EIOPA updates on financial stability in (re)insurance and occupational pensions sector

The European Insurance and Occupational Pensions Authority (EIOPA)
publishes its Financial Stability Report December 2013 (Link:
https://eiopa.europa.eu/publications/financial-stability/eiopa-second-half-year-financial-stability-report-2013/index.html
) with the updates on financial stability in the (re)insurance and
occupational pension sectors in the European Economic Area (EEA).
EIOPA observes that economic conditions in European countries are still
fragile and that both insurance and occupational pension sectors continue
to face three main prominent risks – a prolonged low yield environment,
a weak macroeconomic climate and a possible contagion risk arising from
exposure to sovereigns and financial institutions.
In the insurance sector, the weak macroeconomic climate and low yield
environment has resulted in sales' constraints and is prompting firms to
seek growth opportunities by establishing new business in regions such as
Latin America or South-Eastern Asia.
Moreover, as a reaction to the low yield environment, undertakings are
retreating from guaranteed life products and focusing on unit-linked
products and products with more flexible guarantee structures. This
expected change in the mix of business needs to be closely monitored to
ensure a proper balance between stability of firms and policyholders'
interests.
Overall, Solvency I capital levels for life and non-life insurers are
dropping, but remain well above the 100% minimum requirement.
The global reinsurance sector continued its robust growth. Major loss
events from natural catastrophes in the first half of 2013 seem to be
relatively low compared to previous years. Profitability for the
reinsurance sector has been sustained, but remains under pressure due to
the low yield environment. Issuance of Insurance-Linked Securities (ILS)
reached its highest level since 2007, with large capital inflows across
the sector. As a result global reinsurer capital increased to an all-time
high. The availability of so much reinsurance capacity creates a strong
competitive environment. Developments in ILS also need close monitoring by
supervisors as the extensive usage of ILS tends to cloud the picture in
terms of understanding the risk transfer.
In the occupational pension sector, defined benefit schemes still dominate,
but the sustained shift towards defined contribution schemes in many
countries continues. Investment allocation of pension funds has been
fairly stable over time. However, the low interest rate environment makes
it more difficult for defined benefit schemes to meet the guaranteed
return.
EIOPA's econometric modelling demonstrates a strong link between the
macroeconomic environment and insurance business. Furthermore, EIOPA's
quantitative analysis clearly shows that premium growth in life insurance
would be hit strongly under any adverse macroeconomic scenario.



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