European insurers could see as much as €160 billion wiped off their balance sheets under an adverse stress test scenario that envisages prolonged low interest rates and a negative market shock to asset prices.
The European Insurance and Occupational Pensions Authority on Dec. 15 published the results of its 2016 EU-wide stress test, which covered 236 insurance firms at solo level from 30 European countries, representing 77% of the life insurance market. It tested insurers' vulnerability to two major market risks: A lengthy low-yield environment, and a "double-hit" scenario that reflected a sudden increase in risk premia combined with the low-for-long interest rate environment.
Under the former scenario, the excess of assets over liabilities on the insurers' balance sheets would be reduced by about €100 billion, with 16% of the sampled firms losing more than a third of their excess assets. This percentage rose to 25% without long-term guarantee and transitional measures.
Under the double-hit scenario, the excess assets over liabilities on the insurers' balance sheets would fall by nearly €160 billion, with more than 40% of firms losing more than a third of their excess assets. Without LTG and transitional measures, this negative impact would apply to nearly 70% of firms.
EIOPA Chairman Gabriel Bernardino said the exercise confirmed the significant challenges faced by the European insurance sector posed by the current macro-economic environment.
EIOPA said the results revealed the need for a coordinated response from national supervisory authorities. It issued a series of recommended supervisory actions, including ensuring that insurers align their internal risk management processes to external risks and requesting a cancellation or deferral of dividend distribution when the viability of an insurer's business model is at risk.
The implementation of EIOPA's recommendations will be closely monitored "to ensure a coordinated response to situations that may pose a threat to the viability of the supervised entity and, collectively, to the system as a whole," Bernardino said.