Foreword by the chairman

• Author: Gabriel Bernardino
• Pages: 4-5

FOREWORD BY THE CHAIRMAN

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.

EUROPEAN INSURANCE AND OCCUPATIONAL PENSIONS AUTHORITY

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