With competitive pressure still high, continued profitability in the European reinsurance sector will likely hinge on adequacy of risk pricing at the 2019 mid-year renewals.
This is according to analysts from the European Insurance and Occupational Pension Authority (EIOPA), who assessed the financial stability of the industry in a new report.
The EIOPA noted that European reinsurers continue to face significant challenges due to the continued inflow of capital into the market, increasingly low investment returns, and a diminished ability to release reserves from previous years.
Additionally, the sector experienced elevated levels of catastrophe losses for a second consecutive year in 2018, with trends indicating that re/insurers can expect to see more frequent and severe natural disasters in future.
Despite these losses, reinsurance rates have increased only moderately at the ensuing renewals, and mostly in the regions and lines of business directly impacted by the catastrophe events.
EIOPA attributed the lukewarm pricing environment to the continued supply of alternative capital, which has proven resilient to the testing losses of the past two years.
“A re-strengthening of the soft market is therefore not unlikely amid high competitive pressures,” EIOPA stated, adding that securing risk-adequate pricing at the mid-year renewals would be “crucial” for reinsurers’ continued profitability.
With the capital inflow from the alternative markets set to continue, adequate risk pricing is also likely to remain a paramount concern going into the 2020 renewals as well.
According to EIOPA data, reinsurer capital has increased by 75% over the last decade, but traditional capital remained nearly unchanged in the last 5 years, at around $460 billion.
In terms of the wider European insurance and pension market, EIOPA was primarily concerned about the risk of a prolonged low yield environments, which could continue to put pressure on profitability and solvency positions.
“The economic environment has become more challenging for European insurers and pension funds in recent months,” said Gabriel Bernardino, Chairman of EIOPA.
“The risk of a prolonged low yield environment has become more prominent again, as central banks have become more cautious about monetary tightening amid concerns over economic growth,” he explained. “This is particularly challenging for life insurers and pension funds with long-term liabilities and could trigger further search for yield behavior.”
Bernardino continued: “At the same time, we continue to observe high valuations in certain equity, real estate and bond markets and a sudden reassessment of risk premia could potentially lead to significant losses in the investment portfolios of insurers, which could be exacerbated during a period of economic slowdown.
“EIOPA will continue to closely monitor these developments by assessing vulnerabilities at both, the macro- and micro-level and deliver its mandate of supporting the stability of the European financial system.”