Short timeline for EIOPA stress test reaffirms the need for a robust reporting framework

Short timeline for EIOPA stress test

As of Tuesday the 24th of May, the European Insurance and Occupational Pensions Authority (EIOPA) has launched the 2016 European wide insurance stress test. The insurance companies need to submit their results to the national supervisors by the 15th of July. Given the short timelines, this is likely to put additional pressure on the companies’ reporting processes for those companies that are still building a robust Solvency II reporting framework.

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EIOPA aims at a minimal coverage of 75% of each national insurance market, in terms of gross life technical provisions. For the 2016 stress test exercise the Dutch participants are Achmea, AEGON, ASR, Delta Lloyd, NN and VIVAT, which are the same participants compared to the 2014 European wide stress test.

The objective will be to measure the vulnerability of the insurance industry to systemic risk. The stress test focuses on two scenarios:

  • low interest rate scenario: assessing the impact of a situation of low interest rates and therefore a low risk free interest rate term structure
  • ‘double hit’ scenario: imbedding both a low interest rate environment that impact liability valuations and market stresses that declines the asset prices, which includes equity, real estate, corporate bond and government bond stresses.

Both scenarios provide insight in the resilience of insurance companies to a low interest rate environment, which could have consequences for the entire insurance market.

Besides assessing the impact of the stress scenarios on the Solvency II balance sheet of the insurer, EIOPA requests companies to perform additional analyses as part of the stress test exercise. These additional analyses contain, but are not limited to:

  • Determining the stresses without taking into account transitionals and long term guarantee (LTG) measures (e.g. VA and MA)
  • The low interest stress scenario includes a shock to the UFR, taking into account a reduced UFR of 2%
  • An analysis on the effect of derivatives on the SCR under the low interest rate stress. This analysis is optional unless obligated by the respective national supervisor.

The results of the stress test will be published by EIOPA as of December 2016. Although it is yet uncertain how the results will be published, publication to the market might lead to some commotion given that the first public Solvency II numbers will only be reported from 2017 as part of the SFCR.

The tight timeliness and extensive analyses that are requested re-emphasize the need for a robust reporting framework in order to assess the insurer’s risk profile on a regular basis.

(The technical details of the stress test and Questions & Answers can be found on EIOPA’s website).

 

Author: Gijs Gritter, consultant Financial Risk Management

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