Risk assessment

• Pages: 39-60

5. RISK ASSESSMENT

5.1. QUALITATIVE 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

60

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.

NANCAL STABILITY REPORT

39

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.

5.2. QUANTITATIVE RISK

ASSESSMENT EUROPEAN

INSURANCE SECTOR

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.

INVESTMENTS

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.

R P AN INSURANCE AND OCCUPATIONAL PENSIONS AUTHORITY

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