19 December 2014

EIOPA Risk Dashboard December 2014

The European Insurance and Occupational Pensions Authority published Risk Dashboard December 2014. It is published on a quarterly basis, in accordance with obligations under the EIOPA Regulation and following a framework determined in cooperation with the other ESAs, the ESRB and the ECB.

Market risks remain unchanged since the last review. Low interest rates are at a historically low level, and the downward trend has also continued in 2014. The EIOPA insurance stress test found that 24% of insurers in the sample would not meet their SCR and certain companies could face problems in meeting their promises in 8-11 years’ time in a scenario with protracted low yields (a Japanese-type scenario).

There is a risk of reassessment of risk premia, and the EIOPA stress test found that the sector is indeed vulnerable to this and would suffer in a “double hit” scenario with decreased asset values and a lower risk free rate.

The overall outlook for macroeconomic risks seems to be worsening. Subdued economic growth, low inflation, and economic outlooks repeatedly revised down, which may limit growth in insurance volumes.

Profitability challenges remain, also due to low investment yields. Total return on equity has fallen to below 9%, and return on assets in the life sector (ROA) is remaining at 0.4%. Non-life combined ratios overall below 95%, but higher than 100% in some countries due to floods and hailstorms.

Solvency I figures are robust, but the recent EIOPA stress test found that 14% of companies (representing 3% of total assets in the sample) would have a Solvency Capital Requirement (SCR) ratio below 100% if calculated on a Solvency II basis. Overall, however, the insurance sector is in general sufficiently capitalised in Solvency II terms.

Liquidity and funding risks unchanged, but lapse rates are again increasing in some markets. A slight indication of insurers moving away from liquid assets and cash as a share of total assets.

Interlinkages/Imbalances still create uncertainties, but the banking sector Asset Quality Review and stress test helps to alleviate the most immediate concerns. High private and public indebtedness remains a concern.

Falling premium rates and declining reinsurers’ profit margins as well as massive alternative capital entering the industry could affect the structure of the reinsurance industry in the long term. Low overall nat cat losses provide some relief.

Full dashboard

© EIOPA