Liquidity risk in European insurance sector ‘not expected to significantly increase’ in next 12 months

Written by Adam Cadle

18/12/2020

Liquidity risk for the European insurance sector is not expected to significantly increase in the next 12 months, EIOPA has said.

In its Financial Stability Report December 2020, EIOPA said however that given the latest macroeconomic developments and ongoing uncertainties, an increase in liquidity risk “cannot be ruled out” looking ahead.

The report said that both international and country-specific macroeconomic conditions pose significant concerns. Apart from the prolonged period of ultra-low rates, also credit risk, equity, and property risk are relevant for the sectors. In particular, corporate bond downgrades were identified as a key risk for the insurance sector, and the low profitability of investments as well as insurers’ underwriting profitability driven by low premium growth pose potential concerns.

EIOPA has also assessed the risk related to insurers’ exposure to adverse developments in the commercial real estate market.

“As the COVID-19 crisis triggered extensive work from home, demand for office spaces has decreased. Consequently, a fall in the price of commercial real estate related assets might be expected, which in connection with mark-to-market valuation could negatively affect insurers’ assets. So far, price declines have not materialised significantly in the balance sheets, but significant write-offs are very likely in the future. Results show that although insurers are substantial investors in this asset class, a price decline of 10% would only have a modest impact on insurers. In this case, 4% of excess of asset over liabilities on aggregate is at risk. This number is significantly higher in some countries and for insurers with large exposures to commercial real estate. Overall risks appear to be limited when commercial real estate related assets are considered in isolation. A  fall in other financial market prices would increase the vulnerability.”

Related Articles