EIOPA observes that economic conditions in European countries are still fragile and that both insurance and occupational pension sectors continue to face three main prominent risks – a prolonged low yield environment, a weak macroeconomic climate and a possible contagion risk arising from exposure to sovereigns and financial institutions.
In the insurance sector, the weak macro-economic climate and low yield environment has resulted in sales’ constraints and is prompting firms to seek growth opportunities by establishing new business in regions such as Latin America or South-Eastern Asia.
Moreover, as a reaction to the low yield environment, undertakings are retreating from guaranteed life products and focusing on unit-linked products and products with more flexible guarantee structures. This expected change in the mix of business needs to be closely monitored to ensure a proper balance between stability of firms and policyholders’ interests.
Overall, Solvency I capital levels for life and non-life insurers are dropping, but remain well above the 100 per cent minimum requirement.
The global reinsurance sector continued its robust growth. Major loss events from natural catastrophes in the first half of 2013 seem to be relatively low compared to previous years. Profitability for the reinsurance sector has been sustained, but remains under pressure due to the low yield environment. Issuance of Insurance-Linked Securities (ILS) reached its highest level since 2007, with large capital inflows across the sector. As a result global reinsurer capital increased to an all-time high. The availability of so much reinsurance capacity creates a strong competitive environment. Developments in ILS also need close monitoring by supervisors as the extensive usage of ILS tends to cloud the picture in terms of understanding the risk transfer.
In the occupational pension sector, defined benefit schemes still dominate, but the sustained shift towards defined contribution schemes in many countries continues. Investment allocation of pension funds has been fairly stable over time. However, the low interest rate environment makes it more difficult for defined benefit schemes to meet the guaranteed return.
EIOPA’s econometric modelling demonstrates a strong link between the macro-economic environment and insurance business. Furthermore, EIOPA’s quantitative analysis clearly shows that premium growth in life insurance would be hit strongly under any adverse macro-economic scenario.
Speaking on the Omnibus II Directive and the confirmation of the starting date for Solvency II of 1 January 2016, chairman Gabriel Bernardino said: "There is much to do to be ready for this date and the area of financial stability analysis does not escape. Notwithstanding the responsibility that Solvency II will place on EIOPA to identify adverse developments that trigger certain elements of the Solvency II framework, financial stability analysis will be faced with a new data set. We will need to re-examine the metrics that we use for assessing risk exposures, resilience and other aspects of financial stability analysis. Solvency II will provide us with a rich source of information for stability analysis and I look forward to further developments in this area."
EIOPA-second half-year financial stability report 2013
Forward by Chairman Bernardino
Executive summary
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