In response to the latest European Insurance and Occupational Pensions Authority (EIOPA) insurance stress test results, KPMG has called for the market to step-back and reflect on the results.
In response to the latest European Insurance and Occupational Pensions Authority (EIOPA) insurance stress test results, published on 30th November, KPMG has called for the market to step-back and reflect on the results.
The exercise addressed both adverse market and insurance industry scenarios. A separate exercise was also conducted, looking at the impact on life insurers, who are likely to be affected by either an elongated period of low interest rates or of a sudden reversal in interest rates.
Coverage within the three largest insurance markets – UK, Germany and France – was in the order of 50 – 60% but included few participants, whereas some of the smaller European insurance markets had coverage of nearer 100% with much smaller firms involved.
Janine added, “EIOPA’s comments about the percentage of companies falling below the Solvency II solvency capital requirement (SCR) needs to be taken in this context. It does not mean that there is a systemic issue for the European insurance sector as a whole.
“Unlike the European Banking Authority’s stress tests where individual results were published, the EIOPA approach means headline figures are reported, which can be misleading if they are not put into context. For example, the headline that 14% of insurers would not have met their SCR capital requirement at the end of 2013, masks the fact that only one of the top 30 European insurers is in this position. Over 60% of the top 30 had capital of over 150% of their SCR.”
Peter Ott, insurance partner at KPMG said, “It is worth noting that the SCR is itself based on a 1 in 200 year stress event, so the fact that the extreme events tested could result in the SCR not being covered does not mean that policyholders would suffer. Even under these conditions, more than half of the top 30 firms would be able to meet both their insurance liabilities and the capital requirement.
“The results also confirm the impact of the low yield environment, which has been recognised as a concern for some time. However, they also show that insurers are generally able to cope with these challenges, taking around a decade for some insurers to potentially be unable to meet all policyholder payments. This would allow time for most insurers to respond to the new norm and develop action plans to reduce any impact to the customer. Insurers need to address both this risk and their plans within their own risk and solvency assessment (ORSA).
“Insurers that did not participate in the study should consider the potential impact on their own businesses. As the primary objective of Solvency II is to protect insurers, there is little in here to suggest that the insurance industry will not be able to meet policyholder claims when Solvency II goes live.”
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Simon Chan, PR Assistant Manager
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