to offer appropriate policies at prices that private individuals and companies can afford? And what will happen to the insurance and reinsurance business models if certain risks from climate change are no longer insurable?

It could come to a point where the problem of insurability can no longer be solved purely using the traditional tools of insurance underwriting and we have some very different questions to answer – questions with political and societal implications.

The move towards environmentally friendly energy sources presents insurers with some difficult decisions – both as risk carriers and as investors: while coal-fired power stations – just to pick one example – are still operating across the globe, they have to be insured and financed. Which insurers will still be prepared to do that in the future? Several insurers and reinsurers have already decided that they will no longer insure the risks associated with a high carbon footprint. And more and more insurers are declaring that they no longer wish to invest in brown assets.

These are issues that ultimately need to be debated at a political level: the insurance community will not be able to find a solution by itself.

The general question of “green or brown?” is one that comes up frequently in investment decisions. Converting the real economy into an environmentally-friendly, sustainable system is as desirable as it is expensive. German life insurers and Pensionskassen alone hold investments with a book value of over a trillion euros that has to be profitably invested long-term. Why not call for the financial sector to participate in the financing of sustainability? Surely that would be the most obvious approach?
 
Well, for one thing, investments fulfil a certain fundamental purpose for insurers that I do not need to explain to you. For another, insurers are not obliged to get involved in financing projects intended to achieve the Paris climate goals. But: they do, without a doubt, need to play their part in the migration to a more environmentally friendly economy – and it is in their own interests to do so. However, they need to take appropriate account of the risks that this entails.

As important as the move towards more environmental protection is, green does not necessarily equal safe. This means that there cannot be any regulatory bonuses for sustainable investments – unless these are genuinely objectively - that is. From a risk perspective - warranted. As a regulator I must reject any type of green supporting factor that is based solely on political motives, however honourable these motives might be. The deciding factor is always risk. Anyone who does not follow this principle is paving the way for the next crisis – and is doing a disservice to the issue of sustainability.

Ladies and gentlemen, another group of risks which is difficult to grasp is cyber risks. Digitalisation, while it offers a wide range of opportunities, also makes both insurers themselves and those they insure vulnerable to attack. So once again we see a twofold impact for insurers. The nasty thing about cyber attacks is that they can cripple not just individual companies but entire industries, markets, infrastructures and regions. The interconnectedness of the world today is both a blessing and a curse.

In mid-2015 the cybercriminal group DD4BC, which stands for “DDoS for Bitcoin”, threatened two German insurers with DDoS attacks⁶ unless they paid a ransom of 40 bitcoins.⁷ DDoS stands for distributed denial-of-service. In a DDoS attack, servers are intentionally overloaded and disabled, causing the website to go offline.

The resulting damage can be considerable. Neither of the German insurers succumbed to this attempt at blackmail – apparently because they were confident that any damage would only be minor.
 
Therefore, supervisors have to call on everyone, and every insurer, to analyse their own risk situation in minute detail and include such risks in their overall strategy, governance and risk management.

Insurers will find that there is plenty of global regulatory guidance around. There is one particular point that the regulatory community is in full agreement on: cyber security is the responsibility of senior management – and this is also the stance taken by BaFin in its Supervisory Requirements for IT in Insurance Undertakings (VAIT), which we published last summer. And there is another point that regulators agree about: cyber risks can only be curbed by cooperation across disciplines and across national borders: supervisors such as ourselves, security services, prosecution authorities and so on and so forth.

Targets of hacking and cyber extortion can also include hospitals, electricity providers, telecommunications companies and industrial firms – in other words: insurance policyholders. It is not surprising that some aspirations of the insurance industry are currently aimed at cyber insurance.
 
But when hoping for high premium income, companies should not forget that they could stand to lose as much as they would gain or even more. Above all, insurers must take into account the accumulation risk from worldwide cyber attacks.

Underwriting is particularly crucial in a class of insurance as new as cyber insurance. Before insurers grant cover, they need to examine very carefully whom they are insuring against what. Caution is also needed with older contracts from the pre-digital era and broader wording. These can conceal coverage risks – which are commonly called “silent risks”.

Ladies and gentlemen, there are a large number of questions on our minds in insurance regulation at the moment. Aside from anything else: one feature of resilient financial markets is a high level of diversity. In the insurance sector, this translates into a wide variety of both primary insurers and reinsurers – including special providers like those within the Bermuda insurance community. I welcome this diversity very much and I hope that you will contribute both to financial resilience and to the regulatory debates.

So, now that I have subjected you and myself to a particularly elaborate selection of regulatory amuse-bouches, I am looking forward even more to enjoying this dinner with you.

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