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21st December 2011

EIOPA issues financial stability report

The European Insurance and Occupational Pensions Authority (EIOPA) has published its biannual report on the financial stability of the insurance and occupational pension fund sectors in the European Economic Area (EEA).
The risks in insurance and occupational pensions sectors are at high levels, and are more pronounced than the first half of 2011. The risks stemming from exposures to sovereign and banking debt as well as the macroeconomic outlook are the main factors, which may jeopardise the financial stability of the European insurance and occupational pension sectors going into 2012.
The Financial Stability Report December 2011 also summarises the results of EIOPA low yield stress test for 2011. The test was conducted according to two types of interest rate scenarios. Eight insurance companies failed the first scenario and four firms failed the second one. The “capital deficit” of the failed insurers amounted to approximately E6bn and E2bn, in the first and second scenarios respectively. In addition, it was found that the solvency position of the industry on average would be adversely affected by a prolonged period of low yields.
Due to significant natural catastrophes during the period under review, reinsurers suffered above average losses. Furthermore, life insurers may be subject to the risk of having insufficient liquidity, which can be emphasised by banking related transactions, e.g. through “liquidity swaps” and similar products as well as due to increasing surrenders.
The financial turmoil has in general not affected the occupational pensions sector as severely as some other financial industries. However, the crisis has had an impact on pension funds, primarily in their role as institutional investors, and has also had a significant impact on consumer confidence.