A new report by the European Insurance and Occupational Pensions Authority (EIOPA) has identified environmental risks as among the most pressing concerns for the re/insurance and pension sectors.
EIOPA said environmental risks are the top risk in terms of the highest expected increase in materiality for these sectors given that extreme weather events grow in intensity and frequency.
Therefore, it urges that supervisors need to ensure that robust risk management practices, especially at reinsurers, are in place to address underwriting risks.
However, the Authority also noted that environmental risks could also represent an opportunity for re/insurers due to the potential for closing the protection gap and meeting increased demand for new services.
On the macroeconomic side, EIOPA’s report noted that the COVID-19 pandemic also continues to pose a challenge to European economies, with uncertainties relating to the path of the pandemic and supply chain disruptions weighing on the growth outlook.
And despite the recent pick-up in long-term yields, markets still operate in a low interest rate environment, which puts pressure in particular on life insurers and pension funds.
EIOPA expects inflationary pressures to be transitory and foresee inflation moderating in the course of 2022, but sees significant risk for non-life insurance if it persists, with potential negative impacts for profitability.
Other top areas of risk identified by analysts include cyber risk, partly due to widespread digitalisation trends and home office solutions.
“Despite the increasing momentum, the understanding of cyber risks remains limited, pointing to necessary improvements in data collection and cyber risk modelling,” EIOPA noted. “As with environmental risks, the cyber sphere could also open up opportunities for insurers seeing that demand for cyber insurance is bound to rise.”
“The still ongoing pandemic shed light on some areas of concern for financial stability and provided regulators, supervisors and market participants with valuable lessons learned. EIOPA nevertheless believes that data from the crisis must be handled with caution,” the Authority continued.
“Bearing in mind that unprecedented fiscal measures amid accommodative monetary policies may have distorted regular risk assessment frameworks, it is important for risk managers and supervisors not to underestimate risks.”
