The insurance sector remains well capitalised with a Solvency Capital Requirement (SCR) ratio for the median company above 200% despite the above average 2017 hurricane season having dealt a blow to firms’ profitability, according to the European Insurance and Occupational Pensions Authority’s (EIOPA) December 2017 Financial Stability Report.
The report found that in many cases the diverse SCR ratios within the European Economic Area and the use of long-term guarantees (LTG) and transitional measures create a cumulative effect on SCR ratios “providing a financial stability cushion and potentially acting in a counter cyclical manner.”
However, in the reinsurance sector, the 2017 hurricane season may add to rising claims towards the end of the year and this could eventually affect profitability and solvency levels of undertakings.
The report, which focuses on the re/insurance and occupational pensions sectors in the European Economic Area, further highlighted a trend within the insurance sector of firms adapting investment strategies and business models as they cope with the low yield environment and market volatility.
It also said the increase in unit-linked business over the last year shifts more risks to policyholders and calls for further scrutiny from supervisors.
The European pension sector has been negatively impacted by the uncertain macroeconomic environment as well as by the lack of granularity of data available in Europe, which, according to the report; “seriously limits the relevance and decisiveness of the regular risk assessment and financial stability analysis of the sector.”
Although the global economic outlook has continued to improve, the prolonged low yield environment and low market volatility coupled with high levels of economic and political uncertainty continues to represent major challenges for European insurers and pensions funds.
Despite these challenges, the EIOPA Financial Stability Report found the European insurance sector to be well capitalised with high median Solvency Capital Requirement ratios.
Chairman of EIOPA, Gabriel Bernardino, said the EIOPA will broaden the range of its future risk analysis to include a wider range of business and scenarios in coming years; “in order to address current challenges and newly emerging risks stemming from climate change, new technologies and digitalisation.”
“In addition, as part of its regular vulnerability analyses, EIOPA plans to launch an EU-wide Insurance Stress Test exercise in 2018, focusing on the most relevant and current risks for the sector.”
