Median SCR ratio for life and non-life European insurers continues to improve

Written by Adam Cadle

20/09/2023

European insurers maintained their solvency position during 2022 despite losses on fixed income and equity investments, according to the European Supervisory Authorities (ESAs) Joint Committee Report on risks and vulnerabilities in the EU financial system.

The median SCR ratio for life continued to improve from 228% in Q4 2021 to 234% in Q4 2022 as a result of higher risk-free interest rates. Furthermore, the median SCR ratio for non-life insurers also improved from 213% to 216%.

At the end of 2022, EEA insurers held 66.4% of their investments in government and corporate bonds, 4.4 percentage points less than in 2021. While insurers were also net sellers of government and corporate bonds in Q4 2022, the decrease is explained by a drop in the market values of the fixed income holdings.

“Going forward, while the outlook on financial markets remains highly uncertain, medium to long-term benefit of upward trending interest rates would be an improved profitability of fixed-income portfolios as maturing bonds are replaced with higher coupon bonds,” the report stated.

In the report, the ESAs asked for “vigilance from all financial market participants” throughout 2023.

The report said financial institutions and supervisors should closely monitor the broader impact from strong increases in policy interest rates and sudden rises in risk premia and accounted for in risk management. In addition, it said financial institutions and supervisors should remain prepared for a deterioration in asset quality in the financial sector, and should be aware of and closely monitor the impact of inflation risk. “Inflation not only impacts financial institutions by its effects on asset quality and valuation, but also through rising expenditures and rising funding costs as a result of higher interest rates and other channels,” it said.

Finally, it said financial institutions should place high importance on effective risk management and governance arrangements, in particular in relation to liquidity risk and interest rate risk, as recent problems in the US and Switzerland highlight. “Financial institutions need to remain resilient to the impact of future substantial interest rate changes,” it concluded.

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