Insurance groups under stress
EIOPA publishes 2018 stress test results
The European insurance industry proved to be broadly resilient in the 2018 European stress test. This was likewise true for the five participating insurance groups from Germany. The European Insurance and Occupational Pensions Authority (EIOPA) published the results of the stress test on 14 December.
German participants reinforce overall impression at European level
Taken as a whole, the European insurance industry would be in a solid position if the stress scenarios were to materialise. However, the scenarios of a drop in interest rates accompanied by a prolonged period of low interest rates and of a rise in interest rates accompanied by market shocks both had a clear negative impact on the coverage of the regulatory own funds requirements. Nevertheless, this impact would be manageable. The long-term guarantee (LTG) measures were also shown to provide the intended countercyclical effect.
In general, the participating German groups likewise proved able to withstand a crisis. It became clear, however, that a prolonged low interest rate environment would be a challenge for the German participants in particular.
The 2018 EIOPA stress test involved 42 large European insurance groups. The participants from Germany were Allianz SE, Munich Re, HDI V.a.G., R+V Versicherung and HUK-COBURG Versicherungsgruppe.
Design of the stress test
The goal of the stress test was to identify and assess potential risks for the insurance industry that could materialise as a result of adverse developments. It was not about passing or failing the tests; as EIOPA put it: “It is not a pass or fail exercise”. Neither do the results lead to additional own funds requirements.
The stress test was conducted on the basis of Solvency II valuation principles with a reference date of 31 December 2017. It included three stress scenarios:
- a drop in interest rates accompanied by a prolonged low interest rate environment and a simultaneous increase in life expectancy
- a rise in interest rates accompanied by market shocks and high lapse rates
- a series of natural catastrophes
To assess the impact of stress, EIOPA also required the participating insurance groups to carry out a recalculation of the solvency capital requirement (SCR) for the first time (see July 2018 edition of the BaFinJournal - only available in German).
Three questions on the EIOPA stress test for BaFin Chief Executive Director Dr Frank Grund
Dr Grund, what is your assessment of the results of the recent stress test of large European insurance groups?
The results tally with our findings from ongoing supervision. As expected, the insurance undertakings were sensitive to significant changes in the capital markets and to changes in the interest rate environment.
What can be said specifically from a German perspective?
Due to their long-term obligations, some German undertakings are affected particularly severely by the low interest rate environment – in real life as in the stress test. For example, in the past some German life insurers guaranteed high interest rates that are now no longer readily achievable on the capital market. Despite this, German insurance groups on balance proved resilient in the stress test.
Does the EIOPA stress test allow for conclusions to be drawn about the life insurance industry?
Unlike the 2016 EIOPA stress test, this stress test focused on large insurance groups rather than large life insurers. It does not, therefore, allow for conclusions to be drawn about the German life insurance industry. We use other tools for this, in particular the annual forecast calculations.
This article reflects the situation at the time of publication and will not be updated subsequently. Please take note of the Standard Terms and Conditions of Use.