On 15 December, EIOPA announced the results of its 2016 EU-wide stress test for the European life insurance sector. EIOPA regards the stress test as a supervisory snapshot of the life insurance market in Europe. Vulnerability assessments are a requirement under Solvency II and this is the first one conducted since Solvency II was implemented.
A prolonged low yield environment and a "double-hit" scenario, where a sudden increase in premia combines with a low yield environment, were the two scenarios chosen for the stress test. The insurers' vulnerabilities and resilience to these major market developments were assessed. The 236 participating insurance undertakings with market coverage of 77% came from 30 European countries and included medium and small sized undertakings. The exercise involved insurers calculating the impact of the market risks on their balance sheets with reference to 1 January 2016.
While participating undertakings appeared to have adequate capitalisation on an aggregate basis in the pre-stress situation both scenarios had a negative impact on undertakings' balance-sheets. The impact of the "double-hit" scenario was 160 billion and the prolonged low yield scenario was 100 billion. The stress test disclosed vulnerabilities which need a coordinated supervisory response. EIOPA has issued a number of recommendations to the national supervisory authorities to ensure a co-ordinated response including: to review and assess undertakings' models regarding the behaviour of management and policyholders; to review the clauses of the guarantees, their typologies, and the optionalities they carry to assess if the valuation of the technical provisions can be considered proportionate and prudent; to request a reduction in the maximum guarantees or in unsustainable profit participations offered; and to request a cancellation or deferral of dividend distribution when the viability of the business model is at risk. The national supervisory authorities will be supported in implementing these recommendations by EIOPA, in its coordinating role.
A link to the report on the results is here.