Introduction/market developments

• Author: European Insurance and Occupational Pensions Authority (EU body or agency)
• Pages: 6-10

1. INTRODUCTION/MARKET DEVELOPMENTS

The Covid-19 outbreak has severely aected the macro-

economic and markets conditions worldwide, with the

launch of support packages and monetary easing of some

central banks and governme nts taking place to mitigate

the negative eects. The economic lockdowns in an at-

tempt to contain the virus outbreak have already led to

signif‌icant downside revisions of economic outlooks.

These forecast s have been surrounde d by fundamen-

tal uncertainty regarding the length of the lockdowns,

the conf‌inement measures still necessary in the period

ahead and the eectiveness of the policy response, hence

leading to particularly large downside risks. The resulting

f‌light-to-quality behaviour increased the risk of “low for

long”1 scenario, while the risk bearing capacity of insurers

was further challenged due to high economic uncertainty,

particularly in terms of asset allocation, prof‌itability, sol-

vency and business model adaption .

Despite the variability of GDP growth across countries,

at the European level the GDP growth has slowed down

since the beginning of 2018 (Figure 1.1). Afall in the ex-

ternal demand accompanied by increasing trade and

political uncertainties negatively aected growth during

2019. However, the strong domestic demand supported

economic growth even though 2019 Q4 was negatively

aected by temporary factors such as strikes in France

and a downturn in manufacturing sector. Covid-19 out-

break is expected to aect GDP growth signif‌icantly, as

it is already indicated by 2020 Q1 decrease (Figure 1.1).

The longer-term impact is still uncertain. Based on the

European Commission, an annual de crease of 7.4% for

the real GDP is forecasted for 2020 at the EU level, with

arebound of 6.1% for 2021.2

The inf‌lation rate for EU and EA (HICP rate) has trend-

ed upwards during the beginning of 2019 reverting to

adecreasing trend onwards (Figure 1.2). The ongoing low

levels of energy prices, after their decrease during 2018,

1 The “low for long” scenario is de f‌ined as asituation where short and

long-term nominal interest rates are exp ected to remain low over the

next decade, combine d with aperiod of low economic grow th. The ratio-

nale behind this scenario is that struc tural factors, such as demographic

trends, total factor prod uctivity or an increased pr eference for scarce

safe assets, along with c yclical factors, have pushed interest rate s down

to low levels. See Macropru dential policy issues arising from low interest

rates and structural changes in t he EU f‌inancial system, ESRB, Nove mber

2016 for more details.

2 European Commission, European Economic Forecast, Spring 2020.

aected the slowing down of inf‌lation in the Euro area

during 2019, which was further amplif‌ied at the beginning

of 2020 (Figure 1.3). In fact, in the EU and the Euro area,

the HICP rates peaked at 1.7% and 1.4%, respec tively, for

January, above the average 2019 levels, whereas for March

they decreased to 1.2% and 0.7%, respectively, ref‌lecting

the decrease in oil prices and services sector. The overall

eects of the economic lockdowns and the resulting dis-

ruptions in supply and demand on the inf‌lation are still

uncertain and could vary across countries. In fact, weaker

economic outlook might aect investors in lowering their

expectations ab out inf‌lation and subsequently this might

further push down expected returns. Based on European

Commission forecasts, inf‌lation for 2020 is expected to

be 0.2% for the EA and 0.6% for the EU, whereas for 2021

inf‌lation for the EA is expected to be 1.1% and 1.3% for

the EU.

Figure 1.1: Real GDP growth, by country

(2007Q1=100)

EU EA DE FR IT ES

90

95

100

105

110

115

120

2007Q1

2007Q3

2008Q1

2008Q3

2009Q1

2009Q3

2010Q1

2010Q3

2011Q1

2011Q3

2012Q1

2012Q3

2013Q1

2013Q3

2014Q1

2014Q3

2015Q1

2015Q3

2016Q1

2016Q3

2017Q1

2017Q3

2018Q1

2018Q3

2019Q1

2019Q3

2020Q1

Source: ECB, Eurostat and EI OPA calculations. Last obser vation: March 2020.

Note: EU and EA time series r efer to f‌ixed composition, with EU refe rring to

EU 27.

IMPACT OF ULTRA LOW YIEL DS ON THE INSURANCE SEC TOR, INCLUDING FIRST EFF ECTS OF COVID CRISIS

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