The insurance sector is, in general, sufficiently capitalised in Solvency II terms, according to EU-wide insurance stress tests conducted by the European Insurance and Occupational Pensions Authority (EIOPA).
The stress test results showed that the insurance sector is more vulnerable to a
‘double hit’ stress scenario that combines decreases in asset values with a lower risk free rate.
However, 56 percent of the companies surveyed would have a sufficient level of capital under the most severe ‘double hit’ stress scenario.
The major vulnerabilities as per the insurance specific stresses were mass lapse, longevity and natural catastrophes.
As a follow up to the stress tests, EIOPA issued a set of recommendations to National Supervisory Authorities (NSAs) in order to address the identified vulnerabilities.
Regarding these, NSAs are recommended to engage with companies to ensure that they have a clear understanding of their risk exposures and their vulnerability to given stress scenarios and that they have the capacity to take recovery actions if those vulnerabilities materialise.
Gabriel Bernardino, chairman of EIOPA, said: “EIOPA’s stress test 2014 was a truly preventive supervisory tool.“
“It gave EU supervisors an updated picture of the undertakings preparedness to comply with the upcoming Solvency II capital requirements and by applying a set of rigorous and severe stresses indicated to us the areas where undertakings are most vulnerable.”
“EIOPA’s recommendations will ensure that the vulnerabilities identified are addressed and that follow-up actions by NSAs will be taken in a consistent way”.
Participation in the stress test went above EIOPA’s target, which was to have at least 50 percent of the insurance market of each country.
The core module exercise was completed by 60 groups and 107 companies, while the low yield module was completed by 225 individual companies.
Olav Jones, deputy director general at Insurance Europe, said: “As pointed out in the recommendations of this report, there is still work for both the industry and national supervisors to do in preparation.”
“To that end, the industry continues to work hard with EIOPA and national supervisors to prepare for Solvency II implementation.”
