Investment - Articles - EIOPA updates on key risks to financial stability

 The key risks for (re)insurance companies and occupational pension funds continue to be linked to the weak macroeconomic climate, prolonged low interest rate environment and sovereign credit risk. Overall downside risks have increased. EIOPA’s 2014 stress test, the results of which were published recently, explored the risks highlighted in the financial stability report and concluded that materialisation of these risks could have a substantial impact on the insurance sector. The sector was shown to be particularly vulnerable to a severe “double hit” scenario that combined widespread asset price corrections with a decline in risk free interest rates.
 
 The analysis shows that certain asset prices might not correctly reflect underlying risks. A reversal of markets’ perceptions of those risks could substantially decrease the value of assets held by insurers and pension funds.
 
 Low interest rates are prompting insurers to review and adapt their business models. EIOPA observes such new developments as reducing profit shares; setting-up specific reserve funds or additional technical provisions. The overall profitability of insurance companies is still relatively favourable but results remain pressurised.
 
 The global reinsurance sector continued its robust growth with strong underwriting results and capital returns. The dynamics of the catastrophe bonds’ issuance has been high, albeit the absolute volumes remain modest.
 
 According to EIOPA’s qualitative assessment, in 2015 positive premium growth is anticipated for non-life insurers only.
 
 The thematic article of the report analyses and compares several strategies to measure interconnectedness of financial institutions.
 
 Click below to access the Financial Stability Report December 2014.