Solvency who

16 December 2016 By Liam Proud Follow @liamwardproud

Life insurers look weak in their first stress test since so-called Solvency II reforms. Regulatory carve-outs mean they may not necessarily need capital. But the anonymous nature of the exercise means that investors can’t be certain which are the ones to avoid.

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The European Insurance and Occupational Pensions Authority on Dec. 15 released stress tests covering 236 life insurers in Europe. The results, which were anonymised and aggregated by country, found that insurers' balance sheets would collectively suffer a 160 billion-euro or 100 billion-euro hit, depending on the scenario used.

EIOPA tested two scenarios in the exercise. The first, named "low-for-long", saw euro-zone risk-free interest rates remain lower than mid-2015 levels for seven to 10 years, pushing down the "ultimate forward rate" at which insurers can discount long-term liabilities to 2 percent from 4.2 percent.

The second, called the "double-hit" scenario, combined prolonged low rates with a plunge in asset prices including sovereign and corporate bonds, equities and commercial and residential property across Europe. Sovereign-bond yields spiked by over 1.2 percentage points on average across the EU under this scenario, while stocks fell by more than 30 percent.

EIOPA also modelled the affects of regulatory transitional and long-term guarantee measures on the solvency of insurers in different countries. In the UK, the removal of long-term guarantee and transitional measures saw solvency capital requirement ratios fall to 51 percent from 142 percent before the stressed scenario; in Germany, the fall was to 145 percent from 272 percent.

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