On 28 February 2013, EIOPA published an Opinion on the "Supervisory Response to a Prolonged Low Interest Rate Environment" (available here).

The Opinion won't prompt major soul searching at the FSA. It probably won't trouble many UK (re)insurers either: - since the near collapse of the Equitable Life Assurance Society in 2001/2, the UK regulator and UK (re)insurers have been acutely aware of the risks that crystallise when guaranteed annuity rates and guaranteed investment returns come into the money. They've also recognised how vulnerable a firm can be when it has to rely on investment returns to compensate for poor underwriting and price sensitive markets. Finally, of course, Northern Rock has shown us how important it is for the regulator to challenge outlying business models. The FSA's Tiner Reforms, and many of its later rule changes, have been designed to mitigate these risks.

What might be surprising, however, is EIOPA's implied suggestion that some European supervisory authorities and (re)insurers are still blissfully unaware of the issues.EIOPA begins by reminding us that:

  • 7 Japanese life insurers failed between 1997 and 2001, after a long period of low interest rates and poor economic growth;
  • to mitigate the risk of more failures, the Japanese authorities allowed (re)insurers with a high probability of bankruptcy to vary their contractual guarantees down to the extent that that was necessary to allow them to survive;
  • EIOPA's 2011 Low Yield Scenario Stress Tests suggested that between 5% and 10% of European (re)insurers would breach their MCR, and many others would be at risk, if the Japanese experience was repeated here.

So what's EIOPA proposing? The Opinion recommends that:

  • European supervisory authorities pro-actively assess their firms to determine the nature and extent of the risks they face as a result of a prolonged low interest rate environment,...before reporting the aggregate results to EIOPA;
  • EIOPA co-ordinates stress tests to estimate when and where the biggest problems are likely to arise;
  • European supervisory authorities should intensify their monitoring and supervision of the (re)insurers with the greatest exposure - challenging them to take management actions to mitigate their risks; and
  • The authorities should consider "taking measures [including] conditionality and exit features" (whatever they are).

Although UK (re)insurers and regulators probably can't afford to be too complacent about this, we can at least be grateful that our road will be shorter and less rocky than the roads EIOPA clearly thinks others will have to travel. We can also allow ourselves a wry smile at the immediate trigger for the publication of EIOPA's Opinion: "...insurers [must] not store up risks that may crystallize suddenly with the implementation of Solvency II" ("sudden" and "Solvency II"?).