Executive summary

• Author: European Insurance and Occupational Pensions Authority (EU body or agency)
• Pages: 3-5

EXECUTIVE SUMMARY

In the current macro-f‌inancial environment, one of the major concerns for the insur-

ance market is the exceptionally ultra-low/negative level of interest rates. In addition,

the Covid-19 outbreak has severely aected the macroeconomic and market conditions

worldwide, with the launch of support packages and monetary easing of some central

banks and governments taking place to mitigate the negative eects. The lockdowns im-

plemented in an attempt to contain the virus outbreak have had asignif‌icant economic

impact and led to the depreciation of economic outlooks for the following period. These

forecasts have been surrounded by fundamental uncertainty regarding the length of the

lockdowns, the conf‌inement measures still necessary in the period ahead and the ef-

fectiveness of the policy response, hence leading to particularly large downside risks. In

Europe, this was accompanied by af‌light to quality, increasing the likelihood of a“low for

long” scenario with adverse implications for the insurance sector. As aresult, insurers are

signif‌icantly challenged in terms of asset allocations, prof‌itability, solvency and business

model adaption. The low interest rate environment was and still is, also after Covid-19,

one of the main issues for the insurance market. Given this context, the report assesses

the risks and implications of the ultra-low/negative yields on the investment behaviour

of insurers, considers how challenged are the prof‌itability and solvency positions of the

European insurance market and des cribes the impact on the insurance busine ss models

and consumers. For abetter understanding of the additional challenges and uncertainty

coming from the Covid-19 pandemic, the report had benef‌ited from aqualitative ques-

tionnaire (see Annex 1) that captures the NCAs views regarding the events in Q1 2020

and their expert judgement regarding potential future risks.

The ultra-low interest rates aect insurers through the balance sheet channel both on

the assets and liabilities side, but also through the income channel. For the balance sheet

transmission channel, the overall eect depends on the particular characteristics of the

insurance company. However, because the valuation of the liabilities is performed using

the EIOPA risk free rate curve, adownward shift in the rates used to derive the curve

would result in lower discounting rates and therefore in an increase in the value of liabil-

ities. On the assets side, within the low yield environment before Covid-19, the market

value of insurers’ investment s increased following the higher valuations of f‌ixe d-income

portfolios as well as thegrowth observed in equity markets. Moreover, during the Cov-

id-19 shock, the f‌light to quality observed decreased the market value for lower rated

assets. Measures such as volatility adjustment and symmetric adjustment could decrease

the overall balance sheet eect due to market volatility during Covid-19 shock. In terms

of the income channel, given that insurers hold f‌ixed-income investments to a large

extent, signif‌icant amo unts of earned coupo ns and redemptions from matured bonds

should be reinvested at lower rates. Considering that market yields are at very low levels,

this might have an impact on insurers’ prof‌itability in the medium to long-term horizon.

The Covid-19 shock of March 2020 has amplif‌ied the above-mentioned risks by pushing

risk free rates and high credit quality yields lower while at the same time increasing the

uncertainty and risk premia of riskier assets.

IMPACT OF ULTRA LOW YIEL DS ON THE INSURANCE SEC TOR, INCLUDING FIRST EFF ECTS OF COVID CRISIS

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