Norway’s FSA should not rely on EIOPA stress tests for insurance sector, IMF says

Written by Adam Cadle

13/08/2020

Norway’s FSA is being urged to step up its risk monitoring and conduct its own stress tests of the country’s insurance sector.

In its latest country review, the IMF said “the FSA should strengthen risk-monitoring at group and industry-wide levels to better cover systemic risks”.

“The FSA should also conduct its own market-wide stress tests of the insurance sector, instead of relying on EIOPA exercises, which covers only the two largest insurers,” it added.

“The authorities should monitor banking-insurance conglomerates more closely to assess the aggregation of any counterparty linkages and common exposures. The FSA should also consider a broader set of risk measures to guide its supervisory activities. The FSA follows a risk-based approach to supervision and prioritises its supervisory review of insurers based on two factors—risk and impact, with impact is measured by insurers market share and risk measured by a firm’s solvency ratio. The FSA should consider strengthening the risk dimension of their classification by adding additional metrics. These could usefully include market risk, credit risk, profitability and liquidity, as well as the quality of risk management and governance in the supervised entities. These metrics should help identify not only current risk levels, but also their evolution over time.”

Norway’s insurance sector has balance sheet assets of NOK 1820bn, or about 18% of the total financial system. The life insurance business, including pensions, dominates and accounts for 90% of the sector. Non-life (property and casualty) makes up the remaining 10%. Many insurers are part of broader conglomerates

The small size of the capital market is reflected in the insurers’ asset allocation, which shows on average lower investments in government bonds in comparison to other European jurisdictions but considerable investments in equities and mortgages and loans. Around 61% of total investments are made in bonds. Equities (22%) and loans and mortgages (10%) are the other main investments. Three quarters of Norwegian bond investments are in corporate bonds. Bonds with longer maturities are mainly issued in foreign markets. In comparison, on a European average, the share of government bonds to corporate bonds is about 50:50.

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