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European insurers braced for catastrophes, less so for interest rate shocks

Six European insurance companies' capital would fall below requirements if there were a shock upward movement in interest rates, according to the European insurance regulator's 2018 stress test.

The test, conducted by the European Insurance and Occupational Pensions Authority, or EIOPA, on 42 European insurers and reinsurers, also found that seven companies would fall short if there were a protracted period of extremely low interest rates.

However, the test found that the group of tested companies was more resilient to the natural catastrophe stress scenario, under which European countries are hit by four windstorms, two floods and two earthquakes in quick succession.

The regulator said the test confirmed "significant sensitivity" to marketwide and insurance-sector-specific shocks, but that on aggregate, the European insurance sector is "adequately capitalized to absorb the prescribed shocks."

'Severe but plausible'

EIOPA's latest exercise tested the resiliency of insurers' capital bases in the three scenarios, described as "severe but plausible." The aggregate pre-stress position of the companies was an assets-over-liabilities ratio of 109.5% and a 202.4% coverage of the solvency capital requirement, or SCR, under the Solvency II European insurance capital regime.

In the "yield curve up" stress scenario, the excess of assets over liabilities fell by 32.2% and the aggregate SCR coverage ratio fell to 145.2%. Six companies reported post-stress SCR coverage below 100%.

In the "yield curve down" scenario, the assets over liabilities ratio fell by 27.6% and the SCR coverage ratio to 137.4%, with seven groups dropping below 100%.

But the catastrophe scenario only shaved 0.3 percentage point from the assets over liabilities ratio. EIOPA said companies showed a "high resilience" to the natural catastrophes in the test, highlighting the importance of reinsurance, which absorbed 55% of the losses.

EIOPA only releases individual company results for those that give permission. Of the 42 groups tested, four agreed to the release of their individual results.