Key Developments

AuthorEuropean Insurance and Occupational Pensions Authority (EU body or agency)
The unexpected COVID-19 virus outbreak led European
countries to shut down major part of their economies
aiming at containing the outbreak. Financial markets ex-
perienced huge losses and f‌light-to-quality investment
behaviour. Governments and central banks committed
to the provision of signif‌icant emergency packages to
support the economy, as the economic shock, caused by
demand and supply disruptions a ccompanied by its re-
f‌lection to the f‌inancial markets, is expected to challenge
economic growth, lab our market and the consumer senti-
ment across Europe for an uncertain period of time.
Amid an unprecedented downward shift of interest rate
curves during March, re f‌lecting the f‌light-to-quality b e-
haviour, credit spreads of corporates and sovereigns
increased for riskier assets, leading eectively to adou-
ble-hit scenario. Equity mar kets dramatically droppe d
showing extreme levels of volatility responding to the
uncertainties on virus eects and on the status of gov-
ernment and central banks sup port programs and their
eectiveness. Despite the stressed market environment,
there were signs of improvement following the announce-
ments of the support packages and during the course of
the initiatives of gradually reopening the economies. The
virus outbreak also led to extraordinary working condi-
tions, with part of the services sector working from home,
which rises the potential of those conditions being pre-
served after the virus outbreak, which could decrease
demand and market value for comm ercial real estate in-
Within this challenging environment, insure rs are exposed
in terms of solvency risk, prof‌itability risk and reinvest-
ment risk. The sudden reassessment of risk premia and
the increase of default risk could trigger large-scale rat-
ing downgrades and result in decreased in investments’
value for insurers and IOR Ps, especially for e xposures to
highly indebted corporates and sovereigns. On the oth-
er hand, the risk of ultra-low interest rates for long has
further increased. Factoring in the knock on eects of
the weakening macro economy, future own funds posi-
tion of the insurers could be further challenged, due to
potential lower levels of prof‌itable new business written
accompanied by increased volume of prof‌itable in-force
policies being surrendered or lapsed. Finally, liquidity risk
has resurfaced, due to the potential of mass lapse type
of events and higher than expected virus and litigation
related claims accompanied by the decreased inf‌lows of
For the European occupational pension sector, the nega-
tive impact of COVID-19 on the asset side is mainly driven
by deteriorating equity market prices, as, in anumber of
Member States, IO RPs allocate signif‌icant proportions of
the asset portfolio (up to nearly 60%) in equity invest-
ments. However, the investment allocation is highly di-
vergent amongst Member States, so that IORPs in other
Member States hold up to 70% of their investments in
bonds, mostly sovereign bonds, where the widening of
credit spreads impair their market value. The liability side
is already pressured due to low interest rates and, where
market-consistent valuation is applied, due to low dis-
count rates. The funding and solvency ratios of IORPs are
determined by national law and, as could be seen in the
2019 IORP stress test results, have been under pressure
and are certainly negatively impacted by this crisis. The
current situation may lead to benef‌it cuts for members
and may require sponsoring undertakings to f‌inance fund-
ing gaps, which may lead to additional pressure on the
real economy and on entities sponsoring an IORP.
Climate risks remain one of the focal points for the in-
surance and pension industr y, with Environmental, So -
cial and Governance (ESG) factors increasingly shaping
investment decisions of insurers and pension funds but
also aecting their underwriting. In response to climate
related risks, the EU presented in mid-December the Eu-
ropean Green Deal, aroadmap for making the EU climate
neutral by 2050, providing actions meant to boost the
ecient use of resources by moving to aclean, circular
economy and stop climate change, revert biodiversity loss
and cut pollution. At the same time, natural catastrophe
related losses were milder than previous year, but asym-
metrically shifted towards poorer countries lacking rele-
vant insurance coverages.
Cyber risks have become increasingly relevant across the
f‌inancial system in particular during the virus outbreak
due to the new working conditions that the conf‌inement
measures imposed. Amid the extraordinary en masse
remote working arrangements an increased number of
cyber-attacks has been reported on both individuals and

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