2018 EIOPA Insurance Stress Test report

Executive Summary

  1. The 2018 insurance stress test is the fourth European-wide exercise initiated and coordinated by EIOPA. As in previous exercises, the main objective is to assess the resilience of the European insurance sector to specific adverse scenarios with potential negative implications for the stability of the European financial markets and the real economy. Hence, it cannot be considered as a pass-or-fail or capital exercise for the participating groups. In total 42 (re)insurance groups, representing a market coverage of around 75% based on total consolidated assets, participated. As this exercise is based on group level information, no country results are provided in the report.
  2. The exercise tests the impact of a prolonged low yield environment (Yield Curve Down – YCD – scenario) as well as of a sudden reversal of risk premia (Yield Curve Up – YCU – scenario), which are currently identified as key risks across financial sectors. In the YCD scenario, market shocks are complemented by a longevity shock. In the YCU scenario, market shocks are combined with an instantaneous shock to lapse rates and claims inflation. The market shocks prescribed in the YCD and YCU scenarios are severe but plausible and were developed in cooperation with the ESRB, based on past market observations. Additionally, a natural catastrophe (NC) scenario tests the resilience of insurers to a potential materialisation of a set of catastrophe losses over Europe.
  3. Groups were requested to calculate their post-stress financial position by applying the same models used for their regular Solvency II reporting. The use of LTG and transitional measures was taken into account and the impact of these measures had to be reported separately. Restrictions were prescribed in order to accommodate for the instantaneous nature of the shocks and the static balance sheet approach. In particular, the impact of the transitional measure on technical provisions was held constant in the post-stress situation and potential management actions to mitigate the impact of the scenarios were not allowed.
  4. The novelty of this year’s exercise is the assessment of the post-stress capital position of the participants, with an estimate of the post-stress Solvency Capital Requirement (SCR). Given the operational and methodological challenges related to the recalculation of the group SCR, participating groups were allowed to use approximations and simplifications as long as a fair reflection of the direction and magnitude of the impact was warranted.
  5. In the pre-stress (baseline) situation, participating groups have an aggregate assets over liabilities (AoL) ratio of 109.5% (the ratio ranges from 103.0% to 139.5% for participating groups). Overall, the participating groups are adequately capitalised with an aggregate baseline SCR ratio of 202.4%, indicating that they hold approximately twice as much capital than what is required by regulation.
  6. In the YCU scenario, the aggregate AoL ratio drops from 109.5% to 107.6%, corresponding to a drop of 32.2% in the excess of assets over liabilities (eAoL). Without the use of LTG and transitional measures the impact would be more severe, corresponding to a drop in AoL ratio to 105.1% (53.1% in the eAoL) with 3 groups reporting an AoL ratio below 100% (accounting for approximately 10% of total assets in the sample). The impact of the YCU scenario is driven by a significant drop in the value of assets (-12.8% for government bonds, -13.0% for corporate bonds and -38.5 % for equity holdings). Overall, the losses on the asset side outweigh the gains on the liability side. Technical Provisions (TP) decrease by 17.0%, attributed mainly to a decrease in life TP (-14.5%) due to the reduced portfolio (instantaneous lapse shock) and the increased discounting curve (upwards shock to the swap curves). However, an increase in TP was observed for those groups focusing mainly on non-life business. In this case, the impact of the claims inflation shock on the non-life portfolio leads to an increase in the TP, outweighing the beneficial effect of the increased discounting curve due to shorter-term liabilities.
  7. The capital position is materially affected in the YCU scenario, but the poststress aggregate SCR ratio remains at satisfactory levels of 145.2% corresponding to a drop of 57.2 percentage points. However, 6 groups report a post-stress SCR ratio below 100%. This is mainly driven by a significant decrease (-29.9%) in eligible own funds (EOF) following the shocks to the asset portfolio that are not fully compensated by the reduction of the TP, while the SCR decreases only slightly (-2.3%). LTG and transitional measures play a significant role in the post-stress capital position. Without the application of the transitional measures the aggregate SCR ratio drops by an additional 14.3 percentage points to 130.9%, while in case both LTG and transitional measures are removed, the SCR ratio drops to 86.6%, with 21 groups reporting a ratio below 100%. This finding confirms the importance of the aforementioned measures for limiting the impact of short-term market movements on the financial position of insurers, as expected by their design.
