Europe insurance stress test shows ‘high’ nat cat resilience: EIOPA

European insurers showed “high resilience” to a series of natural catastrophes where European countries are hit in a quick succession of four windstorms, two floods, and two earthquakes, according to the European Insurance and Occupational Pensions Authority (EIOPA).

The stress test included 42 European re/insurance groups representing a market coverage of 75 percent based on consolidated group assets and involved three scenarios covering a wide range of market and insurance specific risks.

In the natural catastrophe scenario only a small decrease of 0.3 percentage points of assets over liabilities ratio was reported, according to EIOPA. Overall, the participating groups demonstrate a high resilience to the series of natural catastrophes tested, showing the importance of the risk transfer mechanisms in place, namely reinsurance, which absorbed 55 percent of the losses, EIOPA said. Consequently, the most affected groups are reinsurers and those direct insurers largely involved in reinsurance activities, it added.

The test also included a yield curve up shock combined with lapse and provisions deficiency shocks, which means there is a sudden and sizeable repricing of risk premia and a significant increase in claims inflation. Furthermore, it also tested the impact of a yield curve down shock combined with longevity stress, which means there is a protracted period of extremely low interest rates accompanied by an increase in the life expectancy.

The impact of the different scenarios on the balance sheet position and on the capital position of the participating groups was assessed by the excess of assets over liabilities and an estimation of the post-stress solvency capital requirement (SCR) ratio.

In the pre-stress (baseline) situation, participants reported an aggregate assets over liabilities (AoL) ratio of 109.5 percent and a pre-stress SCR coverage of 202.4 percent.

Overall, the exercise confirmed the significant sensitivity to market shocks combined with specific shocks relevant for the European insurance sector, EIOPA said. On aggregate, the sector is adequately capitalised to absorb the prescribed shocks, it added.

In the ‘yield curve up’ scenario, the excess of assets over liabilities is reduced by approximately one third (-32.2 percent) and the aggregate post-stress SCR ratio drops to 145.2 percent. Six groups reported a post-stress SCR ratio below 100 percent.

In the ‘yield curve down’ scenario, the impact on the excess of assets over liabilities is of similar magnitude (-27.6 percent) with an aggregate post-stress SCR ratio of 137.4 percent. Seven groups reported a post-stress SCR ratio below 100 percent, EIOPA noted.

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