25 May 2016 Insurance

EIOPA stress test will assess insurers’ vulnerabilities

The European Insurance and Occupational Pensions Authority (EIOPA) has introduced an EU-wide stress test for the European insurance sector.

The exercise aims to assess insurers’ vulnerabilities and should not be interpreted as a pass-or-fail test, according to EIOPA.

It is designed to assess the resilience of the European insurance sector to severe adverse market developments based on a common analytical framework.

The 2016 stress test will examine the potential increase of systemic risks in situations of stress. It will focus on two major market risks, the prolonged low yield environment and a negative market shock to asset prices combined with a low risk free rate.

The exercise focuses on long-term business performed by solo undertakings (no insurance groups).

In order to include a higher number of small and medium size insurers, the participation target was increased from a 50 percent in 2014 to a 75 percent share of each national market in terms of gross life technical provisions.

EIOPA makes use of this exercise to collect at the same time information on the Solvency II equity and Long Term Guarantees (LTG) measures.

This collection of information is part of the mandatory review to be performed by EIOPA in accordance with article 77f of the Solvency II Directive and thus not to be connected with the stress test exercise.

Gabriel Bernardino, chairman of EIOPA, said: “The current challenging macroeconomic environment has to be acknowledged in such a stress test exercise. Therefore, EIOPA decided to conduct severe stress scenarios.

“I am confident that the results of the simulation of such shocks will provide us a high-resolution picture of the European insurance sector and its most critical vulnerabilities. “

He added: “We need to see the issues requiring particular supervisory attention and response to the potential built-up of systemic risks at the European level. Hence this exercise will not focus on who is not meeting the capital requirements after the shocks but on the financial stability implications of those scenarios”.

The exercise will be available on 24 May 2016.

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