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'Double-hit' scenario to cause €160bn EU insurer balance sheet plunge

Written by Adam Cadle

A 'double-hit' scenario across Europe is to have a negative impact worth €160bn on the undertakings balance-sheets of EU-wide insurers and for a 'low-for-long' scenario an impact of €100bn, according to EIOPA's latest insurance stress test report.

The test involved 236 insurance undertakings from 30 European countries with market coverage of 77 per cent. The 'double-hit' scenario reflected a sudden increase in risk premia combined with the low yield environment and found that more than 40 per cent of the sample would lose much more than a third of their excess of assets over liabilities.

The 'low-for-long scenario reproduced a situation of entrenched secular stagnation driving down yields at all maturities for a long period of time. This resulted in a fall in the excess of assets over liabilities of about €100bn and undertakings representing 16 per cent of the sample would lose more than a third of their excess of assets over liabilities (25 per cent if LTG and transitional measures are absent).

"The revealed vulnerabilities deserve a supervisory response," EIOPA said.

In order to ensure coordinated supervisory actions, EIOPA issued recommendations to the National Supervisory Authorities (NSA’s).

The NSA’s actions include, when needed: to ensure that undertakings align their internal risk management processes to the external risks faced, to review and assess undertakings’ models regarding the behaviour of management and policyholders, to review the clauses of the guarantees, their typologies, and the optionalities they carry to assess if the valuation of the technical provisions can be considered proportionate and prudent, to request a reduction in the maximum guarantees or in unsustainable profit participations offered, to request a cancellation or deferral of dividend distribution when the viability of the business model is at risk and to ensure that the vulnerabilities identified at solo level are appropriately recognised and dealt with at the group level.

EIOPA, in its coordinating role, will support the NSAs and undertakings in the follow-up of these recommendations.

EIOPA chairman Gabriel Bernardino said: “The results of this year’s EIOPA stress test confirmed the significant challenges for the European insurance sector triggered by the current macro-economic environment.

"The Stress Test 2016, conducted for the first time after the implementation of the Solvency II framework, provided indeed a “high-resolution” picture of the vulnerabilities of the sector requiring particular supervisory attention."

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