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Last night the European Insurance and Occupational Pensions Authority (EIOPA) released the results of its 2014 stress tests of insurers. These were carried out against the background of the implementation of Solvency II, the new risk-based regulatory regime for insurance and reinsurance, which will be fully applied in the EU from 1 January 2016.

Welcoming the results of these stress tests, Commissioner Jonathan Hill said:

“These were serious and thorough stress tests. The results show that the European insurance sector is, broadly speaking, in good health although vulnerabilities have been identified, in particular for some smaller insurers. The new Solvency II framework – to be fully applied from early 2016 - will introduce a new regulatory system in the European Union. It is designed to prevent some of the issues detected in these stress tests, so public authorities and insurers should press on with their preparations for 2016.”

Background:

The European Insurance and Occupational Pensions Authority (EIOPA) announced last night the results of its EU-wide Insurance Stress Test. The exercise aimed to test the overall resilience of the insurance sector and to identify its major vulnerabilities. Undertakings estimated a baseline scenario using the upcoming Solvency II regime and subjected them to a number of severe shocks. The results of the baseline scenario indicated that the sector is in general sufficiently capitalised in Solvency II terms. But it also detected some vulnerabilities and EIOPA has issued a set of specific recommendations to the national supervisory authorities to address these.

The Solvency II Directive, introducing a new risk-based regulatory regime for the insurance sector in the EU, was adopted in 2009 (see IP/09/621). However, the current environment of low interest rates and low asset values, which developed largely after the adoption of Solvency II, is challenging for insurers offering long-term guarantees (mainly life insurers), and required some adaptations to the Solvency II requirements, including a package of measures for insurers issuing products with long-term guarantees (the LTG package). These were dealt with in the so-called "Omnibus II" Directive (see STATEMENT/14/61). More detailed implementing rules for Solvency II were adopted by the Commission on 10 October 2014 (see MEMO/14/578). Solvency II will be fully applied in the EU from 1 January 2016.

Solvency II includes two capital solvency levels for insurers, a higher one, the Solvency Capital Requirement (SCR), and a lower one, the Minimum Capital Requirement (MCR). If an insurer falls below its SCR, it must implement a recovery plan, in cooperation with its supervisor, but it may continue writing new business. Only if it falls below its MCR must it cease writing new business, unless it can restore the situation according to a reliable short-term finance scheme.Thus, the insurers which were found to fall below their SCR level of capital under certain scenarios in the stress test would not be obliged to cease writing insurance policies in such a situation but to quickly strengthen their capital position.

For more information

EIOPA stress tests:

https://eiopa.europa.eu/home/index.html

European Commission:

http://ec.europa.eu/finance/insurance/index_en.htm

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