In the report, EIOPA states that financial soundness of the European insurance and occupational pensions sectors could face a significantly negative outlook over the medium term due to macro-economic uncertainties and the fragile state of financial markets. Despite recent positive developments in financial market prices, action by the ECB and coordinated political initiatives, the risks to financial stability remain high.
This is particularly pertinent when considering the increasing likelihood of long-lasting low interest rates in a number of global economies, along with capital market volatility.
In the insurance sector, premium growth has been observed overall, but the variation across companies is large. The profitability of undertakings remains relatively stable and Solvency I capital ratios are still at comfortable levels. This should not give rise to complacency however, as Solvency I, is not market or credit risk sensitive. It does not allow supervisors to have a full picture of the underlying market and credit risks to which undertakings are exposed.
Reinsurers’ profitability in the coming months will likely remain under pressure due to excess capacity in the market, as well as reduced demand for reinsurance services resulting from the weak global macro-economic environment.
The analysis of the IORPs data shows a worrying decrease in the IORPs’ funding positions, especially for larger defined benefit (DB) systems such as those in the UK and the Netherlands. The UK statistics now show funding levels below 80 per cent. A key driver behind these developments is the low yield environment, since low discount rates increase the current market value of the liabilities. Taking a longer-term, forward-looking perspective, improved longevity of pensioners will also weigh negatively on funding levels in the future.
Gabriel Bernardino, Chairman of EIOPA, said: “Despite all the positive developments in financial markets and concerted policy actions, risks to financial stability remain quite high. Maintaining a clear perspective on these risks is difficult in a Solvency I environment. In this context a clear and realistic timetable for the implementation of Solvency II would be a very serious contribution to the financial stability work in Europe”.
Press release
Full report
© EIOPA
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