  8. In the YCD scenario, the aggregate AoL ratio decreases from 109.5% to 106.7%, corresponding to a drop in eAoL of 27.6%. Again, the impact is more severe without the use of LTG and transitional measures. The aggregate AoL ratio would drop to 104.8% in that case, corresponding to a decrease of 47.7% in eAoL, with 3 groups reporting an AoL ratio below 100% (accounting for approximately 10% of total assets in the sample). The impact of the YCD scenario can be mainly attributed to an increase in the TP on the liability side (+2.1%), driven by the increase of the life TP (+6.1%) due to the reduction of the discounting curve and the longevity shock. Total assets show a decrease (-0.8%) due to the drop in value of assets held for unit-linked contracts and equity holdings (-14.7%) which is partly offset by the increase in value of the fixed income assets (+3.1% government bonds and +2.3% corporate bonds). This scenario confirms that the European insurance industry is vulnerable to a prolonged low yield environment, also at group level.
  9. The aggregate SCR ratio in the YCD scenario drops by 64.9 percentage points, but remains at 137.4% after shock, although 7 participating groups report a ratio below 100%. The decrease in SCR ratio is driven by a material decrease in EOF (-23.5%) and a significant increase in SCR (+12.7%), both mainly due to higher technical provisions. The LTG and transitional measures partly absorb the negative impact of the prescribed shocks. Without the application of the transitional measures the SCR ratio drops to 124.1%, while excluding both LTG and transitional measures leads to an aggregate SCR ratio of 85.4%, with 20 participating groups reporting a ratio below 100%.
  10. In the NC scenario, participating groups report a drop of only 0.3 percentage points in the aggregate AoL ratio. The limited impact of the NC scenario on the participating groups is mainly due to the reinsurance treaties in place, with 55% of the losses transferred to reinsurers. The most affected participants are therefore reinsurers and those direct insurers largely involved in reinsurance activities. Furthermore, it should be noted that the losses are ceded to a limited number of counterparties, highlighting a potential concentration of risk. The high resilience of the groups to the series of natural catastrophes is confirmed by the limited decrease in aggregate eAoL (-2.7%). Without the LTG and transitional measures, the eAoL would decrease by 15.1% compared to the baseline.
  11. Overall, the stress test exercise confirms the significant sensitivity to market shocks for the European insurance sector. The groups seem to be vulnerable to not only low yields and longevity risk, but also to a sudden and abrupt reversal of risk premia combined with an instantaneous shock to lapse rates and claims inflation. The exercise further reveals potential transmission channels of the tested shocks to insurers’ balance sheets. For instance, in the YCU scenario the assumed inflation shock leads to a net increase in the liabilities of those groups more exposed to non-life business through claims inflation. Finally, both the YCD and YCU scenario have similar negative impact on post-stress SCR ratios.
  12. Further analysis of the results will be undertaken by EIOPA and by the National Competent Authorities (NCAs) to obtain a deeper understanding of the risks and vulnerabilities of the sector. Subsequently, EIOPA will issue recommendations on relevant aspects where appropriate. The responses received on the cyber risk questionnaire that are not part of this report, will be evaluated and discussed in future EIOPA publications.
  13. This exercise marks an important step in the reassessment of capital requirements under adverse scenarios and provides a valuable basis for continuous dialogue between group supervisors and the participating groups on the identified vulnerabilities. EIOPA is planning to further work on refining its stress test methodology in order to fully capture the complexity of the reassessment of capital requirements under adverse scenarios. EIOPA expects that participants use the acquired experience to foster their abilities to produce high quality data and to enhance their corresponding risk management capabilities. NCAs are expected to oversee and promote these improvements.

