By John Bowers, Actuarial Product Director, RNA Analytics
The report on the test shed light on the capacity of EU insurers to deal with the economic fallout from a “severe but plausible" amplification of geopolitical tension – albeit “at a heavy price”.
The stress test assessed 48 carriers (representing approximately 75% of the EEA market by total assets) under an adverse scenario shaped by heightened geopolitical tensions and their cascading effects. The scenario, involving a convergence of events, exceeded the calibration of existing capital requirements. Amid subdued growth and elevated inflation, the ripple effects included tighter financing conditions, a sharper yield curve inversion, widening credit spreads, and uneven increases in government bond yields driven by concerns over debt sustainability. Market-wide shocks were then compounded by insurance-specific challenges such as mass lapses, claims inflation, and reduced premium income.
The results indicate that the European insurance industry has sufficient capital to absorb the extreme but plausible scenarios in the stress test, leading to a loss of EUR285.6bn in excess assets. Just eight insurers did not meet the post-stress capital requirement, requiring reactive management actions – such as such as asset sales, dividend retention, and capital raises – to maintain solvency.
These actions, while not needed to cover liabilities, were applied by other insurers to meet internal risk management frameworks. No significant externalities emerged from these actions, though embedded measures were not accounted for.
The industry was also found to hold adequate liquid assets to cover the material liquidity needs arising from surrenders in EIOPA’s adverse scenario. This resulted in net asset sales of EUR206.7bn under fixed balance sheet assumptions, rising to EUR305.6bn when reactive management actions are allowed, equivalent to approximately 4% of quarterly bond trading volumes in the EEA.
While EIOPA’s stress test is not a “pass-fail exercise”, it provides valuable insights into the sensitivity of European insurers to the significant uncertainties of the geopolitical and economic landscape. The outcome of the exercise is also expected to inform supervisory processes at European and national levels. Further, the insights gathered on the behaviour of the industry under stressed conditions should also inform the discussion on the capital relief at political level in the context of the bloc’s Solvency II review.
Regime change
It is worth noting that the primary objective of Solvency II at the very outset was to create a risk-based regulatory framework that aligned insurers’ capital requirements with the risks they undertake. It also sought to enhance policyholder protection, promote market transparency, and harmonise insurance supervision across the EU, fostering a level playing field.
Whether or not it has achieved this goal is still debated. Solvency II has successfully enhanced transparency, increased policyholder protection, and improved risk management practices across the sector. That said, its complexity has attracted some criticism – which both the UK and EU revisions aim to address, while also preserving the framework’s core principles.
The process of assimilating the onshored Solvency II regime in the UK was completed on 31 December 2024, while progress in Europe is some way behind the UK, as tabled amendments to the Solvency II Directive in the bloc were only recently approved by the EU Council. Member States will have until 29 January 2027 to publish the domestic provisions necessary to comply with the new directive.
Amongst the amendments, the EU’s review introduces a new framework to improve the effective application of proportionality principles, with the aim of driving a reduction in governance and quantitative requirements, based on the nature, scale and complexity of the undertakings’ risk.
In addition to setting out criteria for identifying small and non-complex undertakings (SNCUs) that stand to benefit from proportionality measures, the new regime also empowers supervisors to grant – and withdraw – similar concessions to other insurers whose risk profile justifies the use of some proportionality measures even though they do not classify as small and non-complex.
EIOPA’s recently published technical advice on the matter suggests a combination of quantitative and qualitative conditions, some of which relate to the undertaking’s ability to withstand current and future risks, the complexity of its business model, its governance structure, and the size of its balance sheet.
Testing times
In a similar initiative to the EU’s market-wide stress test, a number of the largest regulated life insurers in the UK have been asked to provide insights into the impact of various stress scenarios on their businesses. LIST aims to evaluate both sector-wide and firm-specific resilience to severe yet plausible adverse scenarios. It also aims to enhance market understanding, foster discipline, and identify vulnerabilities in risk management practices. The results, scheduled for publication later this year, are expected to illuminate how the components of the Solvency UK regime respond under stress conditions.
As Solvency frameworks evolve, these stress tests provide valuable insights into the industry's capacity to navigate complex and unforeseen risks. Looking ahead, the results of similar initiatives, such as the LIST test, will be crucial in shaping future regulatory discussions and enhancing market stability.
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