EIOPA has published a report setting out the results of its 2014 EU-wide insurance stress test. The exercise aimed to test the overall resilience of the insurance sector and identify its major vulnerabilities and consisted of two elements: a core stress module focussed on group results covering asset price stresses and insurance specific stresses; and a low yield module at individual level focusing specifically on the impact of low interest rates.

A total of 167 insurance groups and individual undertakings representing 55 per cent of gross written premium for the EU market participated in the core stress test module. A total of 225 undertakings representing 60 per cent of gross technical provisions participated in the low yield module. Participation was sufficiently representative to be able to draw inferences of a systemic nature. Insurance undertakings estimated a baseline scenario using the Solvency II regime, without internal models. In addition, undertakings tested a number of severe macro-economic and insurance specific shocks, including a prolonged period of low yields and a sudden reverse in interest rates.

In summary, the results revealed that:

  • In general, the insurance sector is sufficiently capitalised in Solvency II terms.
  • 14 per cent of companies have a Solvency Capital Requirement (SCR) ratio below 100 per cent.
  • The sector is more vulnerable to a ‘double hit’ stress scenario that combines decreases in asset values with a lower risk free rate, however, 56 per cent of undertakings would have a sufficient level of capital under the most severe ‘double hit’ stress scenario. Major vulnerabilities were mass lapse, longevity and natural catastrophes.
  • In a prolonged low yield scenario, 24 per cent of insurers would not meet their SCR. A continuation of the current low yield conditions could see some firms face problems in meeting their promises to policyholders in 8-11 years’ time.

As a follow up to the stress test, EIOPA issued a set of recommendations to NSAs in order to address in a coordinated way the identified vulnerabilities. NSAs are recommended to engage in a rigourous assessment of the firms’ Solvency II preparedness, in particular regarding the situations where capital increases and/or balance sheet management actions will be needed.

For further information:

EIOPA insurance stress test 2014