Insurance Europe “puzzled” by EIOPA reaction to Solvency II stress test

Insurance Europe, the European re/insurance federation, has said it feels the industry came through Solvency II stress tests carried out by the European Insurance and Occupational Pensions Authority (EIOPA) very well and is baffled by why EIOPA has made such a long list of recommendations following the tests.

The 2016 EU-wide stress test assessed insurers’ vulnerabilities and resilience to two severe market developments: a prolonged low yield environment and a “double-hit” scenario.

The “low-for-long” scenario reproduced a situation of entrenched secular stagnation driving down yields at all maturities for a long period of time, while the “double-hit” scenario reflected a sudden increase in risk premia combined with the low yield environment.

The severity of the scenarios goes beyond the Solvency II capital requirements.

The exercise involved 236 insurers from 30 European countries, with market coverage of 77 percent in terms of the relevant business (life technical provisions excluding health and unit linked) and included medium- and small-sized undertakings.

The test showed that under the 'double hit' scenario 40 percent of the sample would lose more than a third of their surplus assets and under the ‘low for long’ scenario 16 percent of the sample would lose a similar amount of surplus assets.

Olav Jones, deputy director general of Insurance Europe, said described this as illustrating how resilient the industry is. He said that such circumstances do not illustrate a vulnerability but rather show the system working as it should.

“It is a core role of insurers to protect customers from risks such as these and the purpose of holding surplus capital in excess of liabilities is to allow insurers to absorb risks. Therefore, it is logical that under stress-test scenarios, insurers exposed to those risks will see their surplus assets reduced,” Jones said.

“This is not a vulnerability, it is the system working as it should, and Insurance Europe is puzzled by the long list of supervisory actions recommended. It is also important to view these results in the context of the additional layers of protection that arise from how Solvency II calculates liabilities, which can result in conservative measurements.

“While Solvency II has only been in force for just under one year, it has set the bar very high in terms of the strict requirements insurers need to meet. This already includes capital requirements for low interest rates and reductions in the value of insurers’ investments, as well as all the other risks to which insurers can be exposed.

“Solvency II also includes strict risk management and governance requirements, so that management can take any necessary actions early. It also features extensive reporting and powers of intervention to ensure that supervisors can identify and monitor companies with specific issues and step in to take action, if needed.

“In addition, it is important to emphasise that, as EIOPA has already said, these stress tests were not a ‘pass or fail’ exercise. The companies that took part in this exercise represent only 60 percent of the industry and the 40 percent that was not covered includes non-life and unit-linked business that is unlikely to be impacted by low interest rates. As such, had the entire industry been included, the level of overall resilience shown would have been even higher.”