Executive summary

• Author: European Insurance and Occupational Pensions Authority (EU body or agency)
• Pages: 6-7

EXECUTIVE SUMMARY

The unexpected Covid-19 virus outbreak led European countries to lockdown major part

of their economies, aiming at containing the outbreak. Financial markets experienced

huge losses and f‌light-to-quality inves tment behaviour. Governments and central banks

committed on the provision of signif‌icant emergency packages to support the economy,

as the economic and f‌inancial shock is expected to challenge economic growth, labour

market and the consumer sentiment a cross Europe for an uncertain period of time.

Solid solvency ratios for insurers and improved asset valuations for 2019, supported by

the increase in equity prices and decline in yields, provided abuer to withstand the

impact of the macro-f‌inancial shock on the sector. As of year-end 2019 the insurance

sector was well capitalised with amedian SCR ratio of 213%. Regarding the reinsurance

sector, catastrophe activity in 2019 was benign with global insured losses below the av-

erage of the last 10 years, supporting the increase of 22 percentage points, to 240%, in

the solvency ratio as compared to Q4-2018. Investment and underwriting prof‌itability

remained broadly unchanged in 2019, however considerable pressures is expected from

Covid-19 shock.

Following apositive year for European IORPs with positive investment returns, substan-

tial increases in asset market values and resulting improved cover ratios, the sector has

been heavily aected by the market turmoil in the wake of the Covid-19 pandemic, which

swept away substantial value gains of 2019. Due to the character of the crisis, IORPs

may not only face further market volatility and impairment of market values in apersis-

tent low interest rate environment, yet may be subject to funding and liquidity concerns

due to suspended or lowered contributions from sponsors and members. Sponsoring

undertakings in heavily aected sectors by the Covid-19 pandemic are expected to be

in signif‌icant f‌inancial distress and correspondingly, members of such pension funds are

at risk of unemployment in the near future. Sponsoring undertakings’ f‌inancial dicul-

ties to maintain contributions, or in the worst case, sponsoring undertaking’ insolvency

may test national pension protection schemes. The set-up, structures and design of such

pension protection schemes are heterogeneous amongst Member States and the po-

tential need to use such pension protection schemes may require supervisory attention.

Further, substantially declining coverage and funding ratios of Def‌ined Benef‌it IORPs

require supervisory monitoring and potential actions, which usually entail setting up re-

covery plans and close coordination with the NCAs. The impacts of the Covid-19 crisis

may lead to benef‌it cuts for members and/or require sponsoring undertakings to f‌inance

funding gaps with potential additional pressure on the real economy and on f‌inancial

institutions sponsoring an IO RP.

The prolonged low yield environment has already been afundamental risk for the insur-

ance sector, and the Covid-19 shock increased its potential. The shock has also increased

credit risk, which could challenge the asset side valuations of insurers and their solvency

positions. In fact, the negative macroeconomic outlook could have an adverse impact

on corporates’ prof‌itability, resulting in higher risk of rating downgrades. Furthermore,

home bias behaviour and interconnectedness with other sectors hit by the shock, in

particular banking and do mestic sovereign, could f urther amplify t he risk for insurers.

In terms of insurance risks, the ambiguity regarding the coverage of virus related claims

EUROPEAN INSURANCE AND OCCUPATIONAL PENSIONS AUTHORITY

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