The European Insurance and Occupational Pensions Authority (EIOPA) published today its biannual report on the financial stability for the insurance and institutions for occupational retirement provision (IORPs) sectors in the European Economic Area (EEA).
The Report states that the majority of insurance companies are well capitalized according to the current regulation (Solvency I). This conclusion is based on the analysis of 20 largest European insurance groups: by the end of 2011 they were on average capitalized at 200% of required levels. However, their capitalization and profitability are facing now a slightly decreasing trend.
The Report highlights that the insurance sector remains vulnerable to a possible long-lasting low interest rate environment, though the sector would be capable to cope with this challenge for some time. But this situation might look different in case of renewed turmoil, a failure of governments to stabilize their fiscal situations or a disruptive unwinding of currency risk. While the first order effects of such events seem to be limited and are likely to hit only local insurers, the second order effects might hit bigger European insurers.
Despite a number of severe catastrophic events, the European reinsurance market remained relatively stable and solidly capitalized by the end of 2011. In the beginning of 2012 a modest increase in rates has been observed, which can be partly explained by the absence of major loss events in Europe and North America.
In the IORPs sector a trend towards defined contribution schemes continues. At the same time there is a grave evolution in the funding positions of IORPs, especially for such countries where defined benefit schemes are already very widespread. In those countries, most notably the UK and the Netherlands, recovery programmes are run by the respective regulators.
With regard to macroeconomic developments, the Financial Stability Report concludes that the political and economic climate continues to weigh on growth prospects in Europe. Uncertainty over the euro area government debt level and political situation in some EU countries continues to influence markets even after the recently made strong policy responses.
