“The capital component of the exercise confirmed that the main vulnerabilities for the sector stem from market shocks, and, specifically, from the decoupling of the risk-free rate and risk premia, the so-called double-hit scenario,” said the regulator.
“In the fixed balance sheet approach, where no management actions against the prescribed shocks could be enforced, the aggregate solvency ratio decreased by 92.1 percentage points to 125.7%, bringing nine undertakings under the regulatory threshold of 100%.”
Meanwhile, it was highlighted that, under the constrained balance sheet approach, results improved when participants were allowed to take reactive management actions. What this means, said EIOPA, is that the insurance industry has tools at its disposal to cope with adverse market and economic effects.
As for the liquidity component of the stress test, it was found that participants’ liquidity position appears to be a less significant concern compared to solvency positions, given large holdings of liquid assets. However, it was pointed out that insurers cannot rely solely on cash holdings to cover unexpected outflows.
“The stress test has shown that European insurers can maintain their financial health even amid harsh economic conditions,” stated EIOPA chair Petra Hielkema. “I’m pleased that at no point did participants report a post-stress asset position in which insurers’ commitments to policyholders would have been jeopardised.
“Below the surface of these positive results, however, is an often-heavy reliance on transitional measures, which are going to be phased out by 2032. In the months to come, we will turn our attention to the vulnerabilities that were brought to light in the exercise. We will also call on legislators to consider disclosures of individual results to become a legal requirement.”
Of the 44 participants, only eight consented to the release of their individual results.
The goal of the stress test was to give supervisors a valuable insight into the capital and liquidity positions of European insurers under a severe but plausible scenario. EIOPA said it also provides a useful basis for a follow-up dialogue between group supervisors and the participants to address vulnerabilities.
“EIOPA and the national competent authorities will analyse the results further to gain a deeper understanding of the risks and vulnerabilities of the sector,” added the advisory body. “EIOPA will also assess the need for issuing recommendations on relevant concerns identified in the exercise.”