Investment losses, asset-liability mismatch and market risk are among the top five causes of life insurers falling into trouble, according to a report from the European Insurance and Occupational Pensions Authority (Eiopa).
The authority has analysed a catalogue of 180 troubled insurers in 31 European countries to help understand how underwriters fail, or almost fail.
The cases are taken from 17 years between 1999 to 2016, encompassing the ups and downs of the economic cycle as well as capturing catastrophic periods such as the 11 September attacks and the 2005 hurricane season. The worst period for the industry was unsurprisingly the financial crisis year of 2008.
Eiopa did not identify any of the companies in the sample, but most (95) were non-life firms, followed by life (51), composite (32) and reinsurers (2). Well over three-quarters of the entities were classed as small i.e. technical provisions of less than €1bn ($1.2bn) for life firms; gross written premiums of less than €1m for non-life firms; and less than 5% market share.
The authority spells out the general cause of failure and near miss, and attempts to establish any early warning signals.
Most failures and near misses resulted from a combination of factors, but according to Eiopa's analysis the two most common primary causes are management and staff lacking appropriate expertise or professional qualities ("competence risk"); and the failure of corporate governance systems ("internal governance and control risk").
Other major causes included under-reserving and underestimation of claims reserves ("technical provisions – evaluation risk"), and badly performing investments or assets poorly matched to liabilities.
| Top 5 most common causes of impairment for EU insurers | ||
|---|---|---|
| Failures | Near misses | |
| 1 | Management & staff competence risk | Technical provisions - evaluation risk |
| 2 | Technical provisions - evaluation risk | Internal Governance & control risk |
| 3 | Internal Governance & control risk | Market risk |
| 4 | Investment / Asset-liability management risk | Management & staff competence risk |
| 5 | Fraud | Investment / Asset-liability management risk |
Table 1: Top 5 most common causes of impairment for EU insurers
However, splitting the analysis into life and non-life reveals life firms are most likely to run into trouble through investment/ALM and market risk (which includes interest rate risk).
For non-life firms, market and investment risk were way down the list of causes, behind unexpectedly high claims and inadequate reserving or underwriting.
Eiopa said the most commonly reported early identification signal, by a significant margin, was the deteriorating capital strength and/or low solvency margin of the undertaking.
"After that, evidence of poor management comes second. Third on the list are the high expenses and low profitability," the report said.
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