EIOPA Risk Assessment Shows Increase in Credit and Market Risks
EIOPA published its risk dashboard based on Solvency II data from the fourth quarter of 2019. This dashboard summarizes the key risks and vulnerabilities in EU insurance sector via a set of risk indicators, complemented with market data and other available information. Solvency II data is based on financial stability and prudential reports collected from 96 insurance groups and 2,837 solo insurance undertakings. Results of the analyses show that risk exposures of the insurance sector in EU increased, as the outbreak of COVID-19 strongly affected the lives of all European citizens with disruptions in all financial sectors and economic activities.
The risk dashboard shows that macro and market risk indicators deteriorated in March 2020, moving from high to a very high level. Financial markets have been characterized by sell-off across asset classes, increased volatility for bond and equity markets, increasing risk premia, and flight to quality investment behavior in March 2020. Credit risk has increased across all asset classes, particularly CDS of government bonds and financial and non-financial corporate bonds, have increased sharply. Liquidity and funding risks have been raised to high level due to potential additional strains on the disposable liquidity of insurers in the medium- to long-term horizon. Liquidity indicators were broadly stable in the fourth quarter of 2019; however, some indicators are expected to worsen, triggered by a possible decrease in premiums and new business, potential increase in claims, and illiquid level of certain assets.
Profitability and solvency risks also increased to high level. Although solvency position of insurers remained relatively stable for the fourth quarter of 2019, profitability and solvency risks are expected to deteriorate, given the double-hit scenario negatively affecting insurers on both asset and liability side. Insurance risks have been also raised to high level. While broadly stable in the fourth quarter of 2019, negative effects via income reduction and increase in claims are expected going forward. Market perceptions of the insurance sector have deteriorated as well. Market developments point to a “double-hit” scenario negatively affecting insurers on both asset and liability side, as tested in previous stress test exercises. Insurers’ external ratings and rating outlooks do not show sign of deterioration as of the end March 2020, though credit quality is expected to deteriorate.
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Keywords: Europe, EU, Insurance, Risk Dashboard, COVID-19, Market Risk, Credit Risk, Solvency II, Liquidity Risk, Stress Testing, EIOPA
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