Executive summary

• Pages: 6-7

EXECUTIVE SUMMARY

In the past months, the economic environment has become more challenging due to

ongoing political uncertainty around Brexit, growing trade tensions, aslowdown in

the world economy and an unstable economic outlook in certain emerging markets.

As aconsequence, economic growth projections for both the EU and Eurozone have

been revised downwards, while central banks have become more cautious on rolling

back non-conventional mo netary policy stimulus in Europe 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 remain stretched in certain equity, bond

and real estate markets, indicating that market prices may not fully ref‌lect underlying

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 risk and cyber risks, also continue to demand

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 returns have deteriorated in the current low yield environment, making it

increasingly dicult for insurers to cover guaranteed rates on policies issued in the

past. Insurers in certain countries also continue to show ahigh degree of home bias

in f‌ixed-income and equity investments and remain highly interconnected 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

EUROPEAN INSURANCE AND OCCUPATIONAL PENSIONS AUTHORITY

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