Insurance Regulatory eBulletin - EIOPA

Risk Dashboard April 2018
On 27 April, EIOPA published its updated Risk Dashboard for April 2018. The key observations included:

  • insurance sector risk exposures were stable in the fourth quarter of 2017;
  • low interest rates continue to represent a major risk source for insurers whilst credit and market risk continue to be rated medium;
  • median profitability indicators are generally at the same level as in quarter four of 2016 and solvency positions continued to be strong;
  • insurance risks are at a medium level as a result of the impact of natural catastrophes in quarter three of 2017;
  • insurers' stock prices outperformed the market while at the same time the external rating outlook for some insurance groups deteriorated.
EIOPA launches the fourth EU-wide insurance stress test
On 14 May, EIOPA announced that it was launching its fourth stress test for the European insurance sector. The goal of the stress test is to assess vulnerabilities of the European insurance sector. The stress scenarios encompass a combination of market and insurance specific risks as well as the exposure to cyber risk. The 42 European insurance groups participating in the stress test represent circa 78 % of the total European market.

EIOPA opinion on the solvency position of EU insurers in light of Brexit
On 18 May, EIOPA issued an Opinion on the solvency position of insurers in light of the withdrawal of the United Kingdom (UK) from the European Union (EU). Technical provisions, own funds and capital requirements of insurance and reinsurance undertakings in member states other than the UK may change when the UK becomes a third country due to changed regulatory requirements because Solvency II distinguishes between activities in and outside of the EU. The EIOPA Opinion aims to ensure that risks to the solvency position of insurers arising from the UK becoming a third country are properly addressed, and identifies 14 areas where the determination of the solvency position of insurers will change. The 14 areas include:

  • the standard formula SCR for spread risk, market risk concentration and for counterparty default risk is based on credit ratings issued by an endorsed external credit assessment institution (ECAI) of the assets of the insurance and reinsurance undertakings. The UK credit rating agencies will be deregistered after the withdrawal date and will no longer qualify as ECAIs;
  • service continuity for insurance contracts relies on freedom of establishment and services and certain firms may not be authorised post-Brexit to service these contracts although those contracts remain vald in principle. Technical provisions for these contracts may need to be changed because the expected profit from these contracts cannot be earned anymore or only with delay;
  • depending on the national legal framework for reinsurance activities, UK insurance and reinsurance undertakings may not be able to provide reinsurance services in some EU 27 member states after Brexit unless they take measures to secure market access;
  • the scope of group supervision under Solvency II depends on whether the parent undertaking of the insurance group is located in the EU. For insurance groups with a UK parent undertaking and subsidiaries across other member states the scope of group supervision will therefore change post-Brexit;
  • where an insurance group with a UK parent undertaking applies an internal model at group and subsidiary level, it cannot be used anymore to calculate the SCRs of the insurance and reinsurance undertakings in the group that are located in the EU27 member states without re-approval by the national supervisory authority.

EIOPA plans to monitor the risks and advises that national supervisory authorities should assess the risks arising for their national markets.

First Comparative Study on market and credit risk modelling
On 22 May, EIOPA published its comparative study on the key findings arising from a study undertaken in 2016/2017 of market and credit risk in internal models based on Solvency II 'day-one' data. This is a first step in an ongoing process of monitoring and comparing internal market and credit risk models.
The overall results show significant variations in asset model outputs, which could be partly attributable to model specificities already understood by the relevant NCAs, but might also indicate a certain need for further supervisory scrutiny. As part of a thematic focus on interest rate risk modelling, EIOPA noted that five participants did not model negative rates at the date of the study, but that all of the respective models were adapted to model this as at year-end 2017.