AoL without LTG Transition

SCR With and without LTC Transition

NC Reinsurance

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EIOPA: Potential macroprudential tools and measures to enhance the current insurance regulatory framework

The European Insurance and Occupational Pensions Authority (EIOPA) initiated in 2017 the publication of a series of papers on systemic risk and macroprudential policy in insurance. So far, most of the discussions concerning macroprudential policy have focused on the banking sector. The aim of EIOPA is to contribute to the debate, whilst taking into consideration the specific nature of the insurance business.

With this purpose, EIOPA has followed a step-by-step approach, seeking to address the following questions:

  • Does insurance create or amplify systemic risk?
  • If yes, what are the tools already existing in the current framework, and how do they contribute to mitigate the sources of systemic risk?
  • Are other tools needed and, if yes, which ones could be promoted?

While the two first questions were addressed in previous papers, the purpose of the present paper is to identify, classify and provide a preliminary assessment of potential additional tools and measures to enhance the current framework in the EU from a macroprudential perspective.

EIOPA carried out an analysis focusing on four categories of tools:

  1. Capital and reserving-based tools;
  2. Liquidity-based tools;
  3. Exposure-based tools; and
  4. Pre-emptive planning.

EIOPA also considers whether the tools should be used for enhanced reporting and monitoring or as intervention power. Following this preliminary analysis, EIOPA concludes the following (Table 1):

Table 1 Macro

It is important to stress that the paper essentially focuses on whether a specific instrument should or should not be further considered. This is an important aspect in light of future work in the context of the Solvency II review. As such, this work should be understood as a first step of the process and not as a formal proposal yet. Furthermore, EIOPA is aware that the implementation of tools also has important challenges. In this respect this report provides an overview of tools, main conclusions and observations, stressing also the main challenges.

Table 2 puts together the findings of all three papers published by EIOPA by linking

  1. sources of systemic risk and operational objectives (first paper),
  2. tools already available in the current framework (second paper)
  3. and other potential tools and measures to be further considered (current paper).

Table 2 Papers

The first paper, ‘Systemic risk and macroprudential policy in insurance’ aimed at identifying and analysing the sources of systemic risk in insurance from a conceptual point of view and at developing a macroprudential framework specifically designed for the insurance sector.

The second paper, ‘Solvency II tools with macroprudential impact’, identified, classified and provided a preliminary assessment of the tools or measures already existing within the Solvency II framework, which could mitigate any of the sources of systemic risk.

This third paper carries out an initial assessment of potential tools or measures to be included in a macroprudential framework designed for insurers, in order to mitigate the sources of systemic risk and contribute to the achievement of the operational objectives.

It covers six main issues:

  1. Identification of potential new instruments/measures. The tools will be grouped according to the following blocks:
    • Capital and reserving-based tools
    • Liquidity-based tools
    • Exposure-based tools
    • Pre-emptive planning
  2. Way in which the tools in each block contribute to achieving one or more of the operational objectives identified in previous papers.
  3. Interaction with Solvency II.
  4. Individual description of all the tools identified for each of the blocks. The following classification will be considered:
    • Enhanced reporting and monitoring tools and measures. They provide supervisors and other authorities with additional relevant information about potential risks and vulnerabilities that are or could be building up in the system. Authorities could then implement an array of measures to address them both at micro and macroprudential level (see annex for an inventory of powers potentially available to national supervisory authorities (NSAs)).
    • Intervention powers. These powers are currently not available as macroprudential tools. They are more intrusive and intervene more severely in the management of the companies. Examples could be additional buffers, limits or restrictions. They are only justified where the existing measures may not suffice to address the sources of systemic risk identified.
  5. Preliminary analysis per tool.
  6. Preliminary conclusion.

Four initial remarks should be made.

  1. First, although in several instances the measures and instruments are originally microprudential in nature, they could also be implemented as macroprudential instruments, if a systemically important institution or set of institutions or the whole market are targeted.
  2. Secondly, analysing potential changes on the long-term guarantees (LTG) measures and measures on equity risk that were introduced in the Solvency II directive, although out of the scope of this paper, could contribute to further enhance the framework from a macroprudential perspective. The focus of this paper is essentially on new tools, leaving aside the analysis of potential changes in the current LTG measures and measures on equity risk, which will be carried out in the context of the Solvency II review by 1 January 2021.
  3. Thirdly, when used as a macroprudential tool, the decision process may differ, given that there are different institutional models for the implementation of macroprudential policies across EU countries, in some cases involving different parties (e.g. ministries, supervisors, etc.). This paper seeks to adopt a neutral approach by referring to the concept of the ‘relevant authority in charge of the macroprudential authority’, which should encompass the different institutional models existing across jurisdictions.
  4. Fourthly, there seems to be no single solution when it comes to the level of application of each tool (single vs. group level).

Concerning the different proposed monitoring tools, in the follow-up work, the structure and content of the additional data requirements should be defined. This should then be followed by an assessment of the potential burden of collecting this information from undertakings.

It is important to stress that this paper essentially focuses on whether a specific instrument should or should not be further considered. This is an important aspect in light of future work in the context of the Solvency II review. As such, this work should be understood as a first step of the process and not as a formal proposal yet.

Figure ORSA

Click here to access EIOPA’s detailed discussion paper

EIOPA Risk Dashboard January 2018

Risks originating from the macroeconomic environment remained stable and high. Improvements have been observed across most indicators, but were not sufficient to change the overall risk picture. The improving prospects for economic growth still contrast with the persistence of structural imbalances, such as fiscal deficit. The accommodative stance of monetary policy has been reduced only very gradually, with low interest rates continuing to put a strain on the insurance sector.

