Risk assessment
| Author | European Insurance and Occupational Pensions Authority (EU body or agency) |
| Pages | 49-83 |
. RISK ASSESSMENT
.. QUALITATIVE RISK
ASSESSMENT EUROPEAN
INSURANCE SECTOR
The unprecedented situation of the Covid-19 shock is
causing disruption to households and businesses gener-
ating a high uncertainty regarding the future economic
outlook. Insurance companies are likely to face challeng-
ing conditions, potentially aecting their profitability and
solvency positions. In order to assess the materiality of
risks to financial stability for the insurance sector, EIOPA
conducted a qualitative questionnaire among national
competent authorities (NCAs)
The EIOPA qualitative Covid-19 questionnaire reveals
that profitability of investment portfolio, solvency
position, exposure to banks, underwriting profit abil-
ity, concentration to domestic sovereign and cyber
risk are the top six key risks and challenges in terms of
materiality (Figure 5.1) for insurers62. However, it also
shows that, overall, insurers have set in place adequate
measures to mitigate those risk s.
62 Results of the questionnaire can b e found in the Appendix of the
EIOPA report “Impact o f ultra low yields on the insurance sector, includ-
ing first eects of COVID -19 crisis” published in July 2020 https://www.
eiopa.europa.eu/content/impact-ultra-low-yields-insurance-sector-in-
cluding-first-eect s-covid-19-crisis_ en
Figure 5.1. Top 6 risks in terms of materiality for the
insurance sector
Figure 5.2. The need of risk mitigation measures for the
top 6 risks for the insurance sector
10 20 30 40 50 60 70 80 90 100
Profitability
of investment
portfolio
Solvency
position
Exposure to banks
Underwriting
profitability
Concentration
to domestic
sovereign
Cyber security
risk
Low Very High
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Profitability
of investment
portfolio
Solvency
position
Exposure
to banks
Underwriting
profitability
Concentration
to domestic
sovereign
Cyber
security
risk
No measures are necessary Existing measures
are adequate
Reinforcement of existing
measures is necessary
Introduction of new
measures are necessary
Source: EIOPA Qualitative Covi d-19 questionnaire (May 2020)
Note: Based on the resp onses received. Risks are ranke d according to mate-
riality (from 1 indicating low mater iality to 4 indicating very high materialit y).
The figure shows the aggre gation of the average scores assign ed to each risk.
The results were subsequ ently normalised on ascale from 0 to 1 00.
Source: EIOPA Qualitative Covi d-19 questionnaire (May 2020)
Note: Based on the resp onses received.
FINANCIAL TABILITY ORT
49
Based on the qualitative questionnaire, profi tability of
investment portfolio is the highest ranked risk for the
insurance sector in terms of materiality, with more than
10% of the responses signalling a need to reinforce the
existing measures, although no new measures are seen to
be necessary. Almost half of the respondent NCAs ranked it
as the risk with the highest materiality while aslightly lower
share (40%) ranked it as medium materiality. The low interest
rate is confirmed as the main risk for the insurance sector.
The interest rate was already expected to remain low and this
expectation is now even more strengthened, in the context
of the measures taken by central banks to sustain the econ-
omy. With approximately 65% of the investment portfolio
dedicated to fixed-income assets, the insurance sector is sen-
sitive to the low yield environment.63 As indicated by NCAs in
the open questions of the questionnaire, two additional fac-
tors were mentioned to put pressure on the profitability of
insurers’ investment portfolios. First, the returns generated
by loans and mortgages are expected to decrease, due to im-
pairments because of the forecasted recession. Second, for
the same reason, dividend received on equity holdings might
reduce. On the positive side, NCAs reported that life insur-
ers with guaranteed pro ducts have built significant buer s to
withstand worsening market conditions. Instead, for national
markets, which are not signifi cantly exposed to guarante ed
products sold in the past, the impact of lower investment
profitability is seen so mewhat limited. Furthermore, finan cial
markets have regained lost ground during April and May.
Notwithstanding the adequate capital positions of in-
surers prior to the Covid-19 shock, solvency is ranked
as the 2nd biggest risk for insurance sector, with 15%
of NCAs considering that a reinforcement of existing
measures or introduction of new measures would be
necessary.64 Almost one-quarter of t he participants indi-
cate Solvency position as high materiality and 60% as me-
dium materiality. As stated by many NCAs, adeterioration
of the solvency positions was observed in Q1 2020, both
because of the expected persistence of the low rate and
because of the depreciation of assets and economic un-
certainties that had anegative impact on insurers’ balance
sheets. On the positive side, the reductions and/or cancel-
lations of distributed dividends might mitigate the solvency
risk of some insurers by helping them preserving capital.65
63 The issue was identified as on e of the main concern for the insurance
sector, thus it was decided to have adedic ated report covering the topic:
Impact of ultra- low yields on th e insurance sector, including first eect s
of COVID-19 crisis.
