Foreword by the chairman

AuthorGabriel Bernardino
The econo mic environment has b ecome mo re challenging for Euro pean insurers and
pension funds in recent months. Gr owing trade tensions , uncertainty around Brexit and
an unstable econ omic outloo k in cert ain emerging market s have all contribute d to a
slowdown in e conomic growth in both , the euro area and the European Union. Co nse-
quently, central banks have become more cautious on monet ary tightening amid con-
cerns over economic growth and subdued inf‌lation. Interest rate increases for the euro
area have now b een put o n hold until at le ast mid-2020 and overall mone tary conditio ns
remain loose . These develo pments have made the risk of a p rolonged low yield environ-
ment again more promine nt, which is par ticularly challenging for life insurers and pen-
sion funds with lo ng-term liabilities. As it is beco ming increasingly dicult to generate
sucient investment returns to mee t their long-term f‌inancial obligations, the low yie ld
environment could also trigger further search for yield behaviour by insurer s and pension
funds. EIOPA will there fore continue to monitor closely t his risk to identif y any potential
vulnerabilities at an early stage. In this regard, t his Financial Stability Report also includes
an analysis of the invest ments in Collateralized Loan Obligations (CLOs) by insurers. This
asset cat egor y has signif‌icant ly increase d in re cent ye ars and has attr acted par ticular
supervisor y attention for its relatively high use of leverage and similarities to t he type o f
collateralized secur ities that played a key role in the recent f‌inancial crisis.
Looking at f‌inancial market s it seems that the increase in volatilit y and price corr ections
towards the end of 2018 was only te mporar y, as f‌inancial markets have r ecovered in
the beginning of 2019. Consequently, valuations continue to remain stretche d in certain
equity, bond and real estate mar kets, indicating that market prices may not fully re f‌lect
underlying vulnerabilities . The risk o f a sudden reassessment of risk pre mia therefor e
remains high, ref‌lec ting political r isks and debt concerns in so me Europe an countries,
which could be e xacerbated and r einforced during a p eriod of e conomic slowdown. The
imminent withdrawal o f the United Kingdom fro m the Euro pean Union ad ds to e co-
nomic and f‌inancial markets uncertaint y. While most insurers wi th cross-bo rder busine ss
between the United Kingdom and European Economic Ar ea - EEA30 have implemente d
contingency planning to ensure service co ntinuity on cross-bord er contract s even in the
case of a hard Brexit, the risk remains that a disor derly Brexit will have second round e f-
fects with potential signif‌icant repe rcussions across f‌inancial markets. We will therefore
continue to mo nitor closely the situation.
Moreover, climate and cyber risk are key emerging risks for insurers and pension funds .
Extreme weather relate d events are expect ed to be come more frequent and se vere, with
potential impac t on the liabilities of non-life insurers and reinsurer s, while the move to-
wards a low c arbon economy carries signif‌icant transitio n risks in the inve stment por tfo-
lios of insurers and pension funds. In ad dition, the digital t ransformation and the onset
of cyber attacks makes insurers and pension funds incre asingly susceptible to cyber risk,
while also bringing new oppor tunities for insurers in th e form o f cyber und erwrit ing.
EIOPA will use the re sults from t he questio nnaire on cybe r risk included in the 201 8
Insurance Stress Test to analyse the exposure tow ards cyber risk and cyber unde rwriting
in more d etail in the course of 2019.

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