EIOPA has published the results of its 2021 Insurance Stress Test in which it assessed the industry’s resilience to a prolonged COVID-19 scenario in a “lower for longer” interest rate environment. To assist understanding of the full report, EIOPA has also published a factsheet and an FAQ document.
The Stress Test allowed participants to calculate their post-stress position under two distinct approaches:
- fixed balance sheet approach (without management actions); or
- constrained balance sheet approach (permitted reactive management actions.
For the 44 participants, EIOPA modelled the prescribed shocks on prevailing risks to the financial system. The objective of the Stress Test was to assess the ability of participants to sustain the adverse conditions depicted in the stress test scenario. The post-stress positions of individual participants were then aggregated to make inferences about the overall resilience of the insurance industry.
Some of the key results include:
- the 217.9% solvency ratio at the end of 2020 enabled participants to absorb the shock of the adverse scenario;
- the main vulnerabilities for the sector stem from market shocks;
- in the fixed balance sheet approach, 9 undertakings were brought under the regulatory threshold of 100% in relation to the solvency ratio;
- results improved where participants were allowed to take reactive management actions, enabling 7 participants to raise their post-stress solvency ration to above 100%;
- no participants reported an Assets over Liability ratio below 100%;
- a section of the market is still heavily reliant on transitional measures which are to be phased out by 2032;
- the liquidity positions of market participants seems to be a less significant concern than solvency positions.
EIOPA will now assess whether it needs to issue recommendations relating to concerns identified in the Stress Test exercise. It also expects participants to use the experience to enhance their risk management capabilities, and for National Competent Authorities to oversee these improvements.