The European Insurance and Occupational Pensions Authority (EIOPA) has announced the launch of its 2016 EU-wide stress test for the insurance sector. The latest stress test is focused on two of the greatest risks currently facing the insurance sector: the “low yield” environment and the so-called “double hit”. Following warnings by the International Monetary Fund last year as to the vulnerability of small and medium-sized insurers, the test has been expanded to include 75% of insurers of each national market in terms of gross technical provisions. Furthermore, after the European Systemic Risk Board highlighted the risk of a “double hit” scenario, the test comprises of a combination of a fall in asset prices and a depression of the risk free rate. The “double hit” scenario has been chosen because low interest rates reduce the rate of return insurers receive from their investments and increase the amount of capital required to meet future obligations to policy holders.
Stress testing takes place in order to highlight vulnerabilities within the sector. This “double hit” scenario has not been observed before but EIOPA has said it cannot be ruled out. The test is not a pass/fail test for insurers but is intended to be used to provide high-resolution data on the sector and to highlight any critical vulnerabilities. Insurers will have from 24 May 2016 until 15 July 2016 (pushed back from 31 May 2016) to submit their data. The aggregated and anonymous results will be published at the end of the year.
EIOPA will also collect information on the Solvency II equity and long-term guarantees measures as part of a separate compulsory review of the sector. This is being done simultaneously so as to reduce the burden on insurers.
EIOPA’s press release is available here.