12 June 2013

EIOPA publishes its 2013 Half-Year Financial Stability Report

Key points:

• The insurance and occupational pensions sectors are operating against a broader financial stability backdrop where risks remain high;
• In the life insurance sector, low GDP growth and high unemployment continue to weigh negatively on premium growth, while non-­life insurers report positive premium growth rates due mainly to the mandatory nature of insurance purchases;
• EIOPA and national supervisory authorities continue their joint efforts to respond to the risk of a prolonged period of low interests, while insurers also take action.
• In the reinsurance market, underwriting capacity continues to outgrow demand, though undertakings show a good operating performance;
• IORPs continue to shift from defined benefit schemes towards defined contribution or hybrid schemes.

EIOPA observes that the insurance and occupational pensions sectors are exposed to the risks of financial markets reversals, the impact of low interest rates and the weak economic fundamentals and outlook that characterise the risks to financial stability in the EU more generally.

In the life insurance sector, low GDP growth and high unemployment continue to weigh negatively on premium growth, while non-life insurers report positive premium growth rates mainly due to mandatory insurance purchases.

In line with EIOPA’s call, insurers and supervisors have been responding to the risk of a prolonged period of low interest rates. Some insurance companies have started to shift away from fixed and/or life-long guarantees toward less rigid guarantees in order to reduce reinvestment risk. Others are making a strategic shift towards other non- guaranteed product types. Supervisors continue to engage with firms and to perform targeted exercises aimed at identifying vulnerabilities and appropriate supervisory tools.

In the reinsurance market, underwriting capacity continues to outgrow demand. Reinsurance undertakings showed a good operating performance benefiting from a capital inflow to the sector with investors looking for stable returns in volatile markets. Losses from natural catastrophes remained significantly lower in 2012 than in 2011 and 2005, the worst years ever for the reinsurance industry. So far in 2013, the costliest events in Europe have been the series of earthquakes in Italy´s Emilia Romagna region in May. In addition, a hard winter season affected some European countries which experienced heavy snowfall, high winds, ice and flooding. The wintry weather caused economic losses estimated about €1.4 billion. The more recent flooding in Europe will also generate significant losses, but it is too early to have firm estimates on their scale.

In the occupational pensions sector, the shift from defined benefit schemes towards defined contribution or hybrid schemes continued. This rebalancing reflects a range of factors, including a response to changes in longevity, regulatory changes and developments in the tax treatment of pension schemes in some jurisdictions.

Gabriel Bernardino, Chairman of EIOPA, said: “This Report underlines that uncertainty about the future is still high and that there is no room for complacency in terms of risk management. Insurers and IORPs face a complex set of risks associated with a weak economic environment, low yields and the potential for sudden financial market reversals. That is why it is essential to have the proper risk-based approach to solvency requirements and supervision, so that companies can better understand and manage their risks and supervisors can address problems before adverse events happen”.

Press release

Full report

© EIOPA