European Stress Test Shows Capital Deficiencies Under Extreme Scenario

NU Online News Service, July 5, 1:45 p.m. EDT

While the European insurance market in general is well prepared for potential future shocks, approximately 10 percent of groups evaluated in a recent stress test failed to meet capital requirements under a certain "adverse" scenario.

The European Insurance and Occupational Pensions Authority (EIOPA) conducted the required stress tests between March and May to gauge insurers' ability to meet future Solvency II Minimum Capital Requirements (MCR). Insurers were tested under three scenarios: baseline, adverse and inflation scenarios.

The baseline scenario is defined as a severe test; the adverse scenario includes greater deterioration in macroeconomic variables; and the inflation scenario assumes an increase in inflation that forces central banks to rapidly increase interest rates.

"The results of this stress test indicate that, overall, the European insurance market is well prepared for potential future shocks as tested in this exercise," EIOPA says.

However, the authority adds that around 10 percent of the insurance groups tested do not meet the MCR under the adverse scenario, and around 8 percent of the groups failed to meet the MCR under the inflation scenario.

The EIOPA says participating insurers—representing about 60 percent of the European insurance market—showed an aggregate solvency surplus of €425 billion ($614.9 billion at current exchange rate) before the stress test was applied. The surplus decreased to €275 billion ($397.9 billion) under the adverse scenario and €367 billion ($531 billion) under the inflation scenario.

The groups and companies that did not meet the MCR showed a solvency deficit of €4.4 billion under the adverse scenario and a deficit of €2.5 billion under the inflation scenario.

"At the aggregate level, EIOPA identifies the main drivers of the results as being adverse developments in equity prices, interest rates and sovereign debt markets," EIOPA says. "On the liability side, non-life risks are more critical, triggered by increased claims inflation and natural disasters."