The European Insurance and Occupational Pensions Authority (EIOPA) released its latest Financial Stability Report on 9 December. Unsurprisingly, the impact of the persistently low interest rate environment is called out as the main vulnerability. For obvious reasons, a low interest rate stress will again be a key feature of the Insurance EU-wide stress test that will be conducted in 2017.
EIOPA draws attention to the lapse risk associated with a substantial increase in interest rates (for example, to exit low guaranteed returns), highlighting the lack of surrender penalty clauses attached to a significant volume of contracts (more than 50% of technical provisions within the 19 largest EU life insurers).
The trend towards unit-linked products in the life sector has continued, but perhaps surprisingly, there has been a slight shift in asset portfolios from fixed-income to equity investments. Premium growth has been slower in life than in non-life sector.
EIOPA sees the non-life sector as fairly stable, although it calls out the risks associated with offering competitive premium rates while investment returns remain low. Long-tail motor insurance (such as Payment Protection Order (PPO)) and latent claims (such as asbestos) are called out as lines most impacted by low interest rates.
Reinsurance capacity continues to exceed demand as writers retain a higher level of risk. Results have been driven by low levels of natural catastrophe losses, with profitability retained despite the soft market conditions. Alternative capital has continued to flow into the sector, with insurance-linked investments continuing to be attractive to investors.
Assessing systemic risk
EIOPA also include an external article on this subject at the end of the paper. The authors’ conclusions are that the insurance industry is of persistent systemic relevance over time, but plays a subordinate role in causing systemic risk compared to banks. However, the paper also notes that the conclusions will depend on the time span covered by the analysis as systemic risk contributions can change rapidly. They were also unable to find clear evidence to support the higher systemic relevance of SIFI insurers compared to non-SIFIs.
There are no clear ‘next steps’ relating to this, although EIOPA notes that it will continue to contribute to constructive dialogue on this subject.
Impact on firms
The EIOPA report’s findings will be of little surprise to the insurance industry. The issue of the affordability of guarantees and the ‘search for yield’ remain key concerns for EIOPA, so it will be interesting to see whether it issues any supervisory guidelines in these areas at a later date.
Insurers should also ensure they will have sufficient resources to be able to respond to the 2016 Insurance stress-test, especially given the resource burden already arising from the pillar 3 reporting requirements.