On Thursday, the European Insurance and Occupational Pensions Authority (EIOPA) published its EU-wide stress test for the European insurance sector. The results look positive at first sight, but closer inspection gives grounds for serious concern. An accompanying EIOPA report published today reveals that some insurers only manage to meet their Solvency capital requirement (SCR – the legal minimum excess value of assets over liabilities) because they are allowed to apply so-called long-term guarantee (LTG) measures and transitional measures (transitionals). These relief measures were added to prudential rules for insurers in 2014 under huge pressure from different national insurance industries to avoid them having to take serious action to cope with the prospect of a long period of low interest rates.
Without these measures, three undertakings even have an SCR ratio below 0% which means the value of their assets is below a prudent estimation of the value of their promises to customers.
For the stress test sample, the measures sum up to a relief of 157 billion euro in total. The measures increase the amount of eligible own funds to cover the SCR by 107 billion euro and decrease the SCR by 50 billion euro. At country level, insurers in Greece, Portugal and the United Kingdom would fail to comply with the SCR of 100% if they weren’t allowed to apply LTG measures.
The results of the stress test only show the surplus of assets over liabilities but not the capital requirement. Thus, it is not clear whether after stress the capital requirements are still fulfilled. In contrast to the stress test of the European Banking Authority, EIOPA does not publish results for individual insurers but only aggregated data.
Unfortunately the scope of the EIOPA’s annual report on LGT measures is limited to the 236 insurers (primarily life insurance companies) participating in the stress test exercise while the European insurance market consists of 3050 insurance and reinsurance undertakings.
The Solvency 2 directive requires annual reporting by all insurers to their supervisors to enable EIOPA to obtain the complete picture of the impact of the LTG measures. However it seems that national supervisors, even though empowered to do so, were more concerned about overburdening insurance undertakings with reporting than looking as early as possible at systemic implications of the LTG measures. Consequently EIOPA will only produce the full picture in 2017.
MEP Sven Giegold, financial and economic policy spokesperson of the Greens/EFA group commented:
“EIOPA’s stress test results gloss over the bad shape of Europe’s insurance market. Several undertakings only pass the legal solvency hurdle thanks to generous relief measures granted at the insistence of an industry worried about revealing the consequences of a long period of low interest rates on their ability to meet promises to customers. When unpacking this Christmas present for insurers, the gift will not please European citizens. The situation in Greece, Portugal and the United Kingdom is alarming. Three insurance undertakings actually have negative own funds, but EIOPA and the figleaf of the LTG measures keeps these zombie insurers alive. Many more insurers would be under water if the calculatory interest rates (“ultimate forward rate”) underlying long term obligations would not be loonily optimistic.
EIOPA should seriously assess insurers’ vulnerabilities and publish the results for individual insurers as is done for banks. Likewise, the impact of relief measures has to be calculated for all insurance undertakings and not only for the biggest ones. We call on EIOPA and national supervisors to provide the full and realistic picture of the insurance sector and force zombie insurers to change their business model or be shut down.”
More information on EIOPA’s stress test 2016 can be found here:
The EIOPA report on long-term guarantees measures can be found here: