EIOPA observes an ongoing extremely challenging macro-economic and financial environment. Monetary policy and low crude oil prices imply a protracted low yield environment in the short- to medium-term. In this environment, the “double-hit” scenario cannot be ruled out. Both risks – low yields and a “double-hit” - will be in the focus of EIOPA’s Insurance Stress Test 2016.
In the insurance sector, growth for non-life insurance companies was higher than for life insurers. Insurers increasingly offer new products with e.g. reduced average guaranteed rates. The low yield environment is already negatively impacting investment returns translated into lower profitability.
The reinsurance market continues to suffer from an oversupply of capacity due to the alternative capital inflow and absence of large losses. However, on average, reinsurers have maintained a strong level of capital in 2015 and the first half of 2016. With the Solvency II regime coming into force on 1 January 2016 insurance and reinsurance companies across the European Union are now subject to a harmonised, sound, robust and proportionate prudential supervisory regime, for which they have been preparing during the last few years. Under the new regime EIOPA has an important role of monitoring and ensuring the consistent and convergent application of the Solvency II framework.
In the occupational pensions sector in certain countries the funding ratio of the Institutions for Occupational Retirement Provision (IORPs) has dropped due to low interest rates. This trend was also confirmed by the results of EIOPA’s first EU-wide stress test for occupational pensions.
Gabriel Bernardino, Chairman of EIOPA, said: “Insurers and IORPs need to use robust risk management practices to manage the ongoing macroeconomic challenges. With Solvency II the risk culture in the insurance sector is significantly reinforced. In the IORPs sector, prudential regimes are not sufficiently risk-sensitive and thus might underestimate the risks. Therefore, EIOPA in its recent Opinion on the common framework for risk assessment and increased transparency for pension funds recommended actions for improvements”.
To further contribute to the dialogue between supervisors and academia, this report includes a special article on the impact of mergers and acquisitions on the European insurance sector based on data on equity prices.
EIOPA Financial Stability Report June 2016 is available via EIOPA’s Website.
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