EIOPA warns insurers over prolonged low-yield environment

The risk of a prolonged low-yield environment has intensified during the last six months, remains the key risk for the insurance sector and continues to put pressure on solvency positions. This is according to the European Insurance and Occupational Pensions Authority (EIOPA), which has published its December 2019 Financial Stability Report on the (re)insurance sector in the European Economic Area. The report notes that a combination of weakening economic outlook, growing trade tensions and increased downside risks has ushered in a new round of monetary policy easing by central banks, which has been accompanied by sharp decline in longer-term yields. “While the European insurance sector remains overall well capitalised with a median solvency ratio of 212%, significant disparities remain across undertakings and countries. Overall solvency positions have also deteriorated in the first half of 2019 and the low interest-rate environment is expected to put further pressures on the capital positions going forward, in particular for life business,” states the report. EIOPA warns that the low-yield environment also has implications for long-term profitability. It says that as insurers find it increasingly difficult to meet promises and guarantees issued in the past, this could trigger further search for yield behaviour by insurers, which could add to the build-up of vulnerabilities in the financial sector if not managed properly. It adds that cyber risk and climate change risks continue to demand attention from insurers, pension funds and supervisors, as insurers and pension funds are increasingly susceptible to cyber risks as the digital transformation continues, while also bringing new opportunities for insurers in the form of cyber underwriting. “Regarding climate risk, insurers and pension funds can play a key role in the transition towards a low-carbon economy as major institutional investors, but this transformation carries significant investment risks as well. It is therefore crucial that both insurers and pension funds actively incorporate climate change risks in their own risk management frameworks,” the report states. It points out that climate change can also have a significant impact on the liabilities of non-life insurers and reinsurers, as extreme weather-related events become more frequent and severe. EIOPA recently published an opinion on integrating sustainability and climate change risks into the Solvency II framework. The EIOPA report notes that the reinsurance industry has seen a relatively benign first half of 2019 in terms of catastrophic events, and this, coupled with the overall positive stock market developments, has benefited the profitability and solvency position of the reinsurance sector. But it warns that losses in the second of half of the year could still have a significant impact. Gabriel Bernardino, chairman of EIOPA, said: “Over the past six months, we have seen the risks for a prolonged low-yield environment intensify. A combination of a weakening economic outlook, increased downside risks and ongoing uncertainties about trade disputes and Brexit have ushered in a new round of monetary easing by central banks, which has been accompanied by a sharp decline in longer-term yields. In this regard, we continue to see the clear benefits of Solvency II, as the market-consistent and risk-based regulatory framework has helped price in the risk of low interest rates, build resilience and enhance the risk management practices of insurers.” He added: “At the same time, it is important that the regulatory framework continues to remain robust in the future and adequately reflects the risks faced by insurers in a ‘low for long’ environment. As such, it is crucial that these elements are addressed in the currently ongoing Solvency II review to ensure that promises can continue to be met in the future.”

EIOPA warns insurers over prolonged low-yield environment

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