EU insurers can handle surging geopolitical risks but at a heavy price, EIOPA's stress test reveals

Written by Adam Cadle

17/12/2024

European insurers are well positioned to deal with the consequences of a further escalation of geopolitical tensions, however, the capital and liquidity they would need to draw on to cope with such adverse shocks is substantial, EIOPA’s 2024 Insurance Stress Test has revealed.

Insurance undertakings entered the exercise with a robust aggregate solvency ratio of 221.8%. After applying the shocks, and with no reactive management actions permitted, insurers’ solvency ratio dropped almost 100 percentage points to 123.3%, resulting in a capital loss of over €270bn. However, when insurers were allowed to take reactive management actions, they were able to recover their solvency ratio to 139.9%, demonstrating their ability to adapt and improve their positions in the face of adverse economic and financial conditions.

Eight undertakings fell below the minimum regulatory capital requirements in the fixed balance sheet approach even though they still preserved enough capital to meet their obligations to policyholders. All eight undertakings improved their capital position with reactive management actions and managed to restore their solvency ratio above the regulatory threshold of 100%. The most frequently used management actions included selling assets, retaining dividends, and raising capital through various means.

All participating undertakings maintained their asset-to-liability ratio above 100% in all scenarios. This remains the case even when excluding the contribution of transitional measures.

The stress test’s scenario triggered material liquidity outflows for insurers and underlined the importance of the ample buffer of liquid assets that insurers keep on their balance sheets.

Higher outflows in the adverse scenario due to surrenders and claims inflation combined with lower inflows caused by the cut in premium payments and reinsurance inflows resulted in a net technical outflow of €314bn, which insurers could not fully cover with their cash holdings. To restore their liquidity position, insurers had to liquidate part of their liquid assets, turning from net buyers of €93.2bn into net sellers of €305.6bn under the constrained balance sheet approach.

EIOPA chair, Petra Hielkema, said: “The results therefore underscore the need for prudent risk management and close supervision given the highly uncertain times we are facing. Despite the generally positive outcome of the exercise, we must note with a measure of regret that the majority of the participants remain unwilling to disclose their individual results, which limits the transparency of the stress test.”

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