Executive summary

In the past months, t he econo mic environment has b ecome mo re challenging due to
ongoing political uncertainty ar ound Brexit , growing tr ade tensions , a slowd own in
the world economy and an unstable e conomic outlo ok in cer tain emerging mar kets.
As a consequence, e conomic grow th proje ctions for both t he EU and Eurozone have
been revise d downward s, while centr al banks have beco me more cautious on r olling
back non-conventional mo netary policy stimulus in Euro pe and have put interest rate
increases on ho ld until at least mid-2020. This has made the r isk of aprolonged low yield
environme nt more prominent again.
Despite so me increase in volatility toward the end of 2018, f‌inancial market s have recov-
ered in t he beginning of 2019 and valuations re main stretched in certain equity, bond
and real es tate market s, indicating that market price s may not fully re f‌lect und erlying
vulnerabilities. The risk of asudden r eassessment of risk p remia therefore remains high,
ref‌lecting political risks and de bt concerns in some Euro pean countries, which co uld be
exacerbated and reinforced dur ing aperiod o f economic slowdown. On the other hand,
the pro longed low level of interest rate s continues to po se signif‌icant challenges for life
insurers and p ension funds, making it increasingly dicult t o generate sucient invest-
ment retur ns to meet t heir long-term f‌inancial obligations . This could trigger further po -
tential search for yield behaviour by insurer s and pensions funds, as already highlighted
in EIOPA’s Investment Behaviour Report (2016). The search for yield is slowly becoming
visible in the invest ment port folio of insurers, as re f‌lected by the gradual change in the
investment composition.
Emerging risks, such as climate-related r isk and cyber risks, also cont inue to de mand
attention. Climate-related physical risks re main present in the underwriting activit ies of
insurers, while tr ansition risks aect the investment port folios of insurers and p ension
funds. Although t he impact of the natural catastro phe scenario included in t he EIOPA
2018 Insurance Stress Test Exercise was re latively limited, furth er analysis suggests apo -
tential concentrat ion risk in the ced ed losses to reinsurers, in par ticular for exp osures to
Switzerland. Fur thermore, cyb er threats have become more p rominent, making insurers
not only incre asingly susceptible to cyb er attacks themselves, but also to p otential ‘silent’
cyber risk exposures in the ir underwriting portfolio s. The industry is moving towards ac-
tions to mitigate such risks, but corr ectly monitoring and assessing climate-related risks
and expo sures to cyber risk remains challenging.
Overall Solvenc y ratios of Europ ean insurers have slightly improved further in 2018 and
remain high around 20 0%, but the pr of‌itability of insurers is unde r increased pressure .
Investment re turns have de teriorate d in the current low yield environme nt, making it
increasingly dicult for insurers to cove r guaranteed rates o n policies issued in the
past. Insurer s in cert ain countries also continue to sho w a high degree of home bias
in f‌ixed-income and equity investments and re main highly interconnecte d with banks,
while exp osures to re al estate mar kets ar e also substantial in certain jurisdic tions. This
could make insurers susceptible to p otential spillover e ects from sovereigns, (domes tic)
banking sectors and/or apotential d ownturn in real estate markets. Although the over-
all investment comp osition has remained broadly stable, the EIOPA qualitative risk as-
sessment sur vey suggests that clo se monitoring of p otential search for yield behavior is

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