The European Insurance and Occupational Pensions Authority (EIOPA) published its Financial Stability Report that addresses key financial stability risks in the European insurance and pension sector.
EIOPA emphasizes that the pandemic crisis is still not over and many uncertainties remain despite the progress in vaccination campaigns and decreasing trends in the number of new infections. The impact on the real economy was reduced by extensive fiscal measures, but some negative effects might become visible only when the introduced measures will phase out. In particular, increased unemployment and corporate credit downgrades would have a negative impact on both insurance and pension sectors.
While the EU economy is still subject to high risks, some lessons learnt have already been reflected in the Solvency II review by taking into account the changes in the current economic enviroment. The ongoing crisis also highlighted the critical importance of coordinated approaches among the national competent authorities.
It is also essential to keep the focus on new emerging risks such as cyber and climate risk. Remote working arrangements in the pandemic caused increased cyber-attacks reiterating the growing importance of risks related to digitalisation. Environmental, social and governance factors that increasingly shape investment decisions of insurers and pension funds and affect their underwriting, remain one of the focal points for the insurance and pension industry. In the sensitivity analysis on asset side transition risks published at the end of 2020, EIOPA has been tackling developments in this area, also from the financial stability perspective.
The crisis showed that with Solvency II in place, the insurance industry was overall well prepared. However, there is a need to continuously analyse all risks. In this respect, EIOPA is currently running an EU-wide insurance stress test exercise assessing the impact of an adverse COVID-19 scenario in a “lower for longer” interest rate environment on both capital and liquidity positions of insurers.
The Financial Stability Report also includes two thematic articles, the first one focusing on the impact of EU-wide insurance stress tests on equity prices and systemic risk and the second one on the risks of climate change for the real economy and the potential mitigating role of insurance.