EIOPA Revises LEI Guidelines, Issues Results of Stress Test

The 2021 insurance stress test assessed the industry’s resilience to a prolonged COVID-19 scenario in a “lower for longer” interest rate environment. EIOPA also performed a capital and solvency assessment and, for the first time, examined participants’ pre- and post-stress liquidity positions. The test allowed participants to calculate their post-stress position using two distinct approaches: the fixed balance sheet approach without management actions and the constrained balance sheet approach, where reactive management actions were permitted. Based on the results of this exercise, EIOPA will assess the need for issuing recommendations on relevant concerns identified in the exercise. The following are the key findings from the stress test exercise:

• Despite the grave economic and financial implications of the COVID-19 pandemic, the European insurance industry entered the stress test exercise with a strong level of capitalization—evidenced by a solvency ratio of 217.9% at the end of 2020. This robust buffer in the solvency ratio allowed participants absorb the shock of the adverse scenario.
• The capital component of the exercise confirmed that the main vulnerabilities for the sector stem from market shocks, and, specifically, from the decoupling of the risk free rate and risk premia, the so-called double-hit scenario.
• In the fixed balance sheet approach, where no management actions against the prescribed shocks could be enforced, the aggregate solvency ratio decreased by 92.1pp to 125.7%, bringing nine undertakings under the regulatory threshold of 100%. Results improved when participants, under the constrained balance sheet approach, were allowed to take reactive management actions. The actions taken reduced the original drop seen in the fixed balance sheet approach by 13.6pp to an aggregate solvency ratio of 139.3% and helped seven participants return their post-stress solvency ratios to above 100%. The insurance industry, therefore, demonstrated that it has tools at its disposal to cope with adverse market and economic effects.
• Despite the material cut in excess assets over liabilities, none of the participants reported an Assets over Liability ratio below 100%, neither under the fixed nor under the constrained balance sheet approach. This confirms the industry’s ability to meet promises to policyholders amid severe adverse developments of the economy and the markets.
• The long term guarantee measures which are part of the Solvency II regulation helped absorb part of the severe but plausible shocks, limiting the drop in participants’ solvency ratio. Nevertheless, the stress test also revealed that a section of the market still heavily relies on transitional measures, which, unlike long-term guarantees, are to be phased out by 2032. Undertakings should take concrete steps toward reducing their dependence on temporary measures that were put in place to smooth the transition from Solvency I to the Solvency II regime.
• The liquidity component of the stress test showed that the liquidity position of participants appears to be a less significant concern than solvency positions given the sector’s large holdings of liquid assets. Still, outcomes show that insurers cannot rely solely on their cash holdings to cover unexpected outflows.

Related Links

• LEI Guidelines
• Decision on Information Collection
• Taxonomy Roadmap (XLSX)
• Press Release on Insurance Stress Test
• Report on Insurance Stress Test (PDF)
• Factsheet on Stress Test (PDF)
• FAQs on Stress Test (PDF)

Keywords: Europe, EU, Insurance, Solvency II, IORP, PEPP, Reporting, Taxonomy, COVID-19, Stress Testing, Solvency Ratio, Liquidity Risk, LEI, Guidelines, EIOPA