Key developments

Pages10-18
1. KEY DEVELOPMENTS
Growing t rade tensio ns, political uncertaint y around Bre xit
and concerns over 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 cautious on rolling back non-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 recovered in the beginning of 2019
and valuations remain st retched in cert ain equity, bond and
real estate markets, indicating that market prices may not
fully ref‌lect underlying vulnerabilities. The r isk of a sudden
reassessment of risk premia therefore remains high, re-
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 economic slowdown. Sharply increasing yields
could cause immediate losses in f‌ixed-income investment
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
interconnectedness could lead to spillovers from the bank-
ing sector. On the other hand, the prolonged low level of
interest r ates continues to pose signif‌icant challenges for life
insurers and pension funds, making it increasingly 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 impact of recent f‌inancial market
develo pments on European insur ers and p ension funds ha s
so far been limited. While the par tial correction in equity
prices and limited impact on the f‌inancial system is p ositive
from a f‌inancial stability perspective, the risk o f asudden
repricing cannot be ruled o ut.
Further more, climate-re lated risks co ntinue to deman d su-
pervisory attention, in particular for insurers. 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 frequent and severe due to climate change, putting
signif‌icant pressure on non-life insurers. Transition risks
could also signif‌icantly aect the investment portfolio 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 underwriting strategies. Investments by
insurers in green bond s amounted to the highest amounts
ever recorded 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 threats have become more p rominent, mak-
ing insurers not only increasingly susceptible to cyber at-
tacks themselves, but also to potential ‘silent’ cyber 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 industry is moving towards actions to mitigate such
risks, but cor rectly pr icing and assessing expo sures to cyb er
risk remains challenging.
1.1. MARKET RISKS
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 the EU respectively, 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 (ESI), which
has been de creasing in recent mont hs (Figure 1.3).
Although projections show 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
EUROPEAN INSURANCE AND OCCUPATIONAL PENSIONS AUTHORITY
10

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