European insurance watchdog launches EU-wide stress test

European insurance watchdog launches EU-wide stress test

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

This is the first regular stress exercise, since the implementation of the Solvency II equity and Long Term Guarantees (LTG) measures. It aims to assess insurers’ vulnerabilities and is designed to assess the resilience of the European insurance sector to severe adverse market developments.

The regulator said that it is keen to point that the test is not a “pass or fail test”. Instead it will focus on two major market risks: prolonged low yield environment and the so-called “double-hit”, i.e. a negative market shock to asset prices combined with a low risk free rate

European insurance companies have struggled in recent times under the the new Solvency II capital rules, particularly during a low interest rate period. As a result a number of well-known insurers have been selling parts of their business.  The exercise look at long-term business performed by solo undertakings (ie, no insurance groups). 

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.

European insurance sector

“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.”

Bernardino hopes that the test will highlight issues requiring “particular supervisory attention” and respond to the “potential built-up of systemic risks” at the European level. As a result the exercise will not focus on who is not meeting the capital requirements after the shocks but on “the financial stability implications of those scenarios,” he said.

In a bid to limit the burden on the insurance industry EIOPA said that it will 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 the Solvency II Directive and will not to be connected with the stress test exercise.

Earlier launch date

The launch date of the exercise has been rolled out earlier than initially planned (31 May 2016) to allow the participating insurance companies for more time to complete the test. EIOPA will publish on a weekly basis questions & answers addressing possible queries of the participating companies.

The deadline for submission of results to the national competent authorities (NCAs) will be 15 July. The EU-wide results of the stress test will be disclosed in December 2016.