EIOPA Risk Dashboard – March 2014

20 March 2014

The Risk Dashboard is based on mechanical aggregation of indicators and additional expert judgment if deemed necessary. Besides publicly available market data, extensive use is made of company data which is reported by 32 large and important insurance groups from the EEA and Switzerland under EIOPA’s quarterly fast-track reporting.

The risk environment facing the insurance sector remains broadly unchanged since the last EIOPA Risk Dashboard in December 2013:

• Market risk remains high as the period of historically low short and long term interest rates continues. This situation will put ongoing pressure on earnings results, particularly for life insurers where low yields are eroding the spread between investment returns and guaranteed rates they pay for policyholders.
• The macroeconomic conditions in European countries have improved but remain still fragile. The main vulnerabilities are the high level of government debt and unemployment. The current unemployment rate affects the market growth, especially for life insurance companies as in periods of high economic uncertainty people only tend to buy insurance that is necessary. Ongoing pressure from the European debt crisis, subdued economic growth in the euro area and differences between the European economies (market fragmentation).
• Liquidity and funding risks have increased since the last review, as lapses are increasing. A slight tendency towards less liquid investments can be seen: aim is potentially to offset low interest rates as insurers are opting for these investments to weather current low yields.
• Credit risk is still high. Local European government bonds remain the first choice to match insurance liabilities and hence susceptibility to the deterioration in local economic and financial conditions persist. Recent political tension could pose further risk.
• A rapid change of profitability is unlikely. On the one hand, insurers’ earnings are affected by additional reserving requirements imposed by some national supervisors in the face of low interest rates. On the other hand, reserves are lowered by some other jurisdictions. Earnings’ prospects will very much depend on the further development of these interest rates
  • Return on Assets hover around 0.4% at year end 2013
  • Return on Equity stays around 10% and the average investment return is below 4%
• Solvency II implementation will not be in place until 2016. Solvency I ratios for life insurers and non-life insurers are still relatively strong, at about 200% and 300% respectively.
• Interlinkages/Imbalances still create uncertainties. Contagion risks from banks and sovereigns remain. Sovereign downgrades in the current environment cannot be ruled out.
• The effects of the floods in Central and Eastern Europe in early 2013 and the severe hailstorms in Northern Germany in late 2013 and other events are not fully known yet. However, according to first estimates, 2013 global insured catastrophe losses were below losses in 2012.

Risk Dashboard

Background note

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