21 December 2012

EIOPA: Risk Dashboard

The European Insurance and Occupational Pensions Authority published its risk dashboard (December 2012), assessing the main systemic risks and vulnerabilities faced by the European insurance industry.

On the basis of observed market conditions, data gathered from undertakings, and expert judgment, EIOPA assesses the main systemic risks and vulnerabilities faced by the European insurance industry over the coming quarters to be:

• Macro risks: Recessionary pressure in a number of economies in the EU exemplify the macro-economic risks which are still at an elevated level. Although several important steps have been taken recently both at the European and national level, uncertainty remains with regard to any remaining implementation risks. In addition, the combination of austerity measures, rising unemployment and a prolonged period of subdued growth could have negative effects on insurance demand.
• Credit and market risk: The trend of decreasing CDS spreads has continued. However, this development certainly is also driven by excess liquidity, the difficult global financial investment environment and investors’ risk appetite striving for an appropriate balance of yield versus risk. Recent changes in asset allocation of European insurers rather hint at a reduced risk appetite concerning credit investments. They tend to shift investments towards less riskier counterparties, reducing their European sovereign and banking exposure. This indicates a continuation of a negative outlook/perception on that credit category. Market risks are still dominated by the lowyield environment with 10-year swap rates in Western Europe having again reached new lows in the past months.
• Stabilisation in life insurance business: The declining trend in life gross written premiums has been reversed, however growth rates are still rather subdued. Lapse rates in the sample have improved from their peak in Q42011 and remained stable since last quarter.

Use of expert judgement after the mechanical aggregation:

• Macro risk: slightly upwards due to high heterogeneity in growth figures across EU countries and general uncertainty about the medium-term growth potential and its implications for the demand of insurance products. In addition, implementation risks around the various crisis management tools used in the sovereign debt crisis are non-negligible.
• Credit risk: slightly upwards as the observed decrease of the mechanistic score is considered too large given the uncertain macro outlook, potentially distorted bond prices as a result of excess liquidity while at the same time investors have limited alternatives to substantially reduce their credit risk exposure.
• Market risk: slightly upwards due to the severe consequences a prolonged low-yield environment could have on the profitability and solvency of the insurance sector. Improvements in other indicators, e.g. equity risk, are not considered to make up the effects of recently observed new historic lows in 10-year swap rates, given the on average small equity investments of insurers.
• Liquidity&funding: slightly downwards as the increase of the mechanistic score is solely driven by low issuance volume of cat bonds in Q3 which is seasonally driven and is already picking up substantially in October and November. Other indicators remained stable.
• Insurance risk: slightly upwards due to reduced buffers of reinsurers for catastrophe losses after Hurricane Sandy and potential price hikes in upcoming renewals, which are not reflected in Q3 figures yet. In addition, insurers’ business model might be impacted in a low-yield environmentwhen lower investment returns cannot counter-balance potential underwriting losses.

Full risk dashboard

© EIOPA