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EIOPA published its report on financial stability in relation to the (re)insurance and occupational pension fund sectors in the European Economic Area.
Overall downside risks have increased. EIOPA’s 2014 stress test, the results of which were published recently, explored the risks highlighted in the financial stability report and concluded that materialisation of these risks could have a substantial impact on the insurance sector. The sector was shown to be particularly vulnerable to a severe “double hit” scenario that combined widespread asset price corrections with a decline in risk free interest rates.
The analysis shows that certain asset prices might not correctly reflect underlying risks. A reversal of markets’ perceptions of those risks could substantially decrease the value of assets held by insurers and pension funds. Low interest rates are prompting insurers to review and adapt their business models. EIOPA observes such new developments as reducing profit shares; setting-up specific reserve funds or additional technical provisions. The overall profitability of insurance companies is still relatively favourable but results remain pressurised. The global reinsurance sector continued its robust growth with strong underwriting results and capital returns.
The dynamics of the catastrophe bonds’ issuance has been high, albeit the absolute volumes remain modest. According to EIOPA’s qualitative assessment, in 2015 positive premium growth is anticipated for non-life insurers only. The thematic article of the report analyses and compares several strategies to measure interconnectedness of financial institutions.
Gabriel Bernardino, Chairman of EIOPA, said: “EIOPA continues to use the analytical tools to better capture systemic risks for insurers and pensions. Our financial stability analysis aims to help supervisors to strengthen their practices in particular with regard to the implementation of the upcoming risk-based Solvency II framework. This will allow insurers to keep their promises to policyholders and, thus, to increase confidence in the financial sector”.