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EIOPA published recently the first paper of a series on systemic risk and macroprudential policy in the insurance sector. What are the lessons learnt from the financial crisis and the banking sector affecting the European insurance sector?
Although the insurance sector differs substantially from the banking sector, some of the lessons learned from the banking experience are also useful for insurance sector. First, it is extremely important to identify the potential sources of systemic risk and to find a balance between the entity-based and activity-based approaches.
Secondly, in order to mitigate the sources of systemic risk, a proper macroprudential framework including a comprehensive set of tools should be in place.
Thirdly, we have to see the systemic risk from a holistic point of view and not necessarily framed within specific jurisdictions or specific sectors of the financial system. This approach requires the coordination across jurisdictions and at the same time calls for a cross-sectoral view of systemic risk to avoid potential regulatory arbitrages.
How could a new major crisis in the insurance sector be prevented and what measures are taken on a microprudential basis?
It is important to focus on the lessons learned from the previous financial crisis to avoid similar mistakes. From that point of view, we consider the need to have in place adequate recovery and resolution tools that will enable national authorities to intervene in failing institutions and resolve failures in an effective and orderly manner.
Could you elaborate on EIOPA's stress tests? What's the scope so far and what are the benefits?
This year, EIOPA is running its third European Union-wide insurance sector stress test exercise. The exercise targets globally active European (re)insurance groups selected by EIOPA in cooperation with national competent authorities based on the total assets, gross written premium and technical provisions.
It focuses on the evolution of liquidity and capital positions against a set of scenarios encompassing a wide range of market and insurance specific shocks selected among the risks that are deemed as the most relevant for the insurance sector vis-à-vis the reported Solvency II values as per year-end 2017.
The results are planned to be published at the end of this year.