A new Stress Test report published by the European Insurance and Occupational Pensions Authority (EIOPA) has confirmed that the European re/insurance market is adequately capitalised to withstand a variety of shocks and adverse developments.
EIOPA tested 42 European re/insurers (75% market coverage) for a series of shocks, including a sudden repricing of risk premia and increase in claims inflation, a period of low interest rates accompanied by an increase in life expectancy, and a succession of large natural catastrophes.
In the first ‘yield curve up’ scenario, EIOPA found that re/insurers’ excess of assets over liabilities ratio was reduced by around one third (-32.2%), while their aggregate post-stress Solvency Capital Requirement (SCR) ratio dropped from 202.4% to 145.2%.
In the second ‘yield curve down’ scenario, the impact on the excess of assets over liabilities was of similar magnitude (-27.6%) with an aggregate post-stress SCR ratio of 137.4%.
The market generally proved extremely resilient to the natural catastrophe scenario, which tested for a succession of four windstorms, two floods, and two earthquakes in Europe, with the assets over liabilities ratio decreasing by just 0.3%.
EIOPA attributed this resilience to the role of reinsurance and other risk transfer mechanisms in the European market, which absorbed roughly 55% of the catastrophe losses.
Consequently, the most affected groups in this scenario were reinsurers and those direct insurers largely involved in reinsurance activities.
Gabriel Bernardino, Chairman of EIOPA, commented: “This stress test marks an important step forward in assessing the resilience of the European insurance sector to a set of adverse but plausible scenarios and provides a valuable basis for a continuous dialogue with the participating groups on the identified vulnerabilities and the preventive measures and potential management actions to address them, should they materialise.”
Olav Jones, Deputy Director General of Insurance Europe, also stated: “Insurance Europe is pleased to see that the 2018 stress test exercise confirms the strength of Europe’s insurance industry with a baseline SCR coverage over 200% and Assets over Liabilities (AoL) ratio of 109%.”
“The purpose of this test is to provide information on financial stability under adverse market developments,” Jones continued. “EIOPA chose in fact very extreme scenarios, for example the yield curve down scenario includes an interest rate which is equivalent to assuming zero European growth for the next 100 years.”
“The results confirm that, even under the very extreme scenarios applied, the industry would pose no concerns over their ability to pay claims, with the overall AoL ratio remaining above 106% for even the worst scenario.”
Insurance Europe noted that the European market’s regulatory system, Solvency II, already utilises comprehensive stress test scenarios that model extreme 1-in-200 year events and is publicly reported.
“Therefore, the post-stress SCR ratios reported in the stress test represent the impact of an extreme stress on an extreme stress,” a statement from Insurance Europe said. “Even on this basis the industry is shown to be very resilient.”
