European insurers are in a good position to withstand a major natural catastrophe but could face solvency issues from severe financial market movements, according to the European Insurance and Occupational Pensions Authority (Eiopa).
Findings from 2018's three stress tests revealed only a small decrease of 0.3 percentage points of the assets over liabilities (AoL) ratio in the natural catastrophe scenario – largely thanks to reinsurance contracts, which absorbed 55% of the losses.
By contrast in the ‘yield curve up’ scenario, excess of AoL is reduced by around one third and the aggregate post-stress solvency capital requirement (SCR) ratio dropped to 145.2% from a baseline of 202.4%. Six unidentified insurers reported ratios of less than 100% in the scenario.
Results in the ‘yield curve down’ scenario were on a similar scale, with an aggregate post-stress SCR ratio of 137.4%, and seven groups below 100% SCR.
Eiopa said that while there is significant sensitivity to market shocks, insurers were suitably prepared, on an aggregate basis, to absorb this.
Eiopa’s biennial stress test is one of the authority’s tools designed to assess the resiliency of the insurance sector to potential adverse developments.
This year’s test, the fourth of its kind, is based on a sample of 42 European insurers – including the top 30 groups – and representing around 78% of the European insurance market, based on total consolidated group assets in Solvency II reporting.
As well as the three main tests (see below), the authority announced in May a separate investigation to collect information on vulnerabilities to cyber risk. The results of that will be published in due course.
Eiopa has highlighted that the tests are not a “pass-fail exercise” and the outcome is not intended to lead to the imposition of capital requirements.
The authority is only allowed to report consolidated results, but it has encouraged individual firms to voluntarily release their impact reports.
As of today, only four firms have complied with that request: Danica, Mapfre, PFA Pension and VIG.
The three scenarios used in the stress tests were:
- Yield curve shock combined with lapse and provisions deficiency stress: A sudden increase in interest rates, causing life insurance policyholders to immediately surrender their contracts, and creating claims inflation that affects general insurers. This was the first time such a scenario has been tested. It explores whether market values of assets will be reduced and whether the value of claims will increase faster than expected, effectively increasing the value of liabilities.
- Low yield shock combined with longevity stress: This scenario has been previously tested twice. However, Eiopa remains concerned about the impact of a low-yield environment. The scenario has been developed in collaboration with the European Systemic Risk Board. It uses the European Central Bank’s financial shock simulator, which comprises a set of price shocks for a large spectrum of assets triggered by simultaneous events.
- Natural catastrophe: Measures the impact of natural catastrophes in Europe in the context of climate change. It assumes a catastrophic windstorm, earthquake and flood occur in a narrow timeframe, creating insured losses that may exhaust reinstatement provisions of reinsurance treaties.
All the results of the stress test can be found here.