CEIOPS publishes its Second bi-annual Financial Stability Report for the insurance and occupational pensions sector and considers that the risks described in CEIOPS Spring Report 2009 have not significantly changed during the second half of 2009.
Though the insurance and occupational pension funds sector had a favourable financial position by mid-2008 the financial situation has weakened in the second half of 2008 and 2009. There still is uncertainty on the future outlook for the insurance and occupational pensions sector related to developments in interest rates, equity prices as well as the influenza A(H1N1).
Insurance sector
In 2008 the financial market turmoil has reduced demand of life products significantly, and recessionary pressure on household income will likely reduce demand further throughout 2009. In 2008 the financial performance of most insurance undertakings was weaker than in 2007 due to low investment yields and flat or decreased premium income. Year 2009 is especially challenging due to a prolonged period of deteriorating macroeconomic environment.
During 2008 solvency positions have deteriorated and many undertakings have as a response increased their capital buffers by now.
Driven by high claims from eatherrelated natural catastrophes, 2008 was the second most expensive year on record. In 2008, the course of the softening global reinsurance market continued. Due to the financial turmoil the demand for reinsurance capacities is increasing. Lower or even negative investment results have placed pressure on primary insurance undertakings’ capital. In the European renewal season 2009 the prices increased in certain reinsurance segments.
The insurance industry as a whole faces several risks and challenges going forward, of which the most prevalent are financial risks, in particular the risk of low or even again decreasing interest rates as well as risks related to depressed equity markets. A prolonged period of economic recession will be particularly challenging for the underwriting performance.
The monoline sector remains under significant stress and the deterioration in structured credit markets and, in particular, in securities related to US subprime mortgages, has continued. Capital levels have increased as business runs off the books, with little or no new business being written.
Pension Funds sector
The financial turmoil has hit Institutions for Occupational Retirement Provisions (IORPs) primarily in their role as institutional investors. Sharp drops in the
equity markets and increasing credit spreads have put their investment portfolios under strain. However, the impact has not been as severe as seen in other financial sectors as the long term nature of the liabilities affords some protection in this respect and IORPs have not experienced the liquidity problems seen elsewhere. Policy responses from supervisors in light of the downturn have focused on the flexibilities within the current framework and the differing security mechanisms available.
The defined benefit (DB) occupational pension fund sector is coming under increased pressure, also because of low interest rates and prevailing longevity risk. The crisis has also been challenging for defined contribution (DC) plans, making evident that a careful plan design such as suitable default options and lifecycle mechanisms, are important elements in mitigating the effect of market downturns on plan members. In many Member States, financial education and awareness is increasingly felt crucial, in order to empower people to make sensible and informed choices regarding their pension provisions.
