Stress test shows insurance industry vulnerabilities, says EIOPA

The European insurance sector faces significant challenges due to the current macro-economic environment, EIOPA said.

The stress test imposed two theoretical stress scenarios on 236 European firms: a 'low-for-long-yield', where firms face a prolonged period of low interest rates, and a 'double-hit' scenario, where the low rates are combined with a sudden fall in asset prices.

The first would be likely to hit firms' balance sheets by a total of €100 billion, by reducing the income from investments, and the second by €160 billion, EIOPA said.

"[The] impact of [the] stress scenarios shows that the low interest rate environment and a pronounced reassessment of risk premia pose a significant challenge for European insurance undertakings," EIOPA said.

The "revealed vulnerabilities require a coordinated supervisory response", EIOPA said, as it made several recommendations to National Supervisory Authorities (NSAs) including that they assess firms' business models regarding the behaviour of management and policyholders, and consider requesting cancellation or deferral of dividend distribution when the viability of a firm's business model is at risk.

Gabriel Bernardino, chairman of EIOPA said: "The results of this year’s EIOPA stress test confirmed the significant challenges for the European insurance sector triggered by the current macro-economic environment. The stress test, conducted for the first time after the implementation of the Solvency II framework, provided a high-resolution picture of the vulnerabilities of the sector requiring particular supervisory attention. EIOPA will closely monitor the implementation of the recommendations by the NSAs in order to ensure a coordinated response to situations that may pose a threat to the viability of the supervised entity and, collectively, to the system as a whole."

The industry has criticised the test, saying that the first scenario is unlikely. It is based on a drop in the 'ultimate forward rate' (UFR), which is used to assess the value of long-term liabilities, from 4.2% to 2%. Tobias Buecheler, head of regulatory strategy at Allianz described this in June as a "freak" situation and the test as too extreme.  

Olav Jones, deputy director general of industry body Insurance Europe, said: "The results of this exercise demonstrate that under the current baseline of very low interest rate conditions, the insurance industry is very highly capitalised with an overall solvency of nearly 200%. This is already calculated assuming that interest rates remain at their current very low levels for the next 20 years. Only 0.02% of the total sample were reported as being below their already strong target capital level."

"It is important to emphasise that these stress tests were not a ‘pass or fail’ exercise. The companies that took part in this exercise represent only 60% of the industry and the 40% that was not covered includes non-life and unit-linked business that is unlikely to be impacted by low interest rates. As such, had the entire industry been included, the level of overall resilience shown would have been even higher," Jones said.