In both sectors EIOPA observes a challenging macro-economic and financial environment with persistent low interest rates. Also the "double-hit scenario" remains the key concern as it would lead to a situation where the value of assets decreases whilst the value of liabilities increases causing severe negative implications for the sustainability of the European (re)insurance and pension sectors.
In the insurance sector, low yields and a resultant subsequent reinvestment risk (i.e. impossibility to re-invest with the same return) remain the main vulnerability, especially for life insurers. The current low interest rate environment puts pressure on the profitability of companies and forces them into a - "search for yields" - behaviour.
At the same time, the upcoming Solvency II regime will increase the resilience of the European insurance industry and will bring better alignment of risk and capital management.
The Institutions for Occupational Retirement Provision (IORPs) also struggle with low interest rates, which make it difficult for them to keep pension promises. Investment allocation of pension funds remains broadly unchanged.
Gabriel Bernardino, Chairman of EIOPA, said: "In line with its mandate to preserve financial stability in the European Union, in 2016, EIOPA will launch the third biennial EU-wide stress test for insurers. Particularly taking into account the macroeconomic reality, this exercise will focus on two adverse scenarios, namely: the prolonged low yield environment and the "double-hit" scenario. I am confident that the shocks included in this exercise will allow EIOPA and national supervisors to elaborate on appropriate measures to mitigate these key risks and define areas for further investigation".
EIOPA continues to stimulate discussion on the issues that are important for the positive and sustainable development of the European insurance and occupational pension sectors. In line with this strategic objective, the Report contains a thematic article entitled "Assessing Systemic Risk of the European Insurance Industry". By this EIOPA further contributes to a constructive dialogue with national supervisors and academia on systemic risks.
EIOPA Financial Stability Report December 2015 can be viewed below
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