Over the past seven months, the European Insurance and Occupational Pensions Authority (EIOPA; see below for a definition) has been executing a stress test of the European insurance sector. The results were published yesterday, November 30.
The aim of EIOPA’s stress test was to “assess the resilience of the insurance sector to adverse situations and to extract valid conclusions to support the stability of the financial system.” Unlike the ECB and EBA stress tests designed for banks, EIOPA does not single out entities which have not made it through the test, but rather identifies weak spots and anticipates risks, which are now being communicated to the national supervisory authorities (NSA).
NSAs are among other things advised to “engage with insurance undertakings to ensure that they have a clear understanding of their risk exposures and the vulnerability to given stress scenarios as a result of this, and engage with insurance undertakings to ensure that they have the capacity to take recovery actions to deal with those vulnerabilities.”
The framework for this test was Solvency II. Based on the data from 2013, most insurance companies fulfil the Solvency II criteria and would survive the scenarios of EIOPA’s stress test in good health. However, the Financial Times reports that one in twelve insurance companies would not pass this test, and Der Spiegel stresses that one in seven does not meet the Solvency II requirements (to be implemented in 2016) as of now.
Low interest rates present a challenge for many, but “(l)ife and pension groups are under particular pressure because of the financial commitments they have made to policyholders.” If the interest rates stay this low for another eight years, almost one fourth of all insurance companies could experience lack of capital.
Read the European Commission’s press release together with Commissioner Hill’s statement here.
European Insurance and Occupational Pensions Authority (EIOPA) is one of the three EU Supervisory Authorities for the financial markets. EIOPA works for transparency and the protection of insurance policyholders, pension scheme members and beneficiaries. Official website.