Risk assessment

A conducts twice ayear asurvey among national su-
perviso rs to d etermine t he key risks and challenges for
the Euro pean insurance and pension fund sectors , based
on their p erceived likelihood and potential impac t.
The EIOPA qualitative Spring 2019 Survey30 reveals
that low interest rates remain the main risk for both
the insurance and pension fund sectors (Figure 5.1 and
Figure 5.2). Life insurance is typ ically the most aected
segment in an e nvironment of p rolonged low interes t
rates, given the ir higher prop ensity for dur ation mis-
matches. In additio n, comp anies that oere d high guar-
anteed r ates issued in the past face higher challenge to
achieve the r equired investment ret urns to cover policy-
holder o bligations (see Chapter 1).
30 The survey was carried out in February – March 2019 and only re-
f‌lects mar ket developme nts until then. The refore, the sur vey does not
ref‌lect co ncerns over t he recent mar ket develop ments such as sove reign
spreads wid ening for so me countrie s.
Equity risks also re main prevalent for both insurers and
pension funds, ranking as the seco nd biggest r isk for both
sectors . Cyber risk, which w as considered the third biggest
risk for insurer s in the autumn 2018 FSR e dition, was now
surpassed by macro r isks, re f‌lecting the recent econom-
ic slowdown in s ome countrie s and concer ns about the
trends to wards trad e prote ctionism, de bt sustainability
and uncertainty concer ning the future Brexit landscap e.
Geopo litical risks raised to the 6th positio n in the r ank-
ing for both pensions and insurance secto rs. ALM r isks
continue to b e prese nt in the insurance sector, but less
prominent ly given the increase in macro and geop olitical
risks. For the pensio n fund sect or, credit risk for sove r-
eigns has remained unchanged throughout the year in 3rd
place, while cre dit risk for f‌inancials has fallen from the 4th
to 8th position in the ranking compared the autumn 2018.
Figure 5.1: Risk assessment for the insurance sector
Figure 5.2: Risk assessment for the pension funds sector
010 20 30 40 50
Low interest rates risk
Equity risk
Macro risk
Cyber risk
ALM risks
Geopolitical risks
Catastrophe risk
Credit risk - Sovereigns
Credit risk - Financials
Lapses in life insurance
Property risk
Credit risk - Non f‌inancials
Liquidity risk
Technological risks
Foreign exchange rate risk
Sharing economy risk
Insurance 2019 Spring Insurance 2018 Autumn
010 20 30 40 50 60 70
Lest rat
edit risk - Sovereigns
Macro risk
ALM risks
Geopolitical risks
Cyber risks
Credit risk - Financials
Longetivity risk
Credit risk - Non f‌inancials
Property risk
Foreign exchange rate risk
Liquidity risk
PF 2019 Spring PF 2018 Autumn
Source: Quali tative EIOPA Sp ring 2019 Sur vey
Note: Base d on the respo nses receiv ed. Risks ar e ranked according to probabilit y of materialis ation (from 1 indicating lo w probabilit y to 4 ind icating high
probabilit y) and the imp act (1 indic ating low impa ct and 4 ind icating high impa ct). The f‌igur e shows t he aggregat ion (i.e. p robability times impac t) of the average
scores assign ed to ea ch risk. The results we re subseque ntly normalis ed on asca le from 0 t o 100.
The survey further suggests that in par ticular property,
equity and cyber risks are expected to increase over the
coming year (Figure 5.3). Tin it h bserve
market evelopments hlighted n hapter , ndicat-
in h ncreasin oncern bou tretche aluation
certai ea stat n quit arkets or requen n
more ophisticated yber-attacks, conomic lo do n
and ncreasing imate atastrophes, hich ould l oten-
tiall he f‌inancial position of insurers and pension
funds. This is couple d with an expe cted increase in geopo-
litical and macro r isks following the trade tensions across
the globe . On the other hand , ALM risks and low inter est
rates risks are expecte d to decr ease in the coming p eriod.
Credit risk for sovereigns is the risk that is expected to af-
fect most the insurance and pension sector, should they
materialize. The combined indicator (probability and impact)
is relatively low due to the low perceive d probability of wide-
spread credit risks fo r sovereign. Ho wever, should sove reign
debt concer ns resurface in some countries, trigge red by fac-
tors such as p olitical uncert ainties or areve rsal of risk p remia,
this is expe cted to have a signif‌icant impact on insurers and
pension funds. As further detailed be low, investments of the
insurance sector are characterized by st rong home bias, so
the companies in aected countr ies would suer immediate
negative impact s on their b ond por tfolios.
The survey shows that insurance undertakings in many ju-
risdictions have been applying risk-mitigating actions to
address the low-for-long and catastrophe risks. Low yields
negatively aec t prof‌it ability and put increased pressure on
regulator y capit al in the context of typ ically negative duratio n
gaps for life insurance companie s. In particular, the risk-mit-
igation actions by insurers target ared uction of the volume
in prod ucts entailing minimum guaranteed rates and amove
towards unit-linked businesses . The majorit y of jurisdictions
have, more over, implemented measures (such as stre ss test-
ing and se nsitivity analysis) to evaluate p otential conse quenc-
es of a prolonged pe riod of low inter est rates with re gard to
key regulato ry indicator s. Regarding cata strophe risk s, insur-
ance companies used the ye arly renewals o f contract s and
reinsurance treaties as key risk mit igating actio ns.
This section further assesse s the key risks and vulnerabil-
ities for the Europe an insurance se ctor id entif‌ied in this
repor t. Adetailed breakdown of the investment por tfolio
and asset allo cation is pro vided with afocus on specif‌ic
country exposures, interconnecte dness with t he banking
sector and athorough analysis of co llateralized loans and
mort gages obligatio ns. Moreo ver, follow-up on insurance
stress te st 2018 is prese nted.
Insurance companies’ investments in f‌ixed income
assets have slightly decreased during the last three
Figure 5.3. Supervisor y risk assessment for insurance and pension funds- expected future development
-4 -1 4 9 14 19
Property risk
Equity risk
Cyber risk
Geopolitical risks
Macro risk
Credit risk - Non f‌inancials
Foreign exchange rate
Credit risk - Sovereigns
Credit risk - Financials
Liquidity risk
Low interest rates
ALM risks
Source: Quali tative EIOPA Sp ring 2019 Sur vey
Note: Base d on the respo nses receiv ed. EIOPA mem bers indic ated their expec tation fo r the fut ure devel opment o f these r isks. Score s were p rovided in the
range-2 indicatin g considera ble decre ase and +2 ind icating conside rable incr ease.

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