The European Insurance and Occupational Pensions Authority (EIOPA) has published an Opinion on Supervisory Response to a Prolonged Low Interest Rate Environment.
Persistent low interest rates affect insurers in different ways. On the liabilities side, they lead to an increase in firms’ obligations in today’s terms and, consequently, to a deterioration of their financial position.
On the assets side, low interest rates have an adverse impact on investment results and increase the reinvestment risk of assets.
This problem is even more pronounced where guaranteed rates of returns have been offered to policyholders. In the case of short term insurance business, lower returns reduce the financial margin available to offset adverse combined ratios.
Furthermore, low interest rates may encourage other business model changes such as alterations in asset allocations in a “search for yield”, which may create new risks on the asset side of the balance sheet.
The impact of the current period of low interest rates has been felt in several European jurisdictions, where National Supervisory Authorities (NSAs) and companies have already taken a range of different measures to deal with the issue.
EIOPA recommends a coordinated supervisory response to the prolonged low interest rate environment. NSAs should actively assess the potential scope and scale of the risks arising in this environment, paying special attention to those insurers identified as facing greater exposure. NSAs are invited to report progress in these areas to EIOPA as well as to notify any supervisory action planed or about to be taken.
NSAs should also engage with insurers to explore private sector measures to address the impact of persistent low interest rates. In this context, insurers should carefully consider the impact their solutions may have on consumers. Consumers should be treated in a fair and equitable manner.
EIOPA in turn will coordinate an exercise to quantify the scale and scope of the risk arising from a prolonged low interest rate environment. A separate Appendix to the Opinion presents the list of concrete tasks to be jointly undertaken by the NSAs and EIOPA.
The text of the Opinion can be viewed on EIOPA website (Link: https://eiopa.europa.eu/publications/eiopa-opinions/index.html ).
