EIOPA published a supervisory statement on the impact of the ultra-low or negative interest rate environment on the insurance sector in EU. The statement starts by analyzing the impact of ultra-low or negative yields on the European insurance sector, provides an overview of the supervisory responses and the reactions of undertakings to such an environment, and provides a set of recommendations to mitigate the impact of the ultra-low or negative interest rate environment. This statement should be read along with the background note of EIOPA, which focuses on the supervisory powers and measures and the reactions of companies to the low interest rate environment.
The statement highlights that the ultra-low or negative interest rate environment constitutes one of the most important sources of systemic risk for insurers for the coming years. Such an environment has an impact on both asset and liability sides of the balance sheet, affecting the solvency position and profitability of undertakings. The aim of the supervisory statement is to raise awareness and ensure that the insurance sector continues to be financially resilient. The statement also seeks to inform consumers and policyholders about supervisory measures and actions being taken to protect their interest. EIOPA encourages the national supervisory authorities and the undertakings in EU to continue taking actions to mitigate the impact of the ultra-low or negative interest rate environment on the EU insurance sector.
EIOPA recommends that, in the medium-to-long-term, the national supervisory authorities should identify whether there are any tools or powers missing in their current toolkit. Where a gap is identified, the national authorities should request the missing powers. In the short-term, however, EIOPA recommends that:
- National supervisory authorities should intensify the monitoring and supervision of insurers identified as facing greater exposure to the low interest rate environment;
- National supervisory authorities should engage in dialog with undertakings to explore actions they could take to improve their financial resilience
- Within the context of improving financial resilience and in particular sound capital planning, undertakings should exercise caution in distributing dividends and national supervisory authorities should consider whether it is necessary to restrict the distribution of dividends;
- National supervisory authorities and undertakings should pay special attention on preemptive recovery and resolution planning to reduce the likelihood and impact of insurance failures
- National supervisory authorities should broaden the analysis of the low interest rate environment and also consider the potential build-up of systemic risk.
The content of this document is aligned and should be read in conjunction with the policy proposals contained in the Consultation Paper on the Opinion on the 2020 Review of Solvency II.
Keywords: Europe, EU, Insurance, Interest Rate Risk, Systemic Risk, Solvency II, Recovery and Resolution Planning, Asset and Liability Management, ALM, EIOPA
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