With EIOPA observing the still fragile economic conditions in European countries, both insurance and occupational pension sectors will 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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