Executive summary

AuthorEuropean Insurance and Occupational Pensions Authority (EU body or agency)
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.

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