EIOPA has published its Financial Stability Report May 2015.
EIOPA observes that the risks identified in the previous Report (December 2014) remain broadly unchanged: a weak macroeconomic environment, protracted low interest rates and increased credit risks continue to affect the (re)insurance and occupational pension sectors of the European Economic Area.
The current quantitative easing (QE) policy in the euro area may create favourable conditions for insurers and pension funds in the long run provided that economic growth improves. However, in the short-term, QE has further lowered the risk-free rate and, thus, put an additional pressure on certain insurers’ and pension funds’ business models. Furthermore, the QE programme might significantly reduce market volume for some asset classes. In such circumstances, the herding behaviour of investors related, for example, to a deteriorating geopolitical situation, could trigger a risk reversal or “double-hit” scenario.
In the insurance sector, returns and profitability of products remain under strong pressure with a potential negative impact on solvency.
In the reinsurance sector, risks arising from the low yield environment may urge the reinsurance industry to further consolidate. Reinsurance premiums have been pressurised as companies face continuing competition from non-traditional sources of capital.
The occupational pension funds sector increasingly faces challenges as well. Defined Benefit plans are negatively affected by declining interest rates, in much the same way as guaranteed return insurance products. The future income of Defined Contribution schemes is also under constraint.
Gabriel Bernardino, Chairman of EIOPA, said: “Today’s macroeconomic reality is creating severe challenges for certain insurance and pension fund business models. In this environment it is fundamental that supervisors monitor the situation very closely and challenge the industry on the sustainability of their business models. Furthermore, action is needed from the industry to deal with the vulnerabilities of the “in-force” business and to restructure their mix of products. The transitional measures included in Solvency II should be used to ensure a smooth transition to the new regime, avoiding disruptions in the market, while ensuring that firms will take the necessary steps to restructure their businesses”.
EIOPA Financial Stability Report May 2015