July 01, 2019

EIOPA published its financial stability report on the insurance, reinsurance, and occupational pensions sectors in the European economic area. The report also contains a thematic article that empirically investigates whether the introduction of green bond policies by insurance companies have a positive impact on the equity prices. The results suggest that market investors positively price introducing policies for the issuance of green bonds or launching a green fund. However, the same results were not confirmed for initial investments in green bonds.

The financial stability report shows that, while overall the insurance sector remains adequately capitalized, profitability is under increased pressure in the current low-yield environment. The Solvency Capital Requirement ratio for the median company is 223% for life and 207% for non-life insurance sector, although significant disparities remain across undertakings and countries. The reinsurance industry has proven resilient despite again suffering significant catastrophe losses in 2018, which ended up as the fourth costliest year in terms of insured catastrophe losses. In general, natural catastrophe losses are showing an upward trend, with the 10 costliest years in terms of overall losses all occurring after 2004. The price renewals continue to show only moderate price increases, indicating potential excess capacity in the reinsurance market, with the alternative reinsurance capital market in particular showing a strong appetite for insurance risks.

In the European occupational pension fund sector, total assets and cover ratios remained broadly stable. However, the current macroeconomic environment and ongoing low interest rates continue to pose significant challenges to the European occupational pension fund sector, in particular for the defined benefit pension schemes. The report highlights that new types of risks are emerging with the onset of climate change and cyber risk. The climate-related risks pose threats in particular for the insurance industry, as insurers act simultaneously as investors and underwriters, while the digital transformation makes insurers and pension funds increasingly exposed to cyber-attacks. Thus, the 2019 EIOPA stress test exercise for occupational pension funds incorporates the Environmental, Social, and Governance (ESG) risks. Moreover, results from the cyber risk questionnaire, which is included in the 2018 Insurance Stress Test exercise, will be used to analyze the exposures of insurers toward cyber risk in more detail during 2019.

Going forward, EIOPA will continue to deliver on its mandate on financial stability by assessing vulnerabilities at both macro- and micro-prudential level. In particular, incorporation of new emerging risks in the stress-test methodology will be investigated further. In this regard, enhanced transparency will help improve market discipline and contribute to making insurers and pension funds resilient in the short, medium, and long term.

 

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Keywords: Europe, EU, Insurance, Pension Funds, Reinsurance, Financial Stability Report, Cyber Risk, Climate Change Risks, SCR, Financial Stability, ESG, Solvency II, Stress Testing, EIOPA

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