15 December 2016

Insurance Europe: Response to EIOPA 2016 Solvency II stress tests

Mr. Jones said:

“The results of this exercise demonstrate that under the current baseline of very low interest rate conditions, the insurance industry is very highly capitalised with an overall solvency of nearly 200%. This is already calculated assuming that interest rates remain at their current very low levels for the next 20 years. Only 0.02% of the total sample were reported as being below their already strong target capital level, known as the Solvency Capital Requirement.

“Under the very severe stress scenarios, the industry shows itself to be very resilient. EIOPA reports that under the 'double hit' only 40% of the sample would lose more than a third of their surplus assets and under the ‘low for long’ scenario only 16% of the sample would lose a similar amount of surplus assets.  

“It is a core role of insurers to protect customers from risks such as these and the purpose of holding surplus capital in excess of liabilities is to allow insurers to absorb risks. Therefore, it is logical that under stress-test scenarios, insurers exposed to those risks will see their surplus assets reduced. This is not a vulnerability, it is the system working as it should, and Insurance Europe is puzzled by the long list of supervisory actions recommended. It is also important to view these results in the context of the additional layers of protection that arise from how Solvency II calculates liabilities, which can result in conservative measurements.

“While Solvency II has only been in force for just under one year, it has set the bar very high in terms of the strict requirements insurers need to meet. This already includes capital requirements for low interest rates and reductions in the value of insurers’ investments, as well as all the other risks to which insurers can be exposed. Solvency II also includes strict risk management and governance requirements, so that management can take any necessary actions early. It also features extensive reporting and powers of intervention to ensure that supervisors can identify and monitor companies with specific issues and step in to take action, if needed.

“In addition, it is important to emphasise that, as EIOPA has already said, these stress tests were not a ‘pass or fail’ exercise. The companies that took part in this exercise represent only 60% of the industry and the 40% that was not covered includes non-life and unit-linked business that is unlikely to be impacted by low interest rates. As such, had the entire industry been included, the level of overall resilience shown would have been even higher.”

Press release

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