Credit risks remained constant at a medium level whereas observed spreads continued to decline. The average rating of investments has seen some marginal improvements. Concerns on the pricing of the risk premia remain.

Market risks remained stable at a medium level despite a reduction of the volatility on prices was observed. Only price to book value of European stocks moved in the direction of risk increase.

Liquidity and funding risks were constant at a medium level in 2017 Q3 and remained a minor issue for insurers. Catastrophe bond issuance significantly decreased when compared to the record high registered during the previous quarter. The low volume of issued bonds made the indicator less relevant.

Profitability and solvency risks remained stable at a medium level. A deterioration of the net combined ratio was observed in the tail (90 percentile) of the distribution mainly populated by reinsurers in this quarter. SCR ratios have improved across all types of insurers mainly due to an increase of the Eligible Own Funds. This has been especially marked for life solo companies.

Interlinkages & imbalances: Risks in this category remained constant at a medium level. Investment exposures to banks and other insurers increased slightly from the previous quarter.

Insurance risks increased when compared to 2017 Q2 and are now at a medium level. This was essentially driven by the significant increase in the catastrophe loss ratio resulting from the impact of the catastrophic events observed in Q3 mainly on reinsurers’ technical results. This is also reflected in the loss ratio. Other indicators in this risk category still point to a stable risk exposure.

Market perceptions remained constant, with the improvement in external rating outlooks outweighing the observed increase in price to earnings ratios. Insurance stocks slightly outperformed the market, especially for life insurance, and CDS spreads reduced.

Riskdashboard 12018

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Solvency II : First experiences with SFCR reporting – Germany, UK, Ireland

In May 2017, all German solo insurance companies were required for the first time to publish selected reporting forms as part of Solvency and Financial Condition Reporting (SFCR) – insurance groups followed at the end of June. These reports did not only include a huge amount of data on specific Solvency II risk figures but also comprehensive information about

  • general business development,
  • qualitative explanations on the presented figures and on the financial, solvency and business situation.

Aside from the obligation to publish own Solvency II results, insurance companies now for the first time have the opportunity to compare their Solvency II results with direct competitors.

The publication of SFCR reports also gives stakeholders access to Solvency II reports who did not have insight into these results before, for instance

  • rating agencies,
  • sales partners,
  • customers,
  • media
  • and creditors.

The extension of the target group has two main consequences for insurance companies:

  1. Firstly, Solvency II results need to be explained to an audience that has little experience with Solvency II – unlike insurance supervisors who had exclusive access to Solvency II results until now.
  2. Secondly, the solvency ratio becomes increasingly important as a material piece of information from SFC reports.

Due to the flood of information available in the SFC reports and the lack of experience of many market participants, it can be expected that processing Solvency II results will be mainly restricted to the evaluation of the solvency ratio as the core result of Solvency II. In particular, it was revealed that individual insurance companies are already actively using the solvency ratio in sales.

The attention given to the solvency ratio by the public will increase even further in the future if ratios approach the critical 100% threshold due to reduced interim measures.

Due to its increasing importance, the solvency ratio is no longer regarded as a pure reporting figure but as a value that requires active management. A variety of degrees of freedom and options in the calculation of Solvency II results allow insurance companies both to adjust their business policies and to influence SII results through suitable calculation methods. Due to the short history of Solvency II, there is little understanding of the impact mechanisms “behind” the solvency ratio at the moment, which is why not all optimization potentials are currently leveraged and insurers are still actively searching for solvency ratio levers.

In light of the extended information basis, decisions about

  • the use of interest rate measures,
  • an internal model (instead of the standard model),
  • simplified calculation methods
  • and the use of company-specific parameters

can be reassessed.

SFCR Germany

Click here to access Zeb Control’s detailed report

In a survey of the Solvency and Financial Condition Reports (SFCRs) and public Quantitative Reporting Templates (QRTs) for 100 of the top non-life insurers in the UK and Ireland the aim of the review was twofold – to analyse the numbers disclosed by firms for the first time and to consider how well firms have dealt with the narrative reporting required of them under Solvency II.

The survey team has also drawn upon our Pillar 3 roundtables with insurers and reinsurers across the market to understand how the first year of submissions has worked in practice.

