EIOPA announces results of the EU-wide insurance stress test 2014

The European Insurance and Occupational Pensions Authority (EIOPA)
announced today the results of its EU-wide Insurance Stress Test. The
exercise aimed to test the overall resilience of the insurance sector and
to identify its major vulnerabilities.
Undertakings estimated a baseline scenario using the upcoming Solvency II
regime, without internal models, and on top of that tested a number of
severe macro-economic and insurance specific shocks, including a prolonged
period of low yields ("Japanese-like" scenario) and a sudden reverse
in interest rates ("Inverse" scenario).
The results of the baseline scenario indicated that the sector is in
general sufficiently capitalised in Solvency II terms. Nevertheless, 14%
of the companies representing 3% of total assets, had an SCR ratio below
100%.
The stress test results showed that the insurance sector is more vulnerable
to a "double hit" stress scenario that combines decreases in asset
values with a lower risk free rate. However, 56% of the companies would
have a sufficient level of capital under the most severe "double hit"
stress scenario. The major vulnerabilities as per the insurance specific
stresses were mass lapse, longevity and natural catastrophes.
According to the low yield module of the stress test, 24% of companies
would not meet their SCR under the "Japanese‑like" scenario, while
20% would not meet this threshold under the "Inverse" scenario. A
continuation of the current low yield conditions could see some insurers
having problems in fulfilling their promises to policyholders in 8-11
years' time.
As a follow up to the stress test EIOPA issued a set of Recommendations to
NSAs in order to address in a coordinated way the identified
vulnerabilities.
In the context of the preparation for Solvency II, NSAs are recommended to
engage in a rigorous assessment of the preparedness of insurance
undertakings, in particular regarding the situations where capital
increases and/or balance sheet management actions will be needed.
Regarding the main vulnerabilities identified in the stress test, NSAs are
recommended to engage with companies to ensure that they have a clear
understanding of their risk exposures and their vulnerability to given
stress scenarios and that they have the capacity to take recovery actions
if those vulnerabilities materialise.
Based on the results of the Low Yield module, in particular for
undertakings that operate considerable duration and/or internal rate of
return mismatches, NSAs are recommended to examine their asset/liabilities
management and risk management strategies and practices and ensure that
they properly assess the sustainability of the guaranteed rates offered.
Gabriel Bernardino, Chairman of EIOPA, said: "EIOPA's stress test 2014
was a truly preventive supervisory tool. It gave EU supervisors an updated
picture of the undertakings preparedness to comply with the upcoming
Solvency II capital requirements and by applying a set of rigorous and
severe stresses indicated to us the areas where undertakings are most
vulnerable. EIOPA's recommendations will ensure that the vulnerabilities
identified are addressed and that follow-up actions by NSAs will be taken
in a consistent way".
The documentation can be viewed on EIOPA's website (Link:
https://eiopa.europa.eu/activities/financial-stability/insurance-stress-test-2014/index.html
).


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