Key Developments

• Author: European Insurance and Occupational Pensions Authority (EU body or agency)
• Pages: 10-23

1. KEY DEVELOPMENTS

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-

vestments.

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

premiums.

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

EUROPEAN INSURANCE AND OCCUPATIONAL PENSIONS AUTHORITY

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