The insurance industry in flux: what changes are currently unfolding?

The regulatory requirements for insurance companies are becoming increasingly complex. In this interview, Marc Böhlhoff and Thomas Volkmer, Partners at Mazars in Germany, discuss the impact of this change on the industry and delve into what it means for the operations of auditing and consulting firms. 

Mr. Volkmer, the insurance industry is undergoing rapid change. What are the current biggest regulatory challenges?

Thomas Volkmer: Amidst multiple crises, insurers are facing significant challenges in contributing to the stability of the economic system. Alongside inflation, fluctuations in interest rates, as well as increasing cyber-attacks on businesses, to name just a few, the insurance industry must overcome a wide range of regulatory hurdles. These include the increasing data protection requirements, for example for cloud applications, but also others such as the DORA regulation on Digital Operational Resilience in the financial sector. BaFin has also issued specific administrative instructions through the Insurance Supervisory Requirements for IT (VAIT), focussing on the secure design of IT systems and processes as well as IT governance. Additionally, the forthcoming amendment of the Solvency II Directive at the EU level, the Directive on the Recovery and Resolution of Insurance Undertakings (IRRD), and other regulations such as the EU taxonomy regulation, Corporate Sustainability Reporting Directive (CSRD), and Sustainable Finance Disclosure Regulation (SFDR) will impose a considerable implementation burden on the risk management of insurance companies. These are merely a glimpse of the ongoing challenges faced by both our clients and Mazars as an audit and advisory firm.

What impact do regulations such as the EU taxonomy and the CSRD have on the insurance industry?

Marc Böhlhoff: The regulatory requirements pose extensive challenges for insurance companies, as they must be implemented promptly. We see that insurance companies are currently primarily concerned with ensuring the completeness of the information, the impact on processes and governance as well as the adaptation of the IT system landscape. In further phases, the insurance products will be modified. I also foresee financial and non-financial reporting being brought closer together in the future.

How will the increasingly complex requirements affect future business models?

Marc Böhlhoff: I am convinced that business models will change because of the transparency and comparability of the implementation of sustainability requirements in the future. This will be reflected in the design of insurance coverage and will increasingly influence the allocation of investments. Even though it is a process, the market will compare taxonomy ratios within the industry. Therefore, taxonomy assessment criteria will have an impact on products and processes – and investments in sustainable industries and economic activities will continue to increase. What insurance companies will have to ask themselves in the future: Do we only meet the minimum of sustainability requirements, or do we go beyond them? The latter could become an important marketing tool and provide a competitive advantage for companies. Currently, however, most of them are focussed on meeting the minimum requirements. It remains to be seen how the market will influence the extent of the coverage.

What do the market changes mean for the work of audit and advisory firms? 

Thomas Volkmer: As a professional services company, our duty is to be well-positioned for future topics, to develop solutions for the insurance industry, and to constantly expand our expertise, especially around ESG matters. There are not many specialists on the market who possess this deep know-how. In light of this, Mazars built up its expertise in this field at an early stage with an internal ESG team and the integration of the sustainability consultancy Stakeholder Reporting. Our experts have also acquired detailed knowledge in the fields of IT transformation and solvency II. We are therefore very well positioned, both for our audit and advisory practices.

This article first appeared in Handelsblatt Live (in German).