In order to safeguard the stability of the insurance and occupational pensions sectors, as well as broader financial stability, it is necessary to identify at an early stage potential risks and vulnerabilities. The risks may stem from different sectors of the financial market and the economy across and outside the EU, while vulnerabilities reflect the behaviour, business focus and financial structures of insurance undertakings and occupational pensions.
EIOPA monitors and assesses these risks and vulnerabilities with a view to facilitating or coordinating the necessary supervisory action to deal with such developments. EIOPA strives to be in a position to take preventive action and so takes a forward looking approach to this work. As part of its activity in this field, EIOPA has a responsibility to inform other European Supervisory Authorities, the European Systemic Risk Board (ESRB) as well as the European Parliament, the Council of the EU and the European Commission of the emergence of such risks and vulnerabilities. In this way, EIOPA performs its role as part of the European System of Financial Supervision.
Organisationally, EIOPA has a Financial Stability Committee which draws together experts from national supervisory authorities. This Committee, working in close cooperation with EIOPA staff, carries out the analytical and developmental work to meet EIOPA's responsibilities in the area of financial stability. The output of this activity feeds directly into EIOPA's crisis prevention work, which falls under the remit of EIOPA's Internal Monitoring Group.
The core of EIOPA's approach to financial stability is to bring together risk analysis and vulnerability analysis in order to assess the stability of the sector at a point in time. EIOPA uses the following core tools in this work:
1. Financial Stability Report
On a twice yearly basis, EIOPA carries out comprehensive economic analyses of risks and vulnerabilities facing the insurance and IORPs sectors in order to assess their financial stability. The reports draw on a range of qualitative and quantitative data drawn from supervisory and market sources. The analytical methods used in the Financial Stability Reports are under constant development reflecting the relative newness of this area of analysis. A key issue in this area in the future will be the development of more sophisticated quantitative tools, which will in turn depend on greater access to information and data on the sector.
Financial Stability Reports
2. Risk Dashboard
EIOPA publishes a quarterly Risk Dashboard. The Risk Dashboard is based on a common set of quantitative and qualitative indicators used to identify and measure systemic risks as a part of the joint effort of the European Supervisor Authorities, the European Central Bank and the ESRB. This dashboard aims to give a structured view of risks to the financial sector and to facilitate a regular assessment of these risks and possible mitigation policies.
3. Stress Tests
In accordance with EIOPA's establishing regulation, stress test exercises for the insurance and IORPs sectors should be carried out regularly. The objective of the stress tests is to formally assess the resilience of financial institutions to adverse market developments using a consistent methodology across jurisdictions.
The first EU insurance stress test was conducted in 2010 by CEIOPS (the predecessor of EIOPA). In 2011, EIOPA carried out a general stress test, as well as a satellite exercise assessing the effects of a prolonged period of low interest rates. The stress test in 2011 was developed in consultation and cooperation with the European Systemic Risk Board (ESRB), the European Central Bank (ECB) and the European Banking Authority (EBA) in relation to methodologies for designing and assessing the effect of various economic scenarios on an institution's financial position. Similar processes will be followed in the development of future tests.
Assessment of the feasibility of applying stress test techniques to IORPs is under way and this will steer the decision on whether to launch a first stress test exercise for IORPs in the next few years.
4. Cooperation with the ESRB
As part of the ESFS, EIOPA has close cooperation with the ESRB. This cooperation is focused on the point where microprudential and macroprudential supervision meet, in so far as each has an impact on the other. This cooperation allows EIOPA to bring insurance issues to the ESRB table to inform its work, while at the same time benefitting from the ESRB's broader scope of analysis in EIOPA's own work. EIOPA and the ESRB share relevant information with each other, as well as working in close cooperation on specific topics of mutual interest.
Interview by Andrew Mawdsley, Head of EIOPA Financial Stability and Information Unit, conducted by Jessica McGhie, the Report Insurance-linked securities for institutional investors 2014.