7 May 2014
The European Insurance and Occupational Pensions Authority (Eiopa) has announced a new EU-wide stress test for the insurance sector aimed at assessing its overall resilience.
The test will evaluate the industry’s ability to withstand shocks to the wider financial markets as well as insurance-specific challenges, ahead of Solvency II’s implementation on 1 January 2016.
According to Eiopa, the core part of the test package includes two adverse market scenarios.
These will cover sovereign debt, corporate bonds, interest rates, property and equity stresses, as well as insurance-specific shocks such as mortality, longevity, insufficient reserves and catastrophes.
Charles Garnsworthy, UK Solvency II leader at accountancy giant PwC, said: “Firms will be particularly interested at the addition of a sovereign spread stress, as to date many firms have treated sovereign debt as equivalent to risk-free with their internal models.”
The second aspect of the test will address the impact of a low investment yield environment.
Garnsworthy warned that this exercise could double the workload for firms that are required to complete the stress test at a group level and the low yields assessment at an individual entity level.
Overall, the test is set to cover at least 50 percent of the life and non-life insurance sectors by market share in each country, Eiopa said.
It will be run in co-operation with national supervisory authorities, which will collect data from insurers after 11 July.
Throughout August and September, Eiopa and the national authorities will conduct an EU-wide validation of the data, and results of the stress test analysis will be disclosed in November.
To help insurers through the process, Eiopa said it would hold a workshop in May and launch a Q&A tool throughout May and June.
Eiopa chairman Gabriel Bernardino commented: “I believe that the design and the magnitude of the shocks will properly stress insurance companies’ financial position and that the conclusions of the exercise will allow Eiopa and national supervisory authorities to define areas for further investigation.”
In conjunction with the launch of the stress test, Eiopa also published its Solvency II technical specifications, which provide insurers with a basis for the valuation of assets and liabilities as well as solvency calculations.
They will form the basis for Solvency II interim reporting during 2014 and 2015.
According to Garnsworthy, the technical specifications have not changed significantly from those used in January 2013.
“Whilst this is good news for many insurers who will not need to significantly re-build existing models or alter existing methodologies, it also means that individual firms will be required to develop and apply their own ‘house view’ on remaining key areas of uncertainty,” he explained.
