The low yield environment remains the key risk for European insurers and reinsurers and continues to put pressure on solvency positions, according to the European Insurance and Occupational Pensions Authority (EIOPA).
EIOPA believes the risk of a prolonged low yield environment has intensified over the last six months, as a combination of weakening economic outlook, growing trade tensions, and increased downside risks have ushered in a new round of monetary policy easening by central banks, accompanied by sharp decline in longer-term yields.
While analysts consider the European insurance sector to be well capitalised overall, with a median Solvency ratio of 212%, solvency positions deteriorated in the first half of 2019 and could continue to do so due to the low interest rate environment.
Moreover, concerns over debt sustainability and stretched valuations across financial markets could give rise to a sudden reassessment of risk, which could trigger losses in the investment porfolios of insurers and pension funds, EIOPA suggested.
Looking at the reinsurance sector in particular, analysts noted that profitability and solvency positions have been boosted this year by relatively benign losses in H1, as well as positive stock market developments.
Growth in global reinsurance capital has also been supported mostly by traditional capital, although outstanding alternative reinsurance capital has also continued to grow despite concerns related to the potential effect of climate change on the occurrence of natural disasters.
“Over the past six months, we have seen the risks for a prolonged low yield environment intensify,” said Gabriel Bernardino, Chairman of EIOPA. “A combination of a weakening economic outlook, increased downside risks and ongoing uncertainties about trade disputes and Brexit have ushered in a new round of monetary easing by central banks, which has been accompanied by a sharp decline in longer-term yields.”
“In this regard, we continue to see the clear benefits of Solvency II, as the market-consistent and risk-based regulatory framework has helped price in the risk of low interest rates, build resilience and enhance the risk management practices of insurers,” Bernardino continued.
“At the same time, it is important that the regulatory framework continues to remain robust in the future and adequately reflects the risks faced by insurers in a low for long environment. As such, it is crucial that these elements are addressed in the currently ongoing Solvency II review to ensure that promises can continue to be met in the future.”
Other key risks for the European re/insurance industry include cyber and climate change, EIOPA said, as digital transformations continue and as the role of insurers in the transition towards a low carbon economy becomes an increasingly pressing subject.
