EIOPA warns inflation could increase Solvency II capital

Europe’s insurers have been warned that inflation could drive an increase in their solvency capital requirements (SCR). The European Insurance and Occupational Pensions Authority (EIOPA) says longer-term inflation trends can affect insurers more than short, sharp spikes.

“Therefore, undertakings should monitor inflation risk and their exposure to it as changes in the development of inflation could lead to an increase in the SCR,” it says. Publishing the results of a comparative study on non-life underwriting risk in internal models, which companies can apply to use instead of the standard formula to calculate their SCRs under Solvency II, EIOPA says insurers using internal models show lower capital intensities for premium and reserve risk compared to standard formula calculations.

In its review of 75 European insurers belonging to 31 insurance groups, EIOPA says “outliers” to the general findings of stable capital allocation have been notified, with national supervisors overseeing follow-up action. “Some supervisory actions have also already led to changes in internal models,” EIOPA says.

The study found differences in risk measurement between insurers using internal models, with EIOPA concluding that many insurers with lower capital intensities are relying on “uncertain future profit estimates” in calculating premium risk.

“Such differences in how future profits are accounted for have led European supervisors to carry out further analysis on the matter,” it says.

A harmonised quantitative reporting template for internal models was rolled out at the end of 2023, which EIOPA says most insurers were prepared for.