Key developments

Growing t rade tensio ns, political uncertaint y around Bre xit
and concerns o ver debt sustainability have led to a slow-
down in eco nomic growth in Europe. Inf‌lation in both the
Eurozone and th e EU remains subdued, while central banks
have become more cautio us on rolling back no n-conven-
tional monet ary policy stimulus in Euro pe and have put in-
terest r ate increases on hold until at least mid 2020.
Despite asho rt increase in volatility toward the end of 2018,
f‌inancial markets have re covered in the beginning of 2019
and valuations remain st retched in cert ain equity, bond and
real estate markets, indicating that market prices may no t
fully ref‌lect underlying vulner abilities. The r isk of a sudden
reassessme nt of r isk pre mia there fore r emains high, r e-
f‌lecting po litical risks and debt concer ns in some European
countrie s, which could be exace rbated and reinfor ced during
a period of econo mic slowdown. Sharply increasing yields
could cause immed iate losses in f‌ixed-income investm ent
port folios of insurer s and pension funds, with the overall bal-
ance sheet imp act depending on t he type of pr oducts and
the interac tion between r ising bond spre ads, risk-free rates
and po tential higher t han expecte d lapses. A sudden re pric-
ing of risk could also trigger furt her ‘f‌light to quality’ invest-
ment be haviour, putting additional p ressure on insurers and
pension funds in aected countries, while ahigh degree o f
interconnecte dness could lead to sp illovers from the bank-
ing sector. On the othe r hand, th e prolo nged low le vel of
interest r ates continues to pose signif‌icant challenges for life
insurers and pensio n funds, making it incre asingly dicult
to generat e sucient investment returns to me et their lo ng-
term f‌inancial obligations . This could trigge r furt her p otential
search for yie ld behaviour by insurer s and pensions funds.
Equity markets have recovered afte r acorrectio n in the US
stock market in December, amid concerns of aglobal eco-
nomic slowdown. Despite increasing volatility and political
uncertainty, the overall impac t of re cent f‌inancial market
develo pments on European insur ers and p ension funds ha s
so far be en limited. While the par tial correction in equit y
prices and limited impact on the f‌inancial system is p ositive
from a f‌inancial stability per spective , the risk o f asudden
repricing cannot be ruled o ut.
Further more, climate-re lated risks co ntinue to deman d su-
per visory attent ion, in p articular for insur ers. Climate-re-
lated losse s were again elevated by historical stand ards in
2018 and ext reme weather e vents are exp ected to b ecome
more fre quent and se vere due to climate change, p utting
signif‌icant pr essure on non-life insurer s. Transition risks
could also signif‌icantly ae ct the investment p ortfo lio of
life insurers and pension funds in case of adisorder ly transi-
tion to alo w-carbon econo my. In response to this, some in-
surers have be come more active in sustainable f‌inance, in-
creasingly taking actions against ‘brown’ industries in th eir
investment and under writing strategie s. Invest ments by
insurers in green bond s amounted to the highest amounts
ever re corded in 2018. A rapid increase in green bond is-
suance can also be observed re cently. However, challenges
in monitoring and mitigating climate-related risks in both
underwrit ing and investment act ivities still remain.
Finally, cyber threat s have become more p rominent, mak-
ing insurers not only increasingly susceptible to cyber at-
tacks themselve s, but also to pote ntial ‘silent’ cybe r risk
exposures in their underwr iting portfolios . Silent cyber ex-
posures r efers to instance s where cyber coverage is neith er
explicitly included nor excluded within an insurance p olicy.
The industr y is moving towar ds actions t o mitigate such
risks, but cor rectly pr icing and assessing expo sures to cyb er
risk remains challenging.
The economic slowdown in the euro area and in the EU
in the second half of 2018 was more pronounced than
expected, amid increasing global and domestic uncer-
tainties. GDP growt h in 2018 was 1.8% and 1.9% in the euro
area and in t he EU resp ectively, against a forecast of 2.1%
for both regions (Figure 1.1) This outcom e ref‌lects aweaker
global trade growth involving fur ther tensions be tween the
US and China, elevate d political uncer tainties (Figure 1 .2) as
well as other domestic factors , such as bottlenecks in t he
car industr y. The backdrop is also ref‌lected in the European
Commission’s Economic Sentiment Indicator (E SI), which
has been de creasing in recent mont hs (Figure 1.3).
Although pro jections sho w that the European e conomy is
expecte d to grow fo r the seventh year in arow in 2019 , the
pace of gro wth is slowing down comp ared to recent years.
The econo mic growth forecast s have been re vised down in

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