On 1 July, EIOPA published its June 2019 Financial Stability Report which assesses the financial stability of European (re)insurance companies and pension funds.
The secretariat of Insurance Europe provides a summary below and the full report and thematic article can be found here, with its press release.
Market risks
- The economic environment is challenging; Brexit, trade tensions, unstable economic outlook in emerging markets all contribute to slowdown in economic growth.
- Interest rate increases for Euro have been put on hold until at least mid-2020; the risk of a prolonged low yield environment is more prominent which could trigger further search for yield behaviour.
- The risk of a sudden reassessment of risk premia remains high reflecting political risks and sovereign debt concerns in some European countries
Climate risk and sustainable finance
- The cost of weather-related events elevated by historical standards in 2018 at $178 billion.
- Insurers are increasingly incorporating climate-related risks in their underwriting and investment activities as part of an enhanced approach towards ESG factors.
- However, insurers remain exposed to considerable climate-related transition risk in their investment portfolios, which are still hard to properly quantify.
Cyber risk and the insurance sector
- Cyber threats continue to present a major risk to the financial system. The economic loss due to cybercrime is predicted to reach $3 trillion by 2020.
- Raised awareness about cyber-security and cyber insurance coverage is bringing new opportunities for the insurance sector.
- However, insurers may be exposed to silent cyber risk: instances where cyber risk is neither explicitly included nor excluded within an insurance policy.
Risk assessment
- According to EIOPA’s survey, low interest rates remain the main risk with equity risk also being prevalent.
- Insurer’s allocation to collateralised loan and mortgage markets have increased significantly over the past few years. EIOPA deems that leveraged loans and CLOs could turn out to be risky. However, the exposure of the insurance sector is very limited (0.06% of total investments) at present.
- The insurance sector remains adequately capitalized, but in the current low yield environment, profitability is under increased pressure. The Solvency Capital requirement for the median company is 223% for life and 207% for non-life insurance sector.
- EIOPA has also detailed the results of a regression analysis on the results of the 2018 stress test exercise which confirm a number of conclusions which were presented in its earlier report.
Thematic article – the impact of green bond policies on insurers
- EIOPA investigated whether this kind of policies have a positive impact on insurers’ equity prices. They employed publicly available data (listed equities) and official announcements on companies’ websites, their annual or semi-annual reports, sustainability reports and/or press release to build a pool-regression model that explain how these variables contribute to their equity prices.
- The results suggest that announcements on introducing green bond policies by issuance of green bonds or launching green bond funds are positively priced by market investors.
- Given the fact that insurers are long-term investors, they will have a crucial role in the green bonds market. Furthermore, insurers could transform climate-related risks into a positive value for companies contributing to the overall financial stability of the European insurance sector.