Investment portfolio profitability ‘highest risk’ for insurers - EIOPA

Written by Adam Cadle

30/07/2020

Profitability of the investment portfolio is the key risk and challenge in terms of materiality for insurers, EIOPA has said in its latest Financial Stability Report.

The authority conducted a qualitative questionnaire among national competent authorities (NCAs) in order to assess the materiality of risks stemming from the COVID-19 shock to the financial stability of the insurance sector, and found that the solvency position, exposure to banks, underwriting profitability, concentration to domestic sovereign and cyber risk are the other main risks.

“With approximately 65% of the investment portfolio dedicated to fixed-income assets, the insurance sector is sensitive to the low-yield environment,” EIOPA said.

Other issues include the fact that the returns generated by loans and mortgages are expected to decrease, due to impairments because of the forecasted recession, and secondly, for the same reason, dividend received on equity holdings might reduce, EIOPA added.

As stated by many NCAs, a deterioration of the solvency positions was observed in Q1 2020, both because of the expected persistence of the low rate and because of the depreciation of assets and economic uncertainties that had a negative impact on insurers’ balance sheets.

EIOPA chairman Gabriel Bernardino said: “There is no doubt that the economy will experience a deep and unprecedented recession. The high uncertainty on the recovery path needs to be captured by an appropriate forward-looking risk assessment. In this respect, different recovery scenarios should be captured in the design of next year’s European Union-wide insurance stress test.”

Bernardino stated that the Solvency II regime has “some layers of flexibility”.

“If the crisis deepens and if there will be a significant number of companies in difficulty, EIOPA is prepared to issue a declaration of adverse developments. This measure will allow national authorities to extend the recovery period, providing insurers more time to rebuild capital levels if needed. Recovery plans need to be assessed and granted consistently across countries.”

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