EIOPA announces results of the 2018 insurance stress test

14 December 2018

The EIOPA published the results of its 2018 and fourth Stress Test for the European insurance sector. Overall, the exercise confirmed the significant sensitivity to market shocks combined with specific shocks relevant for the European insurance sector. On aggregate, the sector is adequately capitalised to absorb the prescribed shocks.

This year's exercise assessed the participating insurers' resilience to the following three severe but plausible scenarios:

• A yield curve up shock combined with lapse and provisions deficiency shocks, which means there is a sudden and sizeable repricing of risk premia and a significant increase in claims inflation.
• A yield curve down shock combined with longevity stress, which means there is a protracted period of extremely low interest rates accompanied by an increase in the life expectancy.
• A series of natural catastrophes where European countries are hit in a quick succession of four windstorms, two floods and two earthquakes.

The impact of the different scenarios on the balance sheet position and on the capital position of the participating groups was assessed by the excess of Assets over Liabilities and an estimation of the post-stress Solvency Capital Requirement (SCR) ratio. Given the operational and methodological challenges related to the recalculation of the group SCR, participating groups were allowed to use approximations and simplifications as long as a fair reflection of the direction and magnitude of the impact was warranted.

In the pre-stress (baseline) situation, participants reported an aggregate Assets over Liabilities (AoL) ratio of 109.5 % and a pre-stress SCR coverage of 202.4 %.

In the 'yield curve up' scenario, the excess of assets over liabilities is reduced by approximately one third (-32.2 %) and the aggregate post-stress SCR ratio drops to 145.2 %. Six groups reported a post-stress SCR ratio below 100 %.

In the 'yield curve down' scenario, the impact on the excess of assets over liabilities is of similar magnitude (-27.6 %) with an aggregate post-stress SCR ratio of 137.4 %.  Seven groups reported a post-stress SCR ratio below 100 %.

In the natural catastrophe scenario only a small decrease of 0.3 percentage points of assets over liabilities ratio was reported. Overall, the participating groups demonstrate a high resilience to the series of natural catastrophes tested, showing the importance of the risk transfer mechanisms in place, namely reinsurance, which absorbed 55 % of the losses. Consequently, the most affected groups are reinsurers and those direct insurers largely involved in reinsurance activities.

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Insurance Europe: EIOPA’s stress test confirms strength of the European insurance industry

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