The European Insurance and Occupational Pensions Authority (EIOPA) published the report that assesses financial stability of the insurance and pension sectors in European Union. The report contains special features on the contagion risk analysis of the impact of a bank’s failure on the insurance sector, an analysis on the potential increase of corporate credit risk, cyber risk and the European sector, and European insurers' derivative transactions cleared in UK-based central counterparties. The report notes that the COVID-19 pandemic continues to pose a challenge to European economies. Within this backdrop, environmental risks, cyber risks, and risks stemming from a continued low interest rate environment emerge as key concerns.
Climate and cyber risks remain on the top of EIOPA agenda. Environmental risks are the top risk in terms of the highest expected increase in materiality for the insurance and pension sectors, given that extreme weather events grow in intensity and frequency. Therefore, supervisors need to ensure that robust risk management practices, especially at reinsurers, are in place to address underwriting risks. The insurance industry, however, could also experience increased demand for new services and play a crucial role in closing existing protection gaps. Furthermore, cyber risk is one of the most important risks for the European insurance sector, reflecting widespread digitalization trends and home-office solutions. The clear upward trend of cyber incidents further intensified by the COVID-19 crisis has highlighted the need to better understand and assess cyber risk. The strong concerns of insurance supervisors stem not only from cyber incidents, but also cyber underwriting policy both affirmative and non-affirmative. Despite the increasing momentum, the understanding of cyber risks remains limited, pointing to necessary improvements in data collection and cyber risk modeling. As with environmental risks, the cyber sphere could also open up opportunities for insurers, seeing that demand for cyber insurance is bound to rise. Results of the analysis on the potential increase of corporate credit risk points to overall resilience in the sector, with some pockets of risk in portfolios with especially long durations.
Keywords: Europe, EU, Insurance, Solvency II, ESG, Climate Change Risk, Stress Testing, Scenario Analysis, Sustainable Finance, Cyber Risk, Credit Risk, Pensions, EIOPA
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