European insurers hold up against financial stability risks

Written by Adam Cadle

22/06/2023

European insurers remain resilient in a new period of high uncertainty and elevated financial stability risk, EIOPA has said.

In its June 2023 Financial Stability Report, EIOPA said despite persistent inflation the fraught geopolitical landscape and rising financing costs, European (re)insurers entered 2023 with robust solvency positions.

Premiums grew for non-life business but stagnated for life business.

Concerning investments, fixed income assets remain the dominant category for insurers, although the share of government and corporate bond in their investment portfolios declined. In 2022, insurers notably emerged as net sellers of corporate bonds and government bonds as they moved from more interest rate sensitive assets towards other, sometimes less liquid investment options. Both insurers and occupational pension funds carry material direct exposures to the banking sector with 13% and 6% of their respective total investments exposed, albeit with a steadily falling trend since Q2 2019.

Occupational pension funds and insurers alike make use of derivatives to hedge against interest rate risk. EIOPA’s analysis included in this report has shown that insurers have enough liquid assets to cover potential margin calls resulting from a 100bps shift in the yield curve in either direction.

Petra Hielkema, chair of EIOPA said: “Recent events in financial markets have once again demonstrated that risks can either be ’slow burning’ or can arise all of a sudden. Tensions around US regional banks and the liability-driven investment funds are examples of the latter. Such abrupt developments show how essential it is for insurers and pension funds to have buffers in place and for supervisors to have the necessary data available. As we do not know which risks will actually materialise, a robust supervisory framework is key as are appropriate capital requirements. To best contain the impact of adverse economic and market developments, supervisors need more data on liquidity risk and risks arising from the interconnectedness of financial markets.”

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