Europe’s insurance sector in ‘good health, but vulnerabilities remain’, stress tests show

Out-Law News | 03 Dec 2014 | 10:22 am | 1 min. read

The EU’s financial services commissioner has said the results of ‘stress tests’ of Europe’s insurance industry show the sector is “in good health”, but “vulnerabilities” remain for small firms in particular.

Commissioner for financial services and stability Lord Jonathan Hill welcomed the publication of the results of the tests, conducted this year by the European Insurance and Occupational Pensions Authority (EIOPA), which showed that the sector is “in general sufficiently capitalised”.

However, Lord Hill called on public authorities and insurers to press ahead with preparations for the “full and rapid implementation” of the EU’s ‘Solvency II’ framework, the new risk-based regulatory regime for insurance and reinsurance which will be fully applied in the EU from 1 January 2016.

The Solvency II regime sets out broader risk management requirements for European insurers and dictates how much capital firms must hold in relation to their liabilities. EU legislation was originally scheduled to come into force in 2012; however the Omnibus II Directive, which completed and finalised the new framework, was only approved by the European legislative authorities earlier this year. It must be transposed into national laws by 31 March 2015.

According to the findings of EIOPA, an independent advisory body to the Commission, the European Parliament and the Council of the European Union: “The results of the baseline scenario indicated that the (insurance) sector is in general sufficiently capitalised in Solvency II terms. Nevertheless, 14% of the companies representing 3% of total assets, had a solvency capital requirement (SCR) ratio below 100%.”

In addition, the survey said the insurance sector “is more vulnerable to a ‘double hit’ stress scenario that combines decreases in asset values with a lower risk free rate”.

EIOPA said: “In a prolonged low yield scenario, 24% of insurers would not meet their SCR and certain companies could face problems in meeting their promises in 8-11 years’ time.”

However, EIOPA said the survey showed that 56% of the companies “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.”

EIOPA chairman Gabriel Bernardino said (4-page / 224 KB PDF): “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.”