Featured Product

    EIOPA Report Studies Impact of Ultra-Low Yields and COVID on Insurers

    July 17, 2020

    EIOPA published a report on the impact of ultra-low yields in the insurance sector, including first effects of the COVID-19 crisis. The report assesses the risks and implications of the ultra-low or negative yields on the investment behavior of insurers, considers how challenged are the profitability and solvency positions of insurers, and describes the impact on the insurance business models and consumers. For a better understanding of the additional challenges and uncertainty coming from the COVID-19 pandemic, the report also used a qualitative questionnaire to capture the views of national competent authorities regarding the events in the first quarter of 2020 and their expert judgment on potential future risks.

    In the current macro-financial environment, one of the major concerns for the insurance market is the exceptionally ultra-low or negative level of interest rates. In addition, the COVID-19 outbreak has severely affected the macroeconomic and market conditions worldwide, with the launch of support packages and monetary easing of some central banks and governments taking place to mitigate the negative effects. In Europe, this was accompanied by a flight to quality, increasing the likelihood of a “low for long” scenario with adverse implications for the insurance sector. As a result, insurers are significantly challenged in terms of asset allocations, profitability, solvency, and business model adaption. The low interest rate environment was and still is, also after COVID-19, one of the main issues for the insurance market. 

    The report analyzes the impact of interest rates on assets and liabilities, the solvency capital requirement (SCRand SCR ratios, risk margins, and changes in risk-free rate curves on the technical provisions and asset sensitivity to market movements due to COVID-19. The report highlights that low-yield environment directly affects the solvency position of insurers typically through the balance sheet channel, but also indirectly on a longer time horizon via the income channel. The excess of assets over liabilities has slightly depreciated since interest rates decreased further in 2019, but had a comeback at the end of 2019 reaching the maximum level since the entry into force of the Solvency II regime. The estimates show that some insurers could suffer losses in the excess of assets over liabilities, with the overall market potentially losing more than a third of their excess of assets over liabilities based on this methodological approach. Exact losses are, however, hard to estimate given that Solvency II measures such as the volatility adjustment and the symmetric adjustment of the equity capital charge compensate some of the losses and that several insurers also hedge these risks. 

    The COVID-19 shock added additional pressure on insurers’ solvency ratios through increased market volatility, adverse movements in equity prices, bond yields and credit spreads, and potential bond downgrades. The report presents a methodological approach that estimates the sensitivity of the balance sheets of insurers to market developments in one of the worst days in the financial markets (March 18) since the pandemic outbreak. During the COVID-19 shock, the flight to quality observed decreased the market value for lower rated assets. Measures such as volatility adjustment and symmetric adjustment could decrease the overall balance sheet effect due to market volatility during COVID-19 shock. The COVID-19 shock of March 2020 has amplified the risks by pushing risk-free rates and high credit quality yields lower while increasing the uncertainty and risk premia of riskier assets. The report also points out that direct impact both on the business model of insurance companies and on the policyholders can also be observed. Regarding the insurers’ business model, there is an evidence of a gradual shift from with profit participation products with guaranteed returns toward pure unit-linked products and hybrid products since at least 2016.

     

    Related Links

    Keywords: Europe, EU, Insurance, COVID-19, Solvency II, SCR, ALM, EIOPA

    Featured Experts
    Related Articles
    News

    ESAs Publish Reporting Templates for Financial Conglomerates

    ESAs published the final draft implementing technical standards on reporting of intra-group transactions and risk concentration of financial conglomerates subject to the supplementary supervision in EU.

    January 18, 2021 WebPage Regulatory News
    News

    EBA Publishes Report on Asset Encumbrance of Banks in EU

    EBA published the annual report on asset encumbrance of banks in EU.

    January 18, 2021 WebPage Regulatory News
    News

    US Agencies Publish Updates for Call Reports, FFIEC 101, and FR Y-9C

    FED updated the reporting form and instructions for the FR Y-9C report on consolidated financial statements for holding companies.

    January 15, 2021 WebPage Regulatory News
    News

    EBA Proposes Guidelines for Establishing Intermediate Parent Entities

    EBA issued a consultation paper on the guidelines on monitoring of the threshold and other procedural aspects of the establishment of intermediate EU parent undertakings, or IPUs, as laid down in the Capital Requirements Directive.

    January 15, 2021 WebPage Regulatory News
    News

    EC Adopts Financial Reporting Changes Arising from Benchmark Reforms

    EC published Regulation 2021/25 that addresses amendments related to the financial reporting consequences of replacement of the existing interest rate benchmarks with alternative reference rates.

    January 14, 2021 WebPage Regulatory News
    News

    BIS Bulletin Examines Key Elements of Policy Response to Cyber Risk

    BIS published a bulletin, or a note, that examines the cyber threat landscape in the context of the pandemic and discusses policies to reduce risks to financial stability.

    January 14, 2021 WebPage Regulatory News
    News

    HMT Updates List of Post-Brexit Equivalence Decisions in UK

    HM Treasury, also known as HMT, has updated the table containing the list of the equivalence decisions that came into effect in UK at the end of the transition period of its withdrawal from EU.

    January 14, 2021 WebPage Regulatory News
    News

    EBA Issues Erratum for Technical Package on Reporting Framework 3.0

    EBA published an erratum for technical package on phase 1 of the reporting framework 3.0.

    January 14, 2021 WebPage Regulatory News
    News

    APRA Publishes FAQ on Measurement of Credit Risk Weighted Assets

    APRA updated a frequently asked question (FAQ), for authorized deposit-taking institutions, on the measurement of credit risk weighted assets.

    January 14, 2021 WebPage Regulatory News
    News

    ECB Letter Sets Out Strategies to Address Issue of Nonperforming Loans

    ECB published a letter from Andrea Enria, the Chair of the Supervisory Board of ECB, answering questions raised by the President of the Bundestag (the German federal parliament) on how ECB assesses the financial stability of the euro area in the context of the significant level of nonperforming loans.

    January 14, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6450