The European Insurance and Occupational Pensions Authority (EIOPA) has introduced its Financial Stability Report May 2014 in a new format. In addition to the regular analysis and assessment of risks, the publication now presents thematic articles aimed at deeper analysis of specific issues or broader policy discussions. Furthermore, the report uses some new analytical tools that are part of EIOPA’s ongoing work to develop new methodologies for financial stability assessment.
While the current European economic outlook is rather positive, the key risks for the insurance companies and occupational pension funds remain: vulnerable macroeconomic climate, low yield environment and credit risks arising from the exposure to sovereigns and financial institutions. Heavily indebted private and public sectors; high unemployment and market fragmentation are the main sources of vulnerability. The prolonged low interest rate environment remains a key risk in many countries. It has a negative impact on the ability of insurers and pension funds to maintain long-term profitability and stable financial profiles. As a consequence of low interest rates insurers and pension funds are “searching for yields” and, therefore, allocate their resources in riskier assets.
Attracted by higher profit margins, insurers continued to expand their activities in China, South-East Asia, Latin America and some emerging European countries and, thus, to increase their exposure to political, legal and other risks on these markets.
In the insurance sector EIOPA observes a subdued growth in premiums. According to EIOPA’s projection, this trend will continue until at least the end of 2015. As a result of low interest rates, life insurers are lowering guarantees and focusing on unit-linked products. In the medium-term it might be difficult for insurers to keep their profitability, which still remains relatively robust.
Profitability of the global reinsurance sector is rather high. The demand from investors for catastrophe bonds continues its upward trend and reached its highest level ever.
Low rates put a significant pressure on the profitability of the European occupational pensions sector. Structural budget deficits are forcing governments to shift responsibility for pensions from the state to individuals.
The first thematic article of the Report analyses the relationship between written premiums’ growth in the insurance sector and key macroeconomic determinants on the bases of panel data covering 30 European countries. The second article addresses the issue of Global Systemically Important Insurers.
Click here to access the Financial Stability Report May 2014
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