64 More focused discussion on the ca pital position of insurers can be
found in chapter 2.
65 EIOPA (2/5/2020) EIOPA statement on dividends distrib ution and
variable remuneration policie s in the context of COVID-19. Available at:
https://www.eiopa.europa .eu/content/eiopa-statement-dividends-dis-
tribution-and-variable-remuneration-policies-context-covid-19_en
The risks related to exposure to banks and concentra-
tion of domestic sovereign are ranked on the 3rd and
5th places, respectively, with 10% of the responses
indicating that reinforcement or introduction of new
measures are needed. Exposures to banks are consid-
ered by 23% of the participants as having high or very high
materiality, while more than half of the NCAs consider it
had medium materiality. NCAs indicated ahigher concern
for those insurance companies with high exposure to
banks, as the Covid-19 crisis could negatively aect quality
of banks’ portfolios leading to increase in their NPL (non
performing loans) ratios. Although 70% of the respondent
NCAs stated that existing measures in place taken by the
insurers are adequate, 10 % believe that the reinforcement
of existing measures or introduction of new measures
would be needed. On the other hand, concentration of
domestic sovereign is rated by 30% of the respondents
as high or very high materiality. Insurers heavily exposed
to fixed income assets are more sensitive to interest rates
and spread risks. For some insurers, the Volatility Adjust-
ment (VA) could compensate the variation in spreads, for
others the matching adjustment procedures and hold to
maturity strategies might re duce the spread risk.
The risk of decreased underwriting profitability
emerged, as it is the ranked on 4th place in terms risk
materiality according to the questionnaire, with 10%
of the responses indicating that reinforcement or in -
troduction of new measures are needed. When asked
to assess the impact on life and non-life lines of business
(Solvency II QRT) in the current situation of Covid-19
shock, the responses pointed out that new premiums are
expected to decline almost across all non-life business
lines. Instead, the situation looks more heterogeneous for
claims. Atemporary claims reduction is foreseen for some
non-life business lines, namely, motor business (79% of
the responses expect decrease and strongly decrease),
general liabilities (36%), marine, aviation and transport
insurance (33%), reducing the pressure on profitabili-
ty. However, claim increases have been reported by the
NCAs for some other non-life lines of business such as
miscellaneous financial losses (50% increase and strong
increase), income protection insur ance (40% increase
and strong increase) and credit and suretyship insurance
(60% increase and strong increase). NCAs indicate that
the overall impact seems to be slightly negative, but still
it is too early to make an assessment as some claims could
materialize later, also due to the legal uncertainty on
whether insurers are liable to pay out some type of claims.
UROPEAN INSURANCE AND OCCUPATIONAL PENSIONS AUTHORITY
50
Figure 5.3. Impact on claims incurred for life business
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
eased (>20%) Increased Unchanged Decreased
Strongly decreased (>20%) Not possible to estimate at this point Not underwritten
Annuities
stemming from
non-life insurance
contracts (relating
to other than
health insurance
oblig.)
Annuities
stemming from
non-life insurance
contracts (relating
to health insurance
oblig.)
Other life
insurance
Index-linked
and unit-linked
insurance
Insurance with
profit participation
Health
insurance
Figure 5.4. Impac t on premiums written for life business66
Strongly increased (>20%) Increased Unchanged Decreased
Strongly decreased (>20%) Not possible to estimate at this point Not underwritten
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Health
insurance
Insurance with
profit participation
Index-linked
and unit-linked
insurance
Other life
insurance
Annuities
stemming from
non-life insurance
contracts (relating
to health insurance
oblig.)
Annuities
stemming from
non-life insurance
contracts (relating
to other than
health insurance
oblig.)
OP v v -1 stionnaire (May 2020)
Note: Based on the resp onses received. Risks are ranke d according to impact (from-2 indicating strongl y decrease to +2 indicating strongly incre ase). The figure
shows the aggregation of t he average scores assigned to each r isk. The results were subsequ ently normalised on ascale from 0 to 1 00.
66 Premiums written are based on new business an d existing contracts.
FNANC AL TAB L TY EPORT
51
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