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On 4 July 2011, EIOPA announced the results of the second Europe-wide stress test for the insurance sector which took place between March and May 2011. Overall it considered that the European insurance industry remains robust.
The stress test sought to ascertain the exposure of the insurance industry to adverse capital market developments based on future Solvency II requirements. As such, it assessed whether the European insurance industry can meet minimum capital requirements ("MCR"), the ultimate regulatory threshold, under a number of stress scenarios comprising market, credit and insurance related risks. The main market risk drivers identified were equity prices, interest rates and sovereign bonds, while the main insurance risks were increased claims inflation and natural disasters.
The stress test scenarios employed, which aimed at replicating macroeconomic scenarios and identifying and quantifying the impact of same based on 2010 financial results, were as follows:-
- baseline scenario – severe stress;
- adverse scenario – a more severe market deterioration; and
- inflation stress – assumes an increase in inflation, forcing national supervisory authorities to rapidly increase interest rates.
While the exercise was completed by 221 insurance and reinsurance groups and companies in the EU, EEA and Switzerland, the results reported are for 58 groups and 71 companies due to aggregation of the results within groups. This figure represents approximately 60% of the European insurance sector and surpasses EIOPA's aim of including a minimum of 50% of insurance companies from each country as measured by gross premium income. EIOPA considers that the results of the stress test indicate that overall the European insurance sector is well prepared for potential future shocks as tested in the exercise. However, data did reveal that approximately 10% of the participating groups and companies would not meet the MCR under the adverse scenario and would show a solvency deficit of €4.4 billion if it were to occur, while 8% would fail to meet it in the inflation scenario and would show a €2.5 billion deficit if it were to occur.
At an aggregate level, EIOPA identified the main drivers of the results as being adverse developments in equity prices, interest rates and sovereign debt markets. On the liability side it noted that non-life risks are more critical, triggered by increased claims inflation and natural disasters.
It is however worth stressing that 90% of the groups and companies tested continue to comply with the MCR even in the most adverse scenario. Moreover, EIOPA emphasised that the results of the stress test should be understood in light of the fact that they were based on a future regulatory system and highlight an exposure to hypothetical risks rather than being necessarily indicative of any current solvency problems.
EIOPA's press release noted that national supervisory authorities will discuss the main findings of the stress test with the insurance groups and companies. A copy of the results is available on EIOPA's website www.eiopa.europa.eu .
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