Their key conclusions are:

  • Insurers are generally sufficiently capitalised, but the buffers firms have in place to protect against balance sheet volatility may not be enough to prevent them from having to recapitalise over the short term.
  • Motor insurers typically have the least financial headroom, compared with other insurers.
  • Brexit is on the agenda for many insurers, with some firms setting up internal steering groups to ensure they are well placed to access the European Market after the UK leaves the EU.
  • Uncertainty around the Ogden discount rate used to calculate personal injury compensation payments poses a material risk to some insurers, with two firms disclosing that the recent change required them to recapitalise significantly.
  • Firms must work harder to publish better quality QRTs, with over a quarter of the firms we reviewed disclosing QRTs containing obvious errors.
  • Some firms’ SFCRs are not fully compliant with the Solvency II regulations, with particular areas of weakness including disclosure around sensitivity testing of the SCR and uncertainty within technical provisions.


Click here to access LCP’s detailed survey analysis

EIOPA publishes first set of Solvency II statistics on the European insurance sector

Balance sheet structure, main items


The asset side of the Solvency II balance sheet is split into investments, assets held for unit-linked business and other assets. Investments represent those held by insurers in order to be able to fulfil the promises made to the policy-holder on an on-going basis. This excludes unit-linked business for which the investment risk is assumed by the policyholder. On an EEA wide basis, Figure 1 shows that the investment portfolio of insurers is dominated by bonds. Corporate and government bonds together account for more than 60% of the portfolio.

Figure 1: Investment mix by insurers in EEA following S.02 Balance sheet. 2016 Q3. %

Table 1 EIOPA

However, the investments shown in these figures represent only part of the balance sheet. There is also a considerable share of investments for unit-linked business. Table 1 shows the breakdown of total assets into three main categories (investments as shown above, assets held for unit-linked business and other assets). The share of unit-linked business (measured by assets) in the EEA was 21.9% in Q3-2016.

Table 1: Main categories of total assets by insurers in per country. 2016 Q3. EUR million and %

Tableau 1 EIOPA


Total liabilities consist of technical provisions and other liabilities. This is illustrated on an EEA level in the Figure below. Technical provisions represent the amount of resources to be set aside to pay policy-holder claims and are split into 5 main categories. Other liabilities include debt such as subordinated liabilities and financial liabilities other than debts owed to credit institutions, but also other liabilities such as, for example, deposits from reinsurers.

Figure 2: Liability profile insurers in EEA. 2016-Q3. %

Tableau 2 EIOPA

Premiums (Non-life)

One way of assessing market size is to look at the gross (i.e. before reinsurance) written premiums by country. The Figure below ranks the countries according to the gross premiums written by undertakings in their jurisdiction in the first 3 quarters of 2016. At this stage the figure shows only premiums in the non-life segment, since life premiums are not available for Q3-2016 on a consistent basis. There is an ongoing process to eliminate some national differences in reporting of life premiums.

Figure 3: Non-life GWP (gross written premiums) per country. 2016 Q3 Year to date.
Source: EIOPA [Solo/Quarterly/Published 20170628/Data extracted 20170614]. Excluding undertakings with non-standard financial year-end. Reinsurance premiums not included.

Tableau 3 EIOPA

Own funds and MCR/SCR ratios

Insurance undertakings are required by the Solvency II regulation to hold a certain amount of capital of sufficient quality in addition to the assets they hold to cover the contractual obligations towards policyholders. The amount of capital (called eligible own funds) required is defined by the Minimum Capital Requirement (MCR) and the Solvency Capital Requirement (SCR), which depend on the risks to which the undertaking is exposed.. If the amount of eligible own funds falls below the MCR, the insurance license should be withdrawn if appropriate coverage cannot be re-stablished within a short period of time. Holding enough eligible own funds to cover the SCR enables undertakings to absorb significant losses, even in difficult times. Undertakings’ compliance with the SCR therefore gives reasonable assurance to policyholders that payments will be made as they fall due.

The SCR is calculated either by using a prescribed formula (called the standard formula) or by employing an undertaking-specific partial or full internal model that has been approved by the supervisory authority. Being risk-sensitive the SCR is subject to fluctuations and undertakings are required to monitor it continuously, calculate it at least annually and re-calculate it whenever their overall risk changes significantly.

As non-compliance with the MCR jeopardizes policyholders’ interests, the MCR has to be re-calculated quarterly according to a given formula. The ratios shown in Table 2 are computed by dividing the respective eligible own funds by the SCR and MCR figures as reported by the insurance undertakings at the end of Q3 2016.

Table 2: MCR and SCR ratios by country. Weighted average and interquartile distribution. 2016 Q3

Table 2 EIOPA

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