European insurers and pension funds hold up well despite elevated financial stability risks

The European Insurance and Occupational Pensions Authority (EIOPA) published today its June 2023 Financial Stability Report which takes stock of the key developments and risks in the European insurance and occupational pensions sectors.

EIOPA notes that the European economy is currently experiencing a new period of high uncertainty and elevated financial stability risk. Persistent inflation, the fraught geopolitical landscape and rising financing costs – also in the wake of the recent financial turmoil – pose challenges to growth prospects in Europe and the business conditions of financial institutions. Despite the challenging environment, insurers and pension funds have remained resilient.

European (re)insurers entered 2023 with robust solvency positions even in the face of sizeable natural catastrophe losses, weaker investment returns, higher-than-expected inflation and continued economic uncertainties. Premiums grew for non-life business but stagnated for life business. Underwriting profitability varied greatly across segments and declined overall. Despite challenging renewal negotiations at the beginning of 2023, which lasted longer than usual and saw substantial price increases, insurers were able to obtain the reinsurance cover they sought.

Concerning investments, fixed income assets remain the dominant category for insurers, although the share of government and corporate bonds in their investment portfolios declined. In 2022, insurers notably emerged as net sellers of corporate bonds and government bonds as they moved from more interest rate sensitive assets towards other, sometimes less liquid investment options. Both insurers and occupational pension funds carry material direct exposures to the banking sector with 13% and 6% of their respective total investments exposed, albeit with a steadily falling trend since Q2 2019.

Occupational pension funds and insurers alike make use of derivatives to hedge against interest rate risk. EIOPA’s analysis included in this report has shown that insurers have enough liquid assets to cover potential margin calls resulting from a 100bps shift in the yield curve in either direction.

Petra Hielkema, Chair of EIOPA said: “Recent events in financial markets have once again demonstrated that risks can either be ’slow burning’ or can arise all of a sudden. Tensions around US regional banks and the liability-driven investment funds are examples of the latter. Such abrupt developments show how essential it is for insurers and pension funds to have buffers in place and for supervisors to have the necessary data available. As we do not know which risks will actually materialize, a robust supervisory framework is key as are appropriate capital requirements. To best contain the impact of adverse economic and market developments, supervisors need more data on liquidity risk and risks arising from the interconnectedness of financial markets.

Go to the Financial